Contractors working for private enterprises supporting the US Military have a long-standing history dating back to World War II. Contracting jobs have seen a recent high during the wars in Afghanistan and Iraq and to this day technical specialists are needed on various US bases in and close to combat areas.
Many of these contracting positions are being filled by people who have served in the US Military before. This makes complete sense as they have experience in a high-paced, high-stress work environment and many of them have been in a combat-related work environment before.
However, work as a private contractor – even if it is for the US Military, in a US occupied war zone, on a US Military installation, on a contract backed by US government funds or even in a position not different from the Military job a contractor might have held before – is work for a private company and not for Uncle Sam.
For this reason, any pay received as a contractor will be treated as regular work income by German tax authorities. This can get particularly ugly, when you have lived in Germany before or after the contract and your contracting work was in a country with which Germany does not have a tax treaty. Prominent examples for those non-treaty countries are Afghanistan, Irak, Djibouti, Jordan, Qatar, Somalia or Saudi-Arabia. To make matters worse, from a tax treaty perspective, work places like Guam, Puerto Rico, the Virgin Islands or Diego Garcia do not count as the “geographical USA”. Why is it that you cannot claim tax protection let’s say under NATO-SOFA or some US defense agreement? Well, the main reasons are:
- NATO-SOFA would not protect your contractor pay as for Germany your SOFA status starts and ends at the German borders.
- Any bilateral agreement the US might have with the country in which you contract binds only the US and the other country, but not Germany.
A similar issue holds for any Defense Base Act (DBA) payment as this is a benefit received either from the private employer or the insurance backing the employer. It is not a US government remuneration of any kind. For this reason, a DBA payout can of course also be subjected to taxation in Germany as it would be viewed as a sort of work-related compensation.
Why do we say “can” be taxed? Well, because there are a few angles that can be worked in order to make sure the DBA benefit goes untaxed – at least to some extent. Those angles being the timing of the payout, as well as the structure of the payout.
There is no one-fits-all answer as to what the best structure is. However, due to the abovesaid, if you are contemplating contracting work, are already engaged in it or are standing to receive a major financial benefit from it, while your pre- or after-contracting life revolves around Germany, please reach out to the taxperts ahead of time and let’s make sure the benefits of your hardship assignment do not need to be shared with the German tax system.
