In recent years, the number of short-term assignments has increased significantly. Consequently, it is important to also deal with the taxation of short-term assignments.
However, since short-term assignments can be found in many different forms in practice, it is also not surprising that the tax situation of these assignments is complex. It is therefore necessary to have a good overview to be able to determine possible tax consequences and tax risks. For each short-term assignment, one must therefore ask oneself the following questions:
- Does the employee remain liable to pay tax in the country of residence or does he/she become liable to pay tax in the country of assignment?
- If a tax liability arises in the country of assignment, how must taxes be paid in the country of assignment?
- Is there a permanent establishment risk for the company with the assignment of the employee?
- Does taxation in the country of assignment result in double taxation or can double taxation be avoided?
- Must a tax equalisation / tax protection concept be applied to absorb the additional tax costs for the employee?
It is understandable that one also asks the question, why does the company have to deal with the taxation of employees during a foreign assignment at all? After all, the employee basically receives a gross salary and then has to take care of paying the taxes himself. But if the employee is sent abroad on behalf of the employer, then the employer should get involved and not leave it up to the employee.
Taxation in the country of assignment or residence
In the occasion of each foreign assignment of an employee, it is therefore necessary to check to what extent there are tax consequences in the country of assignment. The decisive factor in the examination is whether a double taxation agreement can be applied to the facts of the case. If no double taxation agreement is applicable, this generally leads to double taxation from the first day of acquisition, regardless of the duration of the assignment. If a double taxation agreement exists, it may be possible to avoid tax liability in the country of assignment and the salary remains taxable in the employee's country of residence.
However, if a double taxation treaty applies, this automatically leads to a review of the so-called "183-day rule". The "183-day rule" basically states that a taxpayer remains liable to tax in the country of residence if
- he stays in the country of assignment for less than 183 days, and
- no salary costs are paid to him from the country of assignment, and
- no salary costs are borne by a permanent establishment in the country of assignment.
If all three conditions are met, the tax liability for the employment remains in the country of residence.
For such an assessment to be made as to whether an employee becomes liable to tax in the country of assignment during the assignment, several factors are important for this reason.
For short-term assignments of up to 6 months, the following factors need to be considered:
- Country of residence
- Country of deployment
- Duration of assignment
- Where will the salary be paid?
- Where are the costs of the assignment borne?
- Tasks and type of work in the country of assignment
If the assignment lasts longer than 6 months, the following factors are added:
- Marital status
- If married: does the family go along
- If the residence in the country of origin is given up
- If regular return trips to the country of origin take place
- Duration of stay in the country of origin during the assignment
For assignments of up to 6 months, the following decision tree is intended to assist in determining in which country the employee becomes liable to pay tax during an assignment abroad, provided there is a double taxation agreement between the two countries.
One could now conclude that one would like to avoid tax liability in the country of assignment for the employee in any case, so that this does not lead to any additional tax costs and also no administrative tasks arise for the employee in the country of assignment or in the country of residence. However, one forgets the tax consideration at the company level. As a rule, in cases where one tries to avoid taxation at the employee level, the tax risks at the company level are higher.
At the company level, it is important to clarify, among other things, whether the employee's activity in the country of assignment constitutes a permanent establishment and whether there is an obligation to withhold taxes on the salary for the company in the country of assignment.
Tax support for the employee
In the event that the employee becomes liable to pay taxes in the country of assignment, it is advisable to provide the employee with a tax advisor in the country of residence and in the country of assignment so that the declarations can be made legally and, in a tax-optimised manner in both countries. These tax situations are usually very complex, and therefore most employees are overwhelmed by them.
Furthermore, this inevitably leads to the application of a tax equalisation concept for these persons. Most companies follow the following principle for secondments: "The employee should not be worse off during the secondment, but also not better off." Among other things, this also refers to the tax differences between the country of residence and the country of assignment.
Different tax rates
The following chart on page 22 shows the different tax rates in Europe. The maximum tax rates are around 50-55% and the lowest tax rate is 15%. Switzerland is in the middle of the pack in terms of tax rates.
An employee from Hungary (tax burden: 15%) will not allow himself to be posted to Austria (tax burden: 55%) and then take over the tax difference himself. If the tax burden for the employee in the country of assignment is higher than in the country of origin, the employer usually takes over this additional burden according to the above-mentioned principle. This represents a non-cash benefit for the employee, consequently this amount must still be extrapolated accordingly with the resulting tax and social security costs.
Summary and checklist
In summary, here is a checklist for examining the taxation of short-term assignments:
I. Gather all the necessary factors to enable an examination of the facts of the case.
II. Is there a double taxation agreement between the country of residence and the country of assignment of the employee?
- No double taxation agreement exists
I. Check the tax regulations in the country of assignment
II. Check for possible tax exemption in the employee's country of residence if there is a tax burden in the country of assignment
III. If there is an additional tax burden, set up a tax compensation scheme for the employee.
IV. Examine the establishment of a permanent establishment in the country of assignment.
2. Double taxation agreement in place
I. Check according to the above decision tree
a. Result: taxation in the employee's country of residence; no further steps necessary at employee level.
b. Result: taxation in the country of assignment; set up tax equalisation model for the employee; check how taxes must be paid in the country of assignment and how double taxation in the country of residence can be avoided.
II. Checking the establishment of a permanent establishment in the country of assignment
With the help of these individual steps and the decision tree, most short-term assignments should be easy to classify and a clear overview of the country in which the employee will be liable for tax should be created.
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.