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.
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.