What is the economic employer?
The economic employer is a treaty-law term, not an employment-law one. Under double taxation agreement law, "employer" within the meaning of Art. 15(2) of the OECD Model Tax Convention (OECD-MC) can mean not only the civil-law contractual employer, but also another company that bears the remuneration for the work performed, or would have had to bear it. Germany's Federal Ministry of Finance (BMF) states in its circular of 12 December 2023: "An employer within the meaning of a DTA can be not only the civil-law employer, but also another natural or legal person who economically bears the remuneration for the dependent work performed for it, or would have had to bear it" (para. 151, referencing a Federal Fiscal Court ruling of 23 February 2005, BStBl II p. 547).
In practice this means: when an employee is posted abroad within a group of companies, the host company can become the economic employer — even without any change to the employment contract. The BMF states explicitly: "A change of the treaty employer status requires neither a formal amendment of the employment contract […] nor the conclusion of an additional employment contract […]" (para. 153). The status change depends solely on the actual circumstances of the assignment.
The two criteria: integration and cost-bearing
According to the BMF circular (para. 152), the host company becomes the economic employer once two conditions are met together:
| Criterion | Test question |
|---|---|
| Integration | Is the employee integrated into the host company's hierarchy — subject to its instructions, responsible for work results there, with the host deciding on pay, leave, or termination? |
| Economic cost-bearing | Does the host company economically bear the remuneration — or would it have had to under the arm's-length principle, even if no intra-group recharge actually takes place? |
Without integration, the sending employer remains the treaty employer — even if costs are recharged. The BMF gives a counter-example: if an employee is posted between a parent and subsidiary without being integrated into the host company's hierarchy, "the host company does not become the economic employer" (para. 157). Senior executives such as board members and managing directors are, per the BMF, regularly considered integrated into the ongoing management of the host company.
Interaction with the 183-day rule
The 183-day rule under Art. 15(2) OECD-MC only protects the taxing right of the state of residence if all three of the following conditions are met together (BMF para. 101):
- The employee stays no longer than 183 days in the host state within the relevant period, and
- the employer who economically bears the remuneration, or would have had to, is not resident in the host state, and
- the remuneration was not economically borne by a permanent establishment of the employer in the host state.
The BMF stresses: "Only if all three conditions are met together does the state of residence of the employee retain the taxing right […]" (para. 102). If the host company becomes the economic employer, the second condition falls away — and with it the protection of the 183-day rule entirely, regardless of the actual length of stay. Even a short assignment can thus trigger immediate wage tax liability in the host country. The BMF also clarifies that the economic employer "is also the domestic employer obliged to withhold wage tax under Section 38(1) sentence 2 of the German Income Tax Act" (para. 154) — the treaty status therefore has direct wage-tax consequences. The concept is distinct from the third condition, the permanent establishment: either one, independently, can remove the state-of-residence protection.
The three-month presumption for short assignments
For short assignments, the BMF circular contains a practically relevant relief: "For an employee assignment between internationally affiliated domestic and foreign companies of no more than three months […] a rebuttable presumption applies that the host company is not to be regarded as the economic employer due to a lack of integration of the employee" (para. 158). This presumption also applies across calendar years for factually connected activities, but can be rebutted in an individual case based on the integration criteria — for instance, if the employee, despite the short duration, is fully integrated into the host company's management structure. For companies this means: short assignments of up to three months carry a lower tax risk in tendency, but are not automatically safe — actual integration remains decisive.
Comparison with the UK and the A1 certificate
The United Kingdom has a structurally identical concept. HMRC's PAYE Manual (PAYE82000, "EP Appendix 4") defines short-term business visitors eligible for simplified treatment as, among other things, individuals "legally employed by a UK resident employer, but economically employed by a separate non resident entity." For stays of 60 days or more, HMRC additionally requires evidence that the UK company does not, in fact, ultimately bear the remuneration; for stays of 59 days or less, it is sufficient to show that payment was made via a non-resident employer's payroll. The same logic applies: without economic cost-bearing by the UK entity, the simplified treatment remains available — if the UK entity bears the cost economically, it effectively becomes the economic employer and PAYE obligations arise.
It is important to distinguish this from the A1 certificate: according to the EU's Your Europe citizens' portal, this governs exclusively which social security system applies — it is "proof that you pay social security contributions in another country as a posted worker or a person employed in several countries." The A1 certificate has no connection to income or wage tax. An employee can remain continuously covered by home-country social security (A1 valid) and still become liable for wage tax in the host country, because the host company becomes the economic employer there. Both regimes — social security and tax law — operate independently and must be assessed separately.
What this means for companies
For HR and payroll teams, the economic employer concept matters because it can effectively override the 183-day rule without any change to the employment contract. When planning a posting or a longer project assignment, companies should check: who decides on work content, leave, and pay on the ground? Is remuneration recharged internally, or should it have been recharged on an arm's-length basis? Tools like premote help track assignment data, days of stay, and cost allocation systematically per international assignment — as a basis for assessing whether wage tax liability looms in the host country, independent of the 183-day threshold.
FAQ
Is the economic employer the same as the employer named in the employment contract?
No. The economic employer is a treaty-law concept and can differ from the civil-law contractual employer without any change to the employment contract.
Does the 183-day rule automatically protect against wage tax abroad?
No. It only protects if, in addition, the employer is not resident in the host state and the remuneration is not borne by a permanent establishment there. If the host company becomes the economic employer, that protection disappears regardless of the length of stay.
Are short assignments automatically safe?
For assignments of up to three months, the BMF applies a rebuttable presumption against the host company being the economic employer — but it can be rebutted in an individual case, for instance if the employee is fully integrated.
Does the A1 certificate also cover the wage-tax question?
No. The A1 certificate governs social security only. The economic-employer question concerns wage or income tax and is assessed independently.
The information provided on this website does not constitute legal advice and is not intended to address any legal issues or problems that may arise in individual cases. The information on this website is of a general nature and is provided for informational purposes only. If you need legal advice for your individual situation, you should seek the advice of a qualified attorney.