This month, our alerts focus on the challenges of payroll for international employees and expatriates. In addition to the set-up for long-term assignments, we will discuss the processing of remuneration elements that are paid in advance of an assignment or afterwards, as well as those that are paid during the assignment but repeatedly raise questions. We will also highlight the challenges from a payroll perspective with regard to short-term assignments for fitters or project staff, as well as business travellers.
Long-term assignments abroad are part of everyday life in many international companies. However, payroll for expatriates poses a particular challenge for human resources and finance departments because employees are usually confronted with two different countries at the same time.
This is due, among other things, to the fact that employees are subject to both tax and social security contributions in both or different countries. To ensure that payroll accounting runs smoothly, a clear system is needed, as well as a good understanding and communication between the two different payroll departments (home country and country of assignment).
- Salary structure: salary split and net remuneration
A proven model is the so-called salary split. This involves dividing the salary:
- One part is paid in the home country to cover social security contributions, mortgages or financial support for the family, for example.
- The other part is paid in the country of assignment to cover living expenses and meet tax obligations there.
Net remuneration is also often agreed in conjunction with a tax equalisation model. The expatriate receives a fixed net salary, while the company covers the difference between taxation in the home country and the country of assignment, as well as the associated social security costs. This ensures that employees are not disadvantaged.
- Taxes and social security
A key issue is taxation in the country of assignment and possibly also in the home country. Double taxation agreements (DTAs) determine in which country income must be taxed. Nevertheless, coordination between the two countries remains complex and often requires external tax advice. As a company, it is highly advisable to carry out a thorough analysis of the remuneration elements and their tax and social security implications in both countries. Social security is also a critical issue. A distinction is made here between assignment to EU member states or Switzerland and EU member states or EFTA- member states and contracting states.
Assignments in non-contracting states pose a particular challenge, as in these constellations the employee often has to pay social security contributions in both countries or take out additional insurance.
- Additional benefits for expats
Long-term assignments entail special burdens, which companies compensate for or cushion with expat packages.The following additional remuneration elements often play a role in this:
- Housing costs in the country of assignment
- School fees for international schools for children
- Flights home per year
- Cost of living allowance
- International health insurance costs
- Tax equalisation
- Hardship allowances for difficult countries of assignment
- Home search support
These benefits not only provide financial security, but are also intended to motivate employees.
- Payroll processes and compliance
Payroll is usually divided into two parts:
- The home payroll continues to deduct social security contributions and pays the home portion.
- The host country payroll is responsible for paying allowances and handling tax matters in the host country.
Close coordination between the two payrolls is important. This is the only way to ensure transparency, compliance with local reporting/tax obligations and consistent reporting for HR and the finance department.
Conclusion
Payroll for long-term assignments is complex and requires careful planning. A well-thought-out model consisting of salary split, tax equalisation and clearly regulated additional benefits forms the basis. Supplemented by tax expertise and close coordination between the home and host country payrolls, companies can ensure that assignments are successful for both sides, both for the employee and for the employer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
