Well Equipped for a Move Abroad

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.

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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.