Refund request: Wage tax wrongfully assessed in case of limited tax liability

A payment made by an employer is wrongly subjected to deduction of wage tax at times even though, for tax treaty purposes, responsibility for taxing it actually rests with the country where the employee lives. In cases like these, note 41c.1 of the wage tax manual for 2021 stated that it was possible to request a refund following the same procedure as provided in Sec. 50d (1), second sentence, of the German Income Tax Act (EStG). For this to occur, the wage income in question was required not to have already been covered as part of an assessment process. The refund claim was supposed to be submitted to the Tax authority responsible for the employer’s establishment. In some cases, there were special formal requirements (such as time limits stipulated in the relevant double taxation agreements) to observe for the refund request. Regardless of their domicile or nationality, this gave employees with limited tax liability who did not have a domicile or habitual residence in Germany a way

• to obtain refunds for wage taxes wrongfully withheld as part of an assessment process (provided that they met the additional requirements for this) or
• to request a simple refund, without assessment.

Simply requesting a refund in lieu of assessment could certainly be an advantageous route in some cases. The reason for this is that the assessment process necessarily causes the German exemption with progression method to apply to the foreign income.

The Withholding Tax Relief Modernization Act eliminated Sec. 50d (1) EStG and struck the note in 41c.1 of the wage tax manual for 2022. In a positive development, the tax authorities are continuing to allow refund requests for an employee’s benefit following the same procedure as provided in Sec. 50c (3), first sentence, EStG.