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Why people on ‘Kurzarbeit’ in Germany need to prepare for a tax surprise

Some seven million people in Germany have been put on Kurzarbeit (reduced work). While the state has taken over paying part of their salaries, they need to know about possible repayments next year.

Why people on 'Kurzarbeit' in Germany need to prepare for a tax surprise
Photo: DPA

Since the coronavirus crisis started, the government has allowed companies to furlough their workers and let the state pick up the tab.

This policy is widely seen as having prevented a steep rise in unemployment – and provides companies with the help they need to get to the other side of the economic crisis.

READ ALSO: German firms apply for Kurzarbeit for nearly 12 million workers during coronavirus pandemic

Those who have been furloughed, either completely or with reduced hours, should know though that the money they receive from the state has an impact on their tax declaration.

This is due to something called the Progressionsvorbehalt (progression caveat).

Let’s take a dive into the labyrinthian world of German tax law to see why.

Just what is the Progressionsvorbehalt?

The tax code states that money that you receive as benefits from the state, such as unemployment benefits, parental support, or short-time working benefits, are tax free.

But that is not the end of the story. Thanks to our friend the Progressionsvorbehalt, the money you receive in benefits is taken into account when the taxman considers how much tax you should be paying on the rest of your earnings from the year.

Basically, the amount that you receive in benefits is added to the amount you received as income and the state calculates your tax rate based on this total.

What does this mean? Well, in many cases the result is that people have to pay an additional sum in tax on top of what has been taken from their salary throughout the year.

Tax experts say that the difference could be around €1,600 for a gross income (salary plus benefits) above €40,000. They thus warn of the importance of putting money to one side to make sure that you can make the additional payment.

As an example: if you earn €30,000 in income over the year, roughly €5,000 of that would be taken off you in tax receipts. But add to that say €15,000 in short-time working benefits and your total tax receipt would go up to about €6,500 as you would be taxed on the €30,000 as if you earn €45,000. 

Will you have to fill out an additional tax return?

That’s not the only bad news. If you receive Kurzarbeitergeld (short-time working benefits) you will have to do two tax returns next year – your normal one plus one for your benefits.

READ ALSO: How to apply for Kurzarbeit in Germany when your working hours are reduced

The good news is that it might not come to this.

Discussions have started in the Bundestag over whether to suspend the Progressionsvorbehalt for one year due to the corona crisis.

The Free Democrats put forward a draft bill to this effect in June, arguing that “while the tax system is normally fair, this unfortunately isn’t the case in the times of corona.”

But the bill was rejected by the government.

Angela Merkel’s CDU say they are not against the idea of suspending the Progressionsvorbehalt, but state that there is still a lot of time before tax declarations are due next year “to calmly consider if we need to react.”

In the meantime, it is advisable to put a bit of money to one side each month, so as to be on the safe side.

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Germany and France extend Covid tax breaks for cross-border workers

Germany and France have agreed to extend the relaxation of tax rules for cross-border workers until the end of the year.

Cross-border workers commute by car but they can for now continue to work at home
Cross-border workers usually have to commute but can for now continue to work at home.. Photo: Fabrice Coffrini / AFP

The agreements between France and the governments of Belgium, Luxembourg, Germany, Switzerland and Italy avoids double taxation issues for anyone travelling across the French border to or from those countries in order to work.

During the pandemic, tax rules were eased to allow French cross-border employees, like their counterparts in Belgium, Luxembourg, Germany, Switzerland and Italy, to work from home without having to change their tax status.

The deals, which were established at the beginning of the health crisis in March 2020, were due to end on September 30th – and would have plunged cross-border workers still working from home because of the health crisis into renewed uncertainty over their taxes.

The latest extension of these agreements means there’s no confusion over where a cross-border worker pays their taxes until December 31st – for example cross-border workers who work in Geneva but live in France, who normally pay their taxes and social security contributions in Switzerland. 

Under normal circumstances, anyone living in France who works in Switzerland can spend no more than 25 percent of their time working from home. If they exceed this time limit, they would have to pay these tax charges tin France rather than in Switzerland, which would be much higher.

The agreements between France and Belgium, Luxembourg, Germany and Switzerland “provide that days worked at home because of the recommendations and health instructions related to the Covid-19 pandemic may … be considered as days worked in the state where [workers] usually carry out their activity and therefore remain taxable,” according to the statement from the French Employment Ministry.

In the case of Luxembourg, days worked from home because of the health crisis are not counted in usual the 29 day limit.