Taxing international mobile employees
What you need to know, including new rules on taxing share awards.
The global exchange of information among tax authorities means that it’s now more important than ever to follow compliance procedures closely when sending employees to other jurisdictions. As well as considering the legal aspects, for example work permits, tax and social security implications need to be addressed carefully.
A key factor in determining the tax treatment of remuneration paid to an employee while in a host country is the residence status of that individual. Each country has its own domestic rules regarding residence and these need to be reviewed carefully.
It’s possible that an employee will remain resident in their home country while also becoming resident in the host country. In such cases, the tax treatment will depend on the treaty between the home and host countries – assuming there is one.
The UK, for example, now has a legislated statutory residence test, which came into force in April 2014. If an employee comes to the UK or leaves during the year, it may be possible to split the tax year between periods of residence and non-residence. However, the rules regarding split-year tax treatment have been narrowly drafted and it may not always be possible to achieve this.
The world can be split into two parts for national insurance obligations purposes: those countries that have signed social security agreements, either individually or collectively, such as EU countries; and those that have not.
Where an agreement exists, it may be possible for the employees to remain in their home country scheme and not pay host country contributions.
Many countries will require tax to be withheld at source from the employee’s remuneration, which will mean the employer will have to set up a payroll scheme in the host country. There may be instances where payroll withholdings are not required, such as where an individual spends minimal time in the host country. The personal service clause of the tax treaty should confirm this, but local host country legislation and practice should also be considered.
The timing of share awards has often been critical in establishing the relevant tax treatment. Historically, it may have been the case that an award was not taxable in a country if the employee was not resident at the date the award was made (even where the individual may have become resident in that country before the award was vested/exercised).
Where an individual was resident at the date of the award, but became non-resident before the award was vested/exercised, the gain will often be apportioned between the periods of residence and non-residence, assuming there was a treaty in place between the home and host countries.
In the UK, it has been legislated that from April 2015, it will no longer be necessary to consider whether a treaty is in place or the employee’s residence status at the date of the award. All awards, even those made before April 2015, will be apportioned according to the gain arising between the date the award was made and the vesting date.
Even if an employee’s earnings are taxable in a host country, significant tax savings may be available for short-term assignments. In some countries, only remuneration for the days spent working in the host country will be taxable, but careful planning will be required. In addition, some costs, such as accommodation and travel, may not be taxable if the host location is deemed to be a temporary workplace.
For more information, contact:
Debra Blacklock or Nicola Pitcher
Saffery Champness, UK
T +44 (0)20 7841 4000
E firstname.lastname@example.org or email@example.com