Compensation and Payroll

When an employee is assigned abroad, his or her previous salary is usually supplemented by additional components. Regardless of whether these serve to cover costs caused by the assignment or simply serve as an incentive or compensation for additional work, each salary component should be carefully planned and worked out in terms of amount in order to meet the employee’s requirements on the one hand, while avoiding unequal treatment and not losing sight of the cost structure on the other.

Various remuneration concepts can be applied in the context of foreign assignments. However, regardless of whether it is a net salary agreement, direct tax transfer or allowance model – all concepts must comply with tax law, not only in Germany but also in the respective host country. Even salary components that are not related to the assignment (e.g. stock options) can be affected by the employee’s place of residence or the possible change in the place of payment for tax purposes. All of this must be taken into account in advance in order to protect employers and employees from unpleasant surprises later on.

Assignments often pose major challenges for a company’s payroll staff. For example, it must be checked whether salary components paid for the assignment are actually part of the salary, whether they must be paid tax-free or subject to tax, and to what extent any existing double taxation agreements have an influence on the employer’s obligation to withhold wage tax. But also various tax calculations, such as the determination of the gross salary in the case of a concluded net salary agreement, must be carried out professionally. Finally, German payroll accounting must also be reconciled with that of the foreign host company in order to prevent double taxation. All this requires careful planning and the necessary know-how.

Employees who go abroad for their employer expect to continue to be covered by social security. For the employer, this expectation means an enormous obligation and, under certain circumstances, high liability risks should errors occur in the process. The employee’s social security position depends primarily on the duration of the assignment abroad and the country of assignment. The contractual arrangement and further necessary steps are also based on this. In which social security system is the employee to be insured? Is an A1 certificate to be applied for? Does a social security agreement exist and what are the implications? All these considerations and checks must be carried out at an early stage in order to be on the safe side.