It is one of the other major components of an expatriate’s assignment cost. If we consider a standard expatriate’s package where the employee is tax equalized and is a tax resident in the host country, the employer will be responsible for 100% of the employee’s host income tax.
For this reason, it is necessary to determine the host income tax to determine the cost of the expatriation. Therefore, you must be aware of the income tax rules applicable in the host country and optimize or make modifications in the package if necessary.
In most countries, when tax resident, income tax is calculated on the worldwide income. Therefore, it is not because the employee is paid by a French employer, for example, that he is not subject to income tax abroad on his French paid income. Indeed, it is often believed that by declaring a theoretical income in the host location, you are only subject on this fixed and pre-determined income but this is incorrect. To avoid a tax audit (corporate and individual), worldwide income must be declared (i.e. home and host paid).
Unless a special tax status is applicable, the employee will be taxable on base salary, premiums, benefit-in-kinds, etc. Knowing the tax optimizations available in the host country is therefore key to reducing the total expatriation’s cost.
The social status can have a large impact on the tax cost especially if social security contributions are deductible or if voluntary social security contributions are considered as benefit-in-kinds in the host country.
For example, we will consider a country where mandatory social security contributions are deductible but where voluntary social security contributions are considered as a benefit-in-kinds:
- The employee seconded for social security purposes is subject to the home country social security contributions (under the condition that a certificate of coverage has been obtained). Employee paid contributions are deductible from the taxable compensation in the host country. The social equalization will have no impact for tax purposes since what is paid by the employer on behalf of the employee is also deductible for tax purposes.
- The employee expatriated for social security purposes will be able to deduct the host social security contributions from his taxable income. However, employee contributions paid by the employee will not be deductible since there are not mandatory and employer contributions will, in many countries, be considered as a benefit-in-kind. Therefore, you will have a higher tax cost in the host country for a similar assignment package.
It is also important to note that numerous countries have implemented special impatriate scheme in order to attract foreign white collars.
For example, in France, it is possible to exempt from French income tax all elements of the expatriate’s package relating to his assignment (i.e. housing, income taxes, etc). this regime requires that certain conditions be respected (see our blog page on article 155b of the French general tax code).
Other countries have similar scheme such as Belgium, Spain, UK, Australia, etc. (more information on the section Fiches pays
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