When you have employees working abroad, there are a number of important factors to consider.
Whether they're temporarily on assignment in another country or going to be living permanently outside their home country - there are tax implications for both the business and the individual.
Here are some key tax questions to consider when dealing with expatriate workers, or becoming an expat yourself.
As tax compliance practices differ from country-to-country it's important to recognise this as only general guidance. For a specific assessment of your circumstances, please contact us or connect with our HR experts at the Global Payroll Association Symposium, 23 May 2019 in Budapest.
1. What is the legal structure?
First and foremost, an expatriate worker's 'legal structure' needs to be determined. This is a legal – rather than a tax – question, but the legal structure may determine some basic tax compliance obligations.
- Does the employing entity have a subsidiary/branch or any other legal presence in the host country?
- Will there be an intercompany arrangement between the home and host entities?
- Which country's employment law will apply?
- Is an assignment letter, local employment contract or both required?
- Have immigration-related considerations – such as work permits – been investigated and determined? Does the employer have an assignment policy?
- What international regulations apply between the home and the host country (double tax treaty, social security agreement)?
2. Where is the expatriate worker's tax residence?
Determining tax residence is a basic requirement, necessary for personal income tax return filing. Tax residence needs to be observed in both the home and in the host country. In cases of dual tax residence, double taxation treaties need to be reviewed to determine ultimate tax residence.
Why is this important? The answer is simple: to avoid facing double taxation and to determine each country's right to levy tax on specific elements of the employee's income.
3. What is the social security position?
Social security is very important since it generally covers both short term (eg. sickness, unemployment, maternity) and long term (pension) issues. Some key questions to ask include the following.
- Where does the employee/employer pay social security during the work assignment?
- How can the employee remain subject to their home country's social security system?
- What about company/private insurances?
- What if the host entity is in the EU (European Union), or outside the EU?
You should generally refer to international social security regulations for these answers.
4. What about payroll/tax compliance?
An expatriate on assignment generally finds themselves obliged to pay taxes in the host country. Potentially, a home country tax liability may also apply (not only in the assignment's first year but thereafter).
- Should the employee or employer register in the host country for payroll purposes?
- Is there any tax withholding liability by the host entity (where the salary is delivered by the home entity1)?
- What if the salary is paid in separate parts - is shadow payroll required?
- Are there any monthly/quarterly/annual tax return filing liabilities for the host/home employer/employee in the home/host country?
- Can the tax (advance) be paid from a foreign bank account?
- How should I report working days for payroll purposes?
- Is there any joint/family tax return filing possibility in the host country?
- Is there a specific expatriate tax regime?
- In which currency is the personal income tax to be paid? Foreign currency or local? If local, what is the conversion rate to be used?
5. What about other taxes?
It's not just legal, personal income tax and social security-related questions that arise for expatriate workers; other tax implications may also apply.
These questions generally come up if intercompany arrangements are also made between the home and the host entity. For example, assignment-related costs are charged/invoiced to the host entity by the home entity, or when some assignment-related costs are born by the host entity directly.
- What are the VAT implications of assignment-related cost charges?
- Will the assignee's activity create a permanent establishment and thus corporate income tax liability in the host country for the home entity?
- Are the assignment-related costs borne by the home entity deductible for corporate income tax purposes?
Talk to us
Managing an expatriate workforce or becoming an expat yourself can be a minefield if you don't know the right legal and tax-related questions to ask – and where to find the answers.
TMF Group's HR, payroll and tax experts based in more than 80 countries worldwide can help with both the tax and HR administration aspects of employee mobility and payroll processing.
Need more information? Contact us today.
Register for the Global Payroll Symposium, 23 May 2019 in Budapest.
1. Home entity is typically the employing entity, where
the individual generally works prior to the assignment.
Host entity means the entity where the expatriate is assigned to.
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.