Who bears the cost? Germany’s economic employer and wage tax risks

Wage tax is the employee’s tax, but the employer must withhold and pay it to the tax office. That comes with strict legal duties and is more than a payroll formality.

Wage tax is one of Germany’s largest revenue sources. In 2025 it generated EUR 262.7 billion. Wage tax audits completed in 2024 led to EUR 826.9 million in additional assessments. For international groups, the risk can start with a simple question: Who really bears employees’ salary costs?

The economic employer

The 183-day rule does not automatically exempt short work assignments from German tax. The identity of the employer also matters.

An example: 

An employee is sent by a foreign group company to its German subsidiary for four months. The salary continues to be paid abroad, but the employee joins the German team, follows local instructions, and works on local projects. The salary costs are charged to the German subsidiary.

The German subsidiary may then be the economic employer because it directs the work and bears the cost. Under many tax treaties, Germany may tax the salary for German workdays from day one, even though the employment contract remains abroad and the employee stays for less than 183 days.

Actual recharging is not the decisive point. A German payroll obligation may also arise where the German company should have borne the salary costs under conditions to which independent companies would have agreed. In other words, not issuing an invoice does not remove the risk if the costs should have been allocated to Germany.

At the same time, a cost recharge by itself is not enough. The employee’s role, reporting lines, and the business purpose of the assignment also matter. If the employee is genuinely performing a service for the foreign company, a recharge does not automatically make the German company the employer.

German payroll consequences

Where German wage tax must be withheld, the German company needs a process to calculate, report, and pay it. The tax can become due when the salary is paid abroad. The company cannot simply wait for the intercompany recharge. If tax is missed, the company may be liable. Managing directors may also face personal liability if a tax shortfall is caused by intentional or grossly negligent breaches of their duties.

The good news is that these risks can usually be managed before the assignment starts. HR, payroll, and tax teams should clarify who directs the work, whose business benefits, and where the salary costs should sit. Salary payments can remain abroad while a German payroll process handles the local tax reporting.

The question is not simply how long someone stays in Germany, but whose business they are really working for, and who should bear the cost.

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Kristian Hachenberg is head of global mobility at KSP. His focus is on where people, pay, and borders meet: international individual taxation and cross-border payroll. He is a German-certified tax advisor, Dipl.-Finanzwirt (FH), and certified consultant for cryptoassets and taxes (WIRE).