International Employments
HEUSER RECHT UND STEUERN is specialized in the globalization of employment relationships and offers advice on contract drafting, social and tax law processing, as well as immigration and work permit issues in 150 countries. The complex processes of secondments, delegations, and assignments are comprehensively supported, including the implementation of resulting recommendations.
Basic information is available as an introduction to the subject.
What does international
assignment mean?
International assignment
The term ‘posting’ originates from German social security law. In abbreviated form, it means that an employee resident in Germany takes up employment in a country other than the Federal Republic of Germany in accordance with instructions within the framework of a domestic employment relationship. This activity is limited in time. In the case of a permanent employment abroad, this is referred to as a transfer or relocation to a foreign company, because the connection to the sending state is no longer expedient and appropriate.
In addition to secondment and transfer, there is also a colourful range of terms that have essentially arisen through the delimitation of different fixed-term periods. Whether this differentiation is appropriate in individual cases seems questionable. For the sake of completeness, however, it is briefly sketched out.
Business trip
Strictly speaking, a business trip is not an assignment. The original employment contract with the employee remains unchanged. He continues to have his primary residence in Germany. This term is of a purely fiscal nature. A business trip can last for up to three months.
Deployment
A secondment is a short-term foreign assignment lasting three to twelve months. Due to the short-term foreign activities, additional remuneration components are typically included in a delegation agreement. Domestic activities will continue to remain the primary focus.
Delegation
A delegation occurs when an employee spends a period of twelve months to three years working abroad. In this case, the employee’s residence shifts to the country where he or she works. This requires additional provisions, which can be set out in a separate contract.
The necessary personnel decisions
Personnel selection and requirements profile
Not every employee is suitable for an assignment abroad, regardless of the duration of the stay. Provided that suitable expertise is available, several requirements must be met simultaneously during an assignment abroad:
Personal requirements of the employee
In general, an assignment abroad requires personal openness to foreign cultures and a tolerant understanding of foreign behavioural patterns. A foreign assignment is only successful if the employee is able to adapt to foreign behaviour. It requires a strong interest in the foreign environment and the determination to find one’s way around and assert oneself within it. A foreign assignment also requires the ability to improvise in unfamiliar situations and to take unexpected environmental influences into account. This requires a good sense of culturally determined differences in expectations regarding one’s own leadership style.
Communication skills are particularly important
The employee's ability to communicate is particularly important. He or she needs a high level of sensitivity and strong communication skills. This ability is not only important in terms of representing a company's own product range, but also in terms of dealing with new business partners. This requires a high degree of commitment to his own company and its corporate culture. These requirements can only be met by those who have the determination to achieve something extraordinary.
Leadership competence and sensitivity
A manager is also expected to have an eye for the essentials and be able to concentrate on the important problems. Closely related to this is a strong ability to make decisions, combined with a good sense of timing and flexibility. When dealing with foreign cultures, delegating tasks is a particularly sensitive matter that requires not only tact but also a willingness to compromise and to learn.
It would be a serious mistake to use foreign assignments as a way of outsourcing employees who have become unpopular in the parent company.
Head Office Staff or New Employees?
The motives of employees for working abroad vary from case to case but often follow similar patterns. Typical motivations include an interest in other cultures or a sense of adventure, the ambition to advance one’s career, the prospect of a higher salary, and an improved professional status.
Conversely, factors such as physical and social security in a familiar environment, job stability, and family and social ties in the home country also play a role.
The international orientation of a company requires the secondment of employees under certain circumstances even in countries where the living conditions are less attractive but the market opportunities for the company are all the greater.
Often, only a specific employee can be considered for such a role due to his or her particular qualifications. From a business perspective, it is in the company’s interest that the employee can work flexibly — for example, in other countries as well as in the host country, in different roles, or by returning to the country of assignment to apply his or her specific expertise.
Use of expatriates often essential
Head office personnel are of crucial importance, particularly in the initial phase. This is because only head office staff are familiar with the corporate culture, philosophy, product range, and stated objectives. This mindset can only be conveyed to new employees after a longer and more intensive training period.
This disadvantage can only be offset by careful planning of the foreign assignment. In many cases, a particularly good knowledge of the foreign market situation is the decisive criterion for hiring a new employee. It remains a managerial decision whether to hire a new employee who is unfamiliar with the corporate culture. In such cases, experience shows that communication difficulties and poor investments are inevitable. Numerous and unpredictable misunderstandings often lead not only to a premature termination of employment, but also to an irrecoverable loss in the future market.
Own employees/expatriates
Loss of contact with the Parent company
The company’s own employees hold a special status within the organisation with regard to their work abroad. However, depending on the planned duration of their stay abroad, they often lose touch with developments within the company at home. This is an inevitable situation that must be carefully managed. At both the planning stage and during the stay abroad, experience shows that it often remains uncertain how the expatriate can later be reintegrated into the company. The high demands associated with a foreign assignment have a lasting impact on the expatriate’s behaviour and working methods. The high level of independence enjoyed abroad is often replaced by a tightly structured hierarchy upon return.
Career and Reintegration Programme
It is therefore advisable to develop a career plan for the expatriate that includes, above all, a recognised and practical reintegration programme. The loss of decision-making autonomy that occurs during reintegration can only be addressed in the long term by assigning additional areas of responsibility. It should therefore be carefully considered from the outset whether the expatriate will manage this market from head office after returning from the assignment abroad.
Local employees/locals
Expatriation is Expensive
The expatriation of an company's own employee is associated with high costs. A large proportion of the ongoing costs arises from the regular salary. However, this cost factor can be significantly reduced by employing local staff on site. At this point, the high wage and ancillary labour costs in the Federal Republic of Germany should be mentioned merely as an indication. However, as local employees are generally unfamiliar with the product range and corporate culture and may lack the necessary expertise to develop the selected market in favour of the parent company, it is advisable to appoint a local manager from the parent company and to train local employees at headquarters. In this way, the secondment of head office staff can be significantly reduced, at least in the long term.
Nevertheless, experiences in this field vary considerably. There is no doubt that this approach is not suitable for every company. However, the personnel strategy should always be assessed and evaluated in light of the company’s investment activities. In some host countries, the hiring of local employees is complicated by official approval requirements. In these countries, recruitment is carried out through employment agencies or the relevant labour authorities. Employment agency monopolies have certain disadvantages, but also some advantages. While it cannot always be ensured that the local employee actually receives the salary allocated to him or her, these monopoly companies often oversee the market for qualified managers and specialists. A careful selection of the service provider is therefore necessary.
The preparation effort
Linguistic - cultural - country-specific preparation
The professional qualifications of the expatriate are often of decisive importance for his or her selection. Usually, the expatriate will not speak the language of the future host country. In this case, intensive language training with a carefully selected provider is of decisive importance not only for the employee but also for the accompanying family members. Language deficiencies are the greatest barrier to establishing a successful foothold in a new market. However, foreign language training should not lead to the expectation that participants will be able to interpret legal contract texts.
Intensive preparation is advisable and profitable
Cultural and country-specific preparation serves to deepen understanding of foreign behaviour, climate, and other environmental conditions. A purely theoretical study of literature does not fulfil the intended purpose. In recent years, management schools have emerged that provide careful and intensive preparation for a specific country of assignment. The assumption that the employee will learn the language on site has proven incorrect. On the contrary, experience shows that savings in language training reduce performance, particularly during the familiarisation phase.
To cope effectively abroad, the employee should acquire at least a basic knowledge of the national language before leaving the country. This applies particularly to the spouse, who is even more reliant on the foreign language, as he or she is not integrated into the company and lacks native-language contact with head office. Before taking up the position abroad, the employee should possess a good working knowledge of the national language. In each individual case, it should be determined which level of written and oral proficiency the employee requires for the assignment, so that it can be provided in advance through individual or group language training.
On-site language and behavioural training
In the first months abroad, the employee and his or her spouse should deepen their knowledge through a local intensive course and gain confidence through an accompanying conversation course. Expatriates require not only adaptability but also the capacity to initiate change, an understanding of both their own and foreign cultures, and specialised behavioural training. They thereby meet the requirement to supplement the previously content-focused training programme with a process-oriented component.
For the whole family: Intercultural Training
Intercultural training is essential not only for employees preparing for a foreign assignment but also for members of international project teams and employees in regular contact with foreign markets. Such training generally contributes to improving cooperation, innovation, and efficiency within an international organisation. Preparatory seminars for assignments abroad can therefore form part of a centrally coordinated training programme for a wider target group. The training phases should also support the expatriate at the beginning of the foreign assignment, as this enables questions arising from the new situation in the host country to be addressed effectively. If the family accompanies the expatriate abroad, they should likewise be offered such training. The focus of intercultural training should shift from imparting isolated knowledge about the host country to illustrating interrelationships within it. Participants in such training should become aware of how they think and act themselves. Only in this way can they recognise the differences and possible communication difficulties with foreign values, other mentalities and patterns of life.
Information on site
A preliminary visit by the expatriate and accompanying family members to the future host country is highly beneficial, as it can help avoid poor investment decisions. Some companies even offer ‘trial weeks’ in advance for the employee and his or her family, with the final decision being made afterwards. The risk of early termination for family reasons can thus be partially reduced. This initial visit should last between two and six weeks after careful preparation and coordination with possible contact persons abroad. In this way it is possible to experience both professional and private changes in the host country. The employee recognises the local, economic and legal framework of the new host state. They may already be familiar with the organisation of the subsidiaries, future employees, current problems and wishes of their superiors.
The quality of life is very important for the family!
In private terms, they have the opportunity to inquire about housing (residential complexes, facilities) and essential local services. Family members can inquire on site about the admission of school-age children to German or public schools. Of great importance are certainly also the shopping possibilities, the local range of goods and the cost of living. For many Europeans, the cultural offerings in the form of clubs, theatres, and museums are of essential importance. Cultural events are often the only means of maintaining contact with other expatriates. They also serve, of course, as an important forum for exchanging information. In the end, the local infrastructure is also of great importance. During this information stay in the host country, the employee and accompanying family can assess whether their expectations align with the company’s plans. This orientation phase is financially reasonable. If the family - due to the previous visit - can already move into an apartment at the beginning of the stay abroad, the company saves hotel costs and work absences during the first weeks in the country. This alone can pay for the information stay. Experience shows that providing the employee with a checklist to guide his or her considerations during the information stay is useful.
Family preparation
Financial incentive to take the family with you
New findings in personnel management show that family support for the expatriate is highly beneficial. Particularly in the initial phase in the host country, the support provided by family members proves very helpful. A few companies offer financial incentives to encourage family members to accompany the expatriate. Accompaniment by school-age children usually entails exceptionally high school and boarding costs by German standards.
In this context, the question arises as to who has to bear these costs and to what extent. The situation becomes particularly problematic when the host country cannot provide German-language schooling. In such cases, a separation is almost inevitable, placing a strain on all family members. Both the company and the employee should be prepared for such a situation. In such cases, compensation through the reimbursement of travel expenses to bridge the separation may be an appropriate solution. To ensure that the employee receives active support from their partner, a budget may be allocated for cultural and educational trips within the country. In this way, the country-specific characteristics can become an integral part of the stay abroad.
Preparatory checklists
1. information trip
a) Professional information
- Organisation of the subsidiary,
- Future employees,
- Tasks,
- Current problems,
- Requests from the superior,
- Working documents.
b) Private matters
- Apartment, residential complex, facilities,
- Family, employment of the partner,
- Culture, clubs, sports facilities, school, beginning and end of school year, curricula,
Type of school leaving certificate,
- Move,
- Opening an account,
- Hotels, Official requirements, e.g. work and residence permit,
- On-site assistance: Homing Manager.
2nd departure checklist
a) Visa, work/residence permit, social security, passport,
international driving licence, vaccination certificate, medical certificates, flight ticket.
b) Tropical examination, vaccination schedule, visit to dentist or family doctor,
Travel or first-aid kit.
c) Terminate rental agreement, sell house / apartment / let,
Transferring road safety obligations, utility companies
information, securing electrical appliances.
d) Removal, storage, import restrictions, customs duties.
e) Deregister or re-register vehicle, have no-claims bonus confirmed,
possible sale; import restrictions?
f) Regulate insurance, clarify tax matters, check standing orders,
open a euro-denominated foreign account
The drafting of contracts
The Importance of the
Assignment Contract
With clear formulations to avoid misunderstandings
The assignment of an employee abroad is not covered by general managerial authority. A longer stay abroad can therefore take place only on a new contractual basis. In addition, an international assignment also creates a need for regulation in the areas of insurance and taxation. Many provisions that are self-evident in a German employment relationship subject to social security contributions apply only under certain conditions during an international assignment. Contrary to the otherwise widespread use of minimalistic standard contracts, it is advisable to supplement the secondment agreement with clarifying provisions in order to avoid unnecessary questions and ensure legal certainty. The secondment agreement serves as a point of reference for the expatriate in case of doubt. Particularly in the area of remuneration, clear and unambiguous definitions are essential to avoid subsequent and unproductive disputes.
The principles of contract design
Various design options
As a rule, the expatriate maintains an employment relationship with the domestic sending employer. To adapt the employment relationship to the conditions of a secondment, there are essentially four structuring options. Another option is ultimately to transfer the employee to a foreign company. Occasionally, the original domestic employment relationship is terminated and replaced by a secondment agreement.
This secondment agreement governs both the domestic employment relationship and the terms of the foreign assignment. The advantage of this approach is that there is ultimately only one single contractual document. The disadvantage is that this solution carries the unpleasant connotation of a termination declaration.
The same result can be achieved through a termination agreement. This structuring option has the advantage of a single contractual document without the negative connotation of a notice of termination. The question, however, is whether this approach is also reasonable for the employee to be seconded from a psychological perspective.
Interim agreement
In many cases, the original domestic employment relationship is suspended under a framework agreement. The suspension agreement temporarily suspends the main obligations arising from the employment relationship, stipulating that they shall resume after a specified date, period, or event. This option offers the employee the advantage of knowing their future status upon completion of the foreign assignment through the reinstatement of the original employment conditions. For the sending employer, this arrangement has the initially unpredictable disadvantage of having to continue employing the individual under the previous conditions after the foreign assignment.
Supplementary contract
The supplementary agreement offers another structuring option, characterised by the tailoring of the domestic employment relationship to the specific requirements of the foreign assignment and its supplementation with the necessary provisions. In this case, the need for adaptation must be analysed and coordinated with particular care. It should also be clarified that, for example, the special remuneration components apply only for the duration of the secondment, as the supplementary agreement expires upon completion of the foreign assignment and thus with the special secondment conditions. The advantage is that the employee knows, after the foreign assignment, that they will continue to work at least under the original terms of employment. Whether the employee’s continued employment after a successful foreign assignment remains appropriate under the original employment agreement must be carefully considered. Alternative options are discussed in the section on reintegration clauses.
The transfer is characterised by the fact that the employment conditions in the host country are defined exclusively by the foreign employer. The employment relationship is then governed by the employment laws of the host country.
While the works council must be consulted in the event of termination, participation rights do not apply to the other structuring options.
The corporate philosophy of the secondment/the connection to
the head office
Employee appraisal brings clarity
The contractual relationship between the employee to be seconded and the head office provides the expatriate with the assurance that key personal and professional matters remain anchored within a familiar cultural environment. All matters related to the secondment should be carefully discussed and clarified in a personnel meeting. This provides the expatriate with a sense of security that is of great importance for the proper fulfilment of duties in the host country.
Timely planning is required
In practice, secondment agreements are sometimes handed over as late as in the airport lounge, leaving the employee with no further or enforceable options for negotiation. Although such an approach cannot always be avoided due to time constraints, awareness of its negative implications should encourage prudent and timely planning.
An important component of the corporate philosophy is the fulfilment of the employer’s duty of care with respect to the employee’s social security arrangements. When an employee is seconded abroad, numerous questions arise that can only be reliably answered by experts from the respective social security institutions. However, under the principle of welfare, the employer is obliged to inform the employee about the implications of an international assignment in matters of social security law. Omissions or violations resulting from inadequate or negligent research can lead to considerable liability exposure.
Success through connection to the parent company
Maintaining a close connection with the head office during the foreign assignment is essential for the successful execution of duties. To ensure effective daily or at least regular communication with the parent company, the expatriate requires a permanent contact person. In this way, the expatriate can report on progress and clarify problem areas, while the parent company provides updates on internal developments and shifts in priorities. This ensures that the assignment in the host country is carried out more effectively. Dependent on the size of the company and its level of diversification, maintaining a direct connection with the management is recommended.
The main areas of
a secondment contract
The Choice of Law Clause
Recommendation: Apply German Labour Law
The drafting of a secondment agreement primarily raises the question of which legal framework should govern matters of structure and conflict resolution. As a rule, both domestic law and the law of the foreign country where the work is performed may be applicable for this purpose. As a general rule, it is advisable to apply German domestic labour law.
The advantage of applying German labour law lies not only in the associated legal clarity but also in the predictability of potential risks. This is because German labour law is generally familiar to both contracting parties. If the secondment agreement is governed by foreign employment law, unpleasant surprises cannot be ruled out.
However, the applicability of foreign employment law cannot be excluded in its entirety. The limits of a choice-of-law clause are determined by mandatory public law. As a rule, public law encompasses the broad field of regulatory provisions in the host country. This typically includes laws governing public holidays, taxation, social security, residence rights, and work permits.
Clarify questions of doubt in advance
A further limitation of a choice-of-law clause is that German labour law is not recognised by all jurisdictions. For this reason, it is always advisable, in individual cases, to consult the embassy, consulate, or a locally based lawyer in the host country to clarify any uncertainties arising from a choice-of-law clause.
Reintegration clause
As previously mentioned, a reintegration clause is of particular importance in the event of termination or rescission of the original employment agreement. In such cases, the employment relationship with the sending employer is governed exclusively by the secondment agreement. The secondment agreement, in turn, generally terminates upon completion of the foreign assignment. At this point, at the latest, the question arises as to the basis and conditions under which the expatriate will be reintegrated into the sending company. This question must be addressed not only in abstract terms but also in light of the expatriate’s specific experience abroad. The expatriate typically enjoys greater autonomy in the host country than he would find within the domestic organisation. His international market experience is of economic value to the sending company.
Reintegration is a sensitive issue
At the outset of a foreign assignment, however, it is impossible to foresee which complications may arise in the host market. Nor is it foreseeable how the company will present itself to the employee in the domestic market upon completion of the foreign assignment. It is therefore naturally very difficult for the sending company, even after careful consideration of all advantages and disadvantages, to make any definitive statements at the outset regarding the employee’s future role upon return to the head office. On the other hand, the employee naturally expects to be rewarded for the sacrifices made by an appropriate career advancement within the parent company. Such decisions can only be made on a case-by-case basis, taking into account all factors relevant to the decision. For this reason, three possible reintegration clauses are set out below, each providing a different regulatory scope.
1. return to the conditions of the previous position
"We will offer you a position equivalent to your previous role with us in terms of function and remuneration, taking into account the general salary development of our employees since you commenced your employment in […]. This offer will apply if your employment agreement with […] expires without early termination for reasons attributable to you, and provided that no pension event has occurred."
2. return clause, taking into account the experience of the
assignment abroad
"Upon completion of your foreign assignment in […], we will offer you a position reflecting your experience and performance both in Germany and abroad, in terms of responsibility, remuneration, and required qualifications. In any event, we will offer you a position equivalent to your previous role with us in terms of function and remuneration, unless a higher-level position can be assigned. You hereby agree to temporarily perform duties of a lesser value if necessary."
3. return clause with position promise
"Upon completion of your foreign assignment, we will offer you the position of […] within our company. Your future responsibilities will include further developing and overseeing the market in […] from the parent company. Remuneration will be determined in line with your level of responsibility and the associated requirements, taking into account the customary practices of our organisation."
Authority to issue directives/subordination/reporting channel
"Upon completion of your foreign assignment, we will offer you the position of […] within our company. Your future responsibilities will include further developing and overseeing the […] market from the parent company. Remuneration will be determined in accordance with your level of responsibility and the related requirements, taking into account the customary practices of our organisation."
The salary system/properties
In the field of international assignments, the range of possible salary components and material benefits is extremely complex. There have already been various attempts to provide a comprehensive and numerical overview of conceivable remuneration elements, but these are, in my view, no longer manageable. When defining a salary and benefits policy, two different approaches must be distinguished.
1) One is defined for all employees - regardless of the country in which they are posted.
turn
- generally applicable remuneration policy;
2. a remuneration policy shall be developed on the basis of the remuneration policy in force in the State in which the work is carried out tax law, taking into account the associated tax advantages.
While the approach described under point 1 is more relevant for large corporations seeking uniformity across their global workforce, the second approach is particularly suitable for medium-sized and smaller companies that can thereby make effective use of fiscal optimisation opportunities. The approaches associated with these two alternatives lead, in practice, to entirely different organisational procedures. In the following, accentuated focal points of a remuneration policy with their essential contents are presented. This presentation does not claim to be complete either.
When defining salary components in the classical sense, the following regulatory aspects must necessarily be taken into account:
1. the incentive function,
2. the compensation of disadvantages,
3. performance-relatedness,
4. international comparison,
5. material advantages,
6. definition of some salary components.
Incentive by mobility premium
In many cases, an employee with a certain professional qualification is particularly suitable for a position abroad. Experience has shown that an attractive salary package is the most effective means of motivating qualified employees. The amount at which the incentive threshold is exceeded varies from case to case. The incentive can be created by a mobility bonus, which is usually granted to every employee who is willing to spend time abroad. The amount of this remuneration component is a question of company policy.
Compensation for disadvantages as consolation
Hardship compensation is required for host countries that are less attractive due to climatic, political, cultural, or economic conditions. These disadvantages are also referred to as hardship. In this area in particular, there is a multitude of conceivable and applied design options. What these systems have in common is a country-specific approach. To facilitate orientation, a brief overview is presented here. In the case of a short-term stay within the framework of a business trip of up to three months or up to a stay abroad of up to 183 days, a justifiable compensation for disadvantages can be achieved by means of the tax-recognised rates for additional expenses for meals and overnight accommodation for business trips of one or more days. It makes sense to use the indices of the BfAI (Bundesstelle für Außenhandelsinformationen in Köln) or Lufthansa for stays abroad that go beyond this point in time. However, in light of increasing European integration, the following model also appears to establish clear distinctions:
Staggered compensation for disadvantages
Starting from the Federal Republic of Germany as the sending country, the European countries have a predominantly recognised high level of quality of life. The rest of the world outside Europe could be divided into industrial countries and developing countries. To this extent, the compensation for disadvantages would have to be structured in three stages, with the EU states representing the lowest stage, the industrialised countries the second stage and the developing countries the top stage. A new idea in connection with disadvantage compensation is that an expatriate adapts to the changed circumstances in the course of his stay abroad, so that the amount of disadvantage compensation can be reduced with increasing length of stay in the host country.
Performance-related remuneration components
Even working in a foreign country can be rewarded from a performance-related point of view. A number of target agreements may be applied in this area, which can be job-related, departmental, employee-related, turnover-based, or performance-based. While the performance-related share of a salary at the beginning of a stay abroad will be rather small, because experience has shown that there is only little room for manoeuvre, it is expected that it will increase over time. The so-called commissions or royalties represent an incentive for the additional work assignments associated with this. Their dynamic nature generally more than compensates for the disadvantage of a salary-dependent hardship allowance.
An international comparison of personnel costs in the increasingly competitive expatriate markets shows significant variations in salary levels, depending on the country of origin of the employee. In a forward-looking definition of salary and material benefits, this aspect cannot be ignored.
The material advantage policy, in turn, can be divided into five larger blocks:
1. necessary reimbursement of expenses,
2. hardship compensation,
3. status questions,
4. incentives,
5. insurance package.
What is included in the reimbursement of expenses?
Under item 1, the following costs are included: those arising from visa applications, residence and work permits, and, where applicable, required medical examinations, such as at a tropical institute. Furthermore, the costs for a certain weight of luggage are covered as well as the flight costs in the host country and for return flights from the host country, which in this case are also business trips. Household liquidation / furniture storage / removal companies are further financial burdens.
The hardship compensation includes the clothing cost allowance plus cleaning and the separation allowance. Status-related benefits include housing, vehicles, domestic staff, telephone, and mobile services. Incentives may include, for example, a home leave budget.
Frequently used remuneration components
-
Net salary arrangement: As in Germany, the net salary continues to be paid as basic remuneration. This compensates for the time devoted to the assigned duties. In contrast to the gross salary arrangement, the net salary is calculated by taking into account personal tax advantages, ensuring that no financial disadvantage arises under any circumstances.
-
Function bonus: A bonus linked to the performance of an extended role and the associated challenges of working abroad.
-
Expatriation allowance: A financial incentive to take up a position in a specific country. In some cases, it is also understood as a country-specific hardship allowance.
-
Danger allowance: Granted in countries with political instability or heightened security risks.
-
Clothing subsidy: In areas with an unfamiliar and harsh climate, where special clothing is required.
-
Housing: Rental costs fluctuate continuously worldwide. The trend is shifting away from rental subsidies towards full reimbursement of housing expenses. Various rental indices are now available. Whether the expatriate is provided with accommodation depends on company policy. For family relocations, housing subsidies are often granted up to a specified limit.
-
Furnishing lump sum: Intended to cover the purchase of necessary furniture at the place of assignment.
-
Purchasing power adjustment: A subsidy towards living expenses designed to offset price and value differences in the host country. Regular review of this allowance is advisable. The benchmark for comparison is typically the indices of specialised consulting firms. Under German tax law, purchasing power adjustments are tax-exempt within prescribed limits.
-
Exchange rate fluctuations: To compensate for the disadvantages of an unstable currency, fixed exchange parities are established, allowing fluctuations to be balanced within a defined range. Often, part of the salary is paid in euros, with the remainder paid in the local currency.
The social security obligation
Clarify the social security obligations!
In the case of an international posting, the question arises as to whether contributions must continue to be paid into the German social security system, into the state insurance schemes of the host country, or even into both systems — resulting in a double payment burden. These questions cannot be answered in general terms. The outcome depends, on the one hand, on the structure of the employment contract and, on the other, on mandatory legal provisions that may stem from both the German legal system and that of the host country. Certain bilateral social security agreements have been concluded with various states to prevent double contributions. In this context, EEC Regulation No. 1408/71 is of particular importance. Outside the EU, additional intergovernmental agreements must also be observed. Relevant information can be obtained from the competent social security institutions.
Reimbursement of return
relocation costs
Since the Federal Labour Court (BAG) ruling of 26 July 1995, contracts allowing an employee to be transferred at any time have been subject to a cost risk if they do not contain an explicit and unambiguous provision regarding relocation expenses, in cases where the seconded employee is recalled or reassigned at the employer’s request.
A previously common flat-rate provision stipulated that relocation costs were to be reimbursed by the employer. In the event of termination of the employment relationship, it was often specified that removal expenses would not be reimbursed, as the employer’s duty of care would have expired by that time.
Based on this flat-rate provision, the Federal Labour Court (BAG) concluded, applying the principle of good faith, that relocation expenses must also be reimbursed. This applies even if the position at the place of posting ceases to exist and the employee terminates their employment for that reason. A reimbursement obligation arises unless it has been expressly excluded by contract.
Taxation of income
Observe double taxation agreements!
When an employee is posted abroad, questions arise as to which state has the right to tax the income, or whether income tax must be paid in both the host and the sending state. These questions are governed by so-called double taxation agreements (DTAs), which aim to avoid the double taxation of income. Various conditions must be taken into account in this regard.
In general, the state in which the employee is domiciled and usually resides to carry out their professional activities has the right to tax employment income.
The employer is legally obliged to withhold and remit income tax.
The starting point for tax liability is the residence principle or the habitual place of residence (§§ 1 EStG, 8, 9 AO). According to this principle, every resident or foreign national who lives in the Federal Republic of Germany and earns income there is subject to taxation. This is referred to as unlimited income tax liability. Limited income tax liability exists in Germany if the employee’s residence has been relocated abroad. Exceptions apply if the employee leaves their family in Germany until family reunification takes place. In such cases, unlimited income tax liability continues to apply. This tax liability also applies if the employee economically transfers the results of their work performed outside the scope of the EStG to the domestic employer, by making their services available and receiving remuneration borne by the domestic employer. This is referred to as the “Verwertungsbestand” under Section 49 (1) No. 4 EStG.
An exception to FRG’s right to tax the entire income arises under a double taxation agreement. In such cases, the right of taxation generally passes to the state of activity after 183 days, and the employee becomes subject to limited taxation in FRG for their remaining income. In certain circumstances, the right of taxation may transfer to the state where the work is performed after only a few days, if the conditions for the so-called permanent establishment reservation are met; see Article 15 of the OECD Model Convention, which is typically incorporated into Article 15 of the respective DTA.
In cases of unlimited tax liability in Germany, the employer must record the employee’s global income, including monetary benefits, withhold the taxes, and remit them to the tax authorities. If only limited tax liability applies, the DTA or the Foreign Activity Decree (ATE), as well as the applicable regulations of the host country, must be taken into account. Monetary benefits are often tax-exempt in such cases. Each case must be reviewed individually. The relevant information must always be included in the payroll records. To confirm the question of domicile, a certificate from the employee’s local tax office may be obtained.
Tax matters become more complex if no DTA has been concluded with the country in which the employee works. In such cases, it is advisable to consult an experienced specialist.
HEUSER News
Here you will find our latest publications for magazines and specialist literature.
videos
magazine
literature
