Employed managing directors of GmbHs engaged in cross-border activities
In order to stay competitive in today’s globalised world, companies and their employees are increasingly required to perform their work across borders. In many cases also the management is faced with international fields of work and responsibilities along with flexible working hours and places. In this blog entry you will learn which tax issues are to be considered if employed managing directors of GmbHs are engaged in cross-border activities.
Article 16 vs. Article 15 OECD Model Tax Convention
The superordinated special norm of Article 16 OECD Model Tax Convention (OECD Model) regulates the taxation of remunerations paid to members of the Supervisory Board and the Administrative Board as well as of similar payments paid by a corporation resident in a Contracting State to a natural person resident in the other Contracting State. The state of residence of the corporation has to tax these remunerations, irrespective of the place where the natural person carries out the physical activity.
It must be emphasised that the German version of Article 16 OECD Model only comprises monitoring activities (“remunerations paid to members of the Supervisory Board and the Administrative Board”). On international level, the English version allows for a broader interpretation due to the wording “director’s fees”. This is why next to remunerations paid to members of the Supervisory Board and the Administrative Board some Contracting States also include remunerations paid to managing directors in the scope of Article 16 OECD Model, which, in practice, may lead to some issues.
For lack of explicitly mentioning remunerations paid to managing directors of GmbHs in the German version of the OECD Model, according to the prevailing opinion such remunerations do not lie within the scope of Article 16 but are comprised in the general standard of Article 15 OECD Model. This Article provides for taxation in the state of residence of the natural person, unless the employment is physically exercised in the other state (state of assignment/state of source). If the natural person resides on not more than 183 days within a twelve-month period in the state of assignment and if the remunerations are not paid by an employer or their permanent establishment resident in the state of assignment, taxation returns to the state of residence of the natural person.
Practice shows that personnel expenses of managing directors of GmbHs engaged in cross-border activities are often paid by an employer resident in the state of assignment or their permanent establishment. Therefore, taxes are often to be paid in the state of assignment/source even if the 183 days limit is not exceeded.
Special case Article 16 double taxation agreement Germany-Austria
With regard to our neighbouring state Germany, bear in mind that remunerations of managing directors of GmbHs in any case are to be taxed in the corporations’ state of residence. This results from Article 16 para. 2 double taxation agreement Austria/Germany, which – deviating from the OECD Model – explicitly mentions remunerations of managing directors.
It is recommended to review set-ups including managing directors engaged in cross-border activities with regard to Germany but also with regard to other states, in order to ensure compliance of your company with all involved states.
The P&O team is happy to support you in analysing and assessing the risk of such set-ups as well as in implementing necessary compliance steps, if any.
