When you request an employee to work across borders, you have to consider up-front which approach you take with regard to the salary payment. This is specifically important when your company does not have a set policy in place or when you are developing a policy. What are the different approaches and the pros and cons?
Most applied is the concept of ‘tax equalisation’. Tax equalisation means that you calculate the tax due from the employee based on home country tax rules and rates. This way you keep the assignee whole from a home country tax perspective before adding assignment allowances. All assignees from the same country are treated the same, regardless of their work location. The home country tax is withheld as so-called hypothetical tax (hypotax) and used by the employer to pay the host country taxes due. The hypothetical tax calculation is revised with any salary adjustment or change in tax rules and rates.
Similar to tax equalisation is to agree a fixed net income during the assignment abroad. In the basis the same approach as tax equalisation is used by applying home country tax rules and rates to determine the net income. Difference is that any increases are calculated based on the net amount and that changes in tax rules and rates do not affect the net income during the assignment abroad. While seeming easier to apply compared to tax equalisation, agreeing a fixed net income may cause difficulties when determining the equivalent gross salary upon return.
When you would like your employee to benefit from lower tax rates in the host country compared to the home country but you do not want them the be affected negatively, you could agree a so-called ‘tax protection’ approach. Under tax protection the employee benefits from any tax advantages, but any disadvantages will be for the account of the employer. Employees will be happy to agree on tax protection, but this approach is not commonly applied by companies as it disregards all other expenses associated with working abroad that are also for the account of the employer.
Finally, the tax burden in home and host country can be the own responsibility of the employee if you do not agree any approach concerning the gross salary. You see this in practice when the employee works abroad by his or her own choice. When applying this you should consider that sometimes home country employer pension contributions are taxable income in the host country and increase the tax burden significantly.