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Nexia Ebner Stolz


Well Equipped for a Move Abroad

As globalized markets make it critical for midsize companies to position themselves outside their national borders, these companies are increasingly opening an office abroad or expanding their international presence. As a result, the companies and their companies must increasingly be prepared for the global labor market.

Mid­size com­pa­nies dep­loy emp­loyees abroad for many rea­sons - staff are often sent over­seas to open a new office or incor­po­rate a new sub­si­diary. By sen­ding their own emp­loyees, these com­pa­nies can ensure that their exis­ting pro­ce­du­res, struc­tu­res and cor­po­rate cul­ture are estab­lis­hed in the for­eign coun­try and that suf­fi­ci­ent know-how is available right from the start. The spe­cial exper­tise of cer­tain emp­loyees may be nee­ded to ensure qua­lity stan­dards and satisfy custo­mers. Youn­ger emp­loyees, in parti­cu­lar, look for­ward to pro­ving their skills inter­na­tio­nally.

Global Mobility© Thinkstock

Once the deci­sion has been made to send an emp­loyee abroad, the com­pany faces a num­ber of com­plex issues. The chal­lenge is to sort out the various legal rules that apply in each coun­try - since both the laws of the home coun­try and of the inter­na­tio­nal loca­tion will come into play. The com­pe­ting legal rules have a bea­ring on all sorts of issues ran­ging from resi­dence and work per­mits, to the emp­loy­ment agree­ment for the inter­na­tio­nal assign­ment and tax and social secu­rity ques­ti­ons. This will require solid exper­tise in the laws of several juris­dic­ti­ons, and pro­fes­sio­nals from the coun­tries in ques­tion will work clo­sely toge­ther to struc­ture the best pos­si­ble solu­tion for the com­pany and the emp­loyees being trans­fer­red.

The details of an over­seas assign­ment should be defi­ned pre­ci­sely in the emp­loy­ment agree­ment. This can be accom­p­lis­hed eit­her in a new emp­loy­ment agree­ment or in an amend­ment to the exis­ting one. Lar­ger com­pa­nies often estab­lish "Terms and Con­di­ti­ons of Assign­ments Abroad," which cover issues such as taking the family along, allo­wan­ces in addi­tion to the base salary, resi­dence in the for­eign coun­try, tui­tion fees and child­care, a com­pany car, trips home, vaca­tion and pro­vi­si­ons for the return home at the end of the assign­ment. In this connec­tion it is also very important to desi­g­nate which com­pany will be the emp­loyer of the trans­fer­red emp­loyee. Ger­man labor law dis­tin­gu­is­hes bet­ween an Abord­nung (an assign­ment to ano­ther loca­tion) and a Ver­set­zung (a trans­fer to ano­ther com­pany). In the first case, the per­son being sent abroad remains an emp­loyee of the ori­gi­nal com­pany, but in the second case the per­son beco­mes an emp­loyee of the com­pany in the for­eign coun­try. Tax law, on the other hand, looks at the situa­tion from an eco­no­mic per­spec­tive. Both sets of laws will have mate­rial effects on the emp­loyee's tax and social secu­rity bur­dens and entail the risk of dou­ble taxa­tion and insuf­fi­ci­ent coverage.

Alt­hough risks of this sort are mit­i­ga­ted by dou­ble taxa­tion trea­ties and social secu­rity con­ven­ti­ons, it is in the inte­rest of the aut­ho­ri­ties of each coun­try to secure the lar­gest pos­si­ble tax base for their respec­tive nati­ons. Addi­tio­nal con­f­licts arise because the agree­ments in this regard are someti­mes inter­p­re­ted dif­fer­ently by the aut­ho­ri­ties in each coun­try.

From the income tax stand­po­int it is parti­cu­larly sig­ni­fi­cant where the trans­fer­red emp­loyee has his or her prin­ci­pal place of resi­dence during the assign­ment abroad. The prin­ci­pal place of resi­dence might remain in Ger­many, e.g. because the family remains behind, or might switch to the for­eign coun­try, because the ent­ire family deci­des to make the move abroad. Parti­cu­lar care must be taken when the emp­loyee's for­eign assign­ment merely con­sists of trips to the for­eign coun­try. With inc­rea­sing fre­qu­ency this can still result in taxa­tion in the for­eign coun­try because the con­cept of a "per­ma­nent estab­lish­ment where ser­vices are pro­vi­ded" is being app­lied by more and more coun­tries in order to tax busi­ness tra­ve­lers and their emp­loy­ers in those coun­tries. The mere fact that the emp­loyee stayed in the for­eign coun­try beyond a cer­tain period of time (often six months) can result in taxa­tion.

And an inter­na­tio­nal assign­ment is not just fraught with pit­falls for the emp­loyee. The emp­loy­ment of staff in ano­ther coun­try can also have sig­ni­fi­cant effects on a com­pany's cor­po­rate income tax. There is a clear trend in inter­na­tio­nal tax policy - known as "base ero­sion and pro­fit sha­ring" (BEPS) - to levy taxes at the loca­tion where the emp­loyee works - whe­ther via the fic­tion of per­ma­nent estab­lish­ments or via trans­fer pri­cing adjust­ments.

Most Ger­man com­pa­nies have no choice but to do busi­ness inter­na­tio­nally and they will the­re­fore have to over­come the chal­len­ges that go with it. Given the com­plex nature of the issues, it is best to con­sult experts who will deve­lop practi­cal solu­ti­ons in close col­la­bo­ra­tion with their col­lea­gues over­seas. Via Nexia Inter­na­tio­nal, Ebner Stolz has a large net­work of con­sul­ting firms in more than 100 coun­tries who can help make Glo­bal Mobi­lity a suc­cess for eve­r­yone invol­ved.

You can find out more about the cur­rent hot topics in inter­na­tio­nal assign­ments of emp­loyees at our semi­nar "Are you equip­ped for the next exter­nal pay­roll tax audit?" (in Ger­man) to be held in the spring at several of our loca­ti­ons.

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