Foreign work assignments as financial risks

in Tax, 15.10.2015

Secondments abroad contain financial risks for the home company. A secondment does not exclusively impact the employee and his administrative situation – the activity of the employee has also a direct impact on the taxes and social security of the home company. An analysis is needed.

If companies send their employees abroad, an operational business need is the main driver: filling a vacant position, solving a technical problem or offering training possibilities. Very often enough attention is not devoted to tax and social security matters. Risks do not only arise on the employee side but exposes risks on the side of the employer as well.

Tax trap

Depending on the personal situation of the employee, the duration of his assignment and existence of a double taxation agreement, the assignment can lead to a taxation of the employee in the host country (for outbound cases) or in Switzerland (for inbound cases). In all these cases, the Swiss employer has clear duties.

a) To Switzerland – Inbound

A foreign employee is subject to source taxes in Switzerland. The host country employer is responsible for paying this source taxes, which is based on the gross salary of the employee. If the employee is paid by the home company, the income tax basis for the inbound very often remains unclear. Is it solely employment income? Are allowances included or not? How are allowances to be treated? In addition, how do taxes paid by the host employer have to be considered? Does a shadow payroll have to be set-up and does a Swiss salary certificate have to be issued?

In any case, the host country employer is responsible for remittance of the correct taxes. This obligation cannot be waived by the employer and passed on to the employee! The risks for the employers are significant: Non-compliance can cause serious damage. The source tax, which is deductible from the employee’s gross income, cannot be passed on to the employee. It has to be extrapolated to 100% (so called Gross-up). A tax burden from 35% can therefore quickly turn into nearly 54%! This tax burden remains with the employer!

b) From Switzerland – Outbound

The employee operating abroad can be liable to pay taxes according to foreign tax law. Many foreign countries have tax withholding systems similar to the source tax system in Switzerland. Depending on the country, taxes have to be paid on a monthly, on a quarterly or on a yearly base. The tax base and the remittance modules are determined by the tax law of the respective country. The risks for the employer are significant. As foreign countries often have higher tax rates than Switzerland, possible extrapolations to 100% can be immense. Determining the budget for secondments abroad can get completely out of hand. Unlawful behavior can lead to fines and companies be blacklisted as well as temporary disqualification from business activities in the respective country.

Social Security

The secondment also affects the social security of the employee. The question arises as to whether the employee is insured correctly or not.

In Europe agreements exist, which determine where an assignee is subject to social security and allocate them exclusively to a state. The rules are complex, depending on the place of work, residency, and domicile of the company as well as on the question whether it is a pure assignment or alternating places of work in several countries. If a social security coverage in the home country is given, an A1 from the home country is required to confirm this..

With states beyond Europe we partial coverage with bilateral agreements is given, so called totalisation agreements. The scope of coverage of social security insurances depends on the respective agreement. For assignments, these totalisation agreements normally stipulate exclusive allocation to the home country system, whereas proportional allocation is provided for alternating operations in several countries. Basically, it is the duty of every employer to make sure that the employee is covered for social security purposes. The employer has to apply for a “Certificate of Coverage” (CoC), thereby determining the correct social security system. If the employer omits to deal with this aspect or handles it incorrectly, the employer risks being held liable for damages such as invalidity, which can quickly lead to costs of several hundred thousand francs.

Business establishment

The operation of an employee abroad can lead to a tax liability for the employer in the foreign country. An operation abroad from an established institution for a certain period and an active market presence including the competence to act on behalf of the home country and/or to be vested with the power to sign contracts is generally considered as a business establishment in the respective country. In that case, a part of total profit from the company is subject to taxation abroad. Detailed information to this is given in Claudia Schaub’s article.

Recommendation – What to do?

The most important thing is that the company does not give up control of leadership and administrative duties when it sends its employees on assignment. A laisser-faire attitude or shifting of obligations to the employee without appropriate control will impact the company negatively in respect to their finances and their reputation. Only the companies, which plan and monitor their international assignments can control their financial risks.

 

 

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