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Foreign investors are usually desirous to send some of their staff abroad, when setting up a new operation. After an initial period, such personnel may take additional responsibilities in additional European countries. Apart from individual motivations, and excellent career prospects when returning home, such staff expects to maintain a standard of living in Germany comparable to that in his or her home country. To achieve this, parties usually agree on a basic salary plus a number of expenses linked to and caused by the stay in Germany (costs of relocation, housing allowance, additional health insurance, cost of German driving licence, tuition fee for children, language courses, flights home, tax consulting, etc.); those expenses are tax deductible only to a rather limited extent; in other words: the payment of those items by the company is a benefit in kind liable to German income tax. The liability to German Social Security contributions constitutes a major additional expense (see above) of rather doubtful benefit to foreigners having made their own arrangements in their home country.

Thus, parties usually agree on the disbursement of those payments on a net basis to the effect that the employer pays an additional amount in cash to enable his employee to bear German income tax - as far as applicable - on those disbursements. With due regard to the limitation of tax deductible items and the 48% tax rate on a taxable income of 60 k€ (for single, 120 k€ for married tax payers), the income tax due on these benefits in kind quite easily equals the over all expenses of the employer.

However, German law provides for a number of contractual agreements which can reduce the tax burden quite substantially; at the same time, those agreements can totally free the employee from the contributions to the German social security system, at least for a time.

  1. Social Security: Both national German law as well as a number of bilateral agreements Germany is a party to provide for the possibility that the employee on duty in Germany is not liable to contributions it the employee is detached by his employer at home, for a limited period of time, for services in Germany.
  2. If the employee is responsible for a number of businesses in different states, be it permanent establishments or legal entities, and actually works on their behalf in the respective country, it might be a good idea to split the total income of the person between those different countries, in proportion to the time actually spend in the respective countries: the consequence is that the income in each country may fall into a much lower tax bracket in this country, and that the aggregate amounts of the net income after taxes from each country may be considerably higher. In other words: if the foreign based employer and the employee have agreed on a net income, the total cost of wage will be lower for the employer, with the employee ending up with the same net amount.

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