Cost-of-living adjustments – free from income tax?

By Sven Rücker, ECOVIS Düsseldorf, Germany
An employee maintaining his/her place of work abroad for a certain (limited) period may get an extra-pay as a cost-of-living adjustment. This extra-pay can be kept tax-free in Germany up to a certain amount, provided that the employee dispatched has got a place of residence or a habitual abode abroad.
The amount of the tax exemption depends on the cost-of-living adjustments that are paid to government employees.
The surcharge for extra-pay due to the cost-of-living allowance are as follows for German employees dispatched to China:
Hong Kong: 5% / Others: 0% (as at April 1st, 2013)