Beginner’s Guide to Expats
One of the most common questions I get from clients is how to deal with expats. This is not surprising as many companies expand overseas by relocating their existing employees. However, expats are one of the most complicated issues faced by HR and payroll managers. Expats involve complexities that are unique to other areas of HR and payroll. It can be hard to find anyone to advise you how to tackle the problem step by step without making a big cost commitment.
How this blog will help
If you are new to expats, this blog aims to give you a better understanding of:
- What is an expat?
- How do I pay an expat?
- What are the rules governing expats?
It also provides free links to information on other expat questions.
What is an expat?
Let’s start by defining an expat. An expat literally means someone who is outside their home country. An expat employee means someone who is working outside their home country. So for example a German national who works in the USA will be an expat employee while they are in the USA.
Why does this matter for payroll?
Payroll needs to know if an employee is an expat. Otherwise payroll will assume they are a domestic national and they will be treated like any other local employee. Expats may require any of all of their salaries, taxes and social security to be calculated and paid differently from other domestic employees in that country.
How long is it before an employee becomes an expat?
Usually an employee who works overseas for a one-off, short assignment does not need to be classed as an expat. This is why staff who travel overseas for a conference do not usually need to have expat payroll treatment. The rules vary around the world, but many countries say that anyone working e.g. for six months in their country will become an expat.
What happens if an expat breaks their stay abroad by coming home briefly?
Usually this has no impact on the tax rules. The rules measure the total amount of time an employee spends overseas, rather than the length of any one individual trip. As a result employees who regularly travel overseas may need to be classified as expats, or as a particular category called Short Term Business Visitors. For these employees their total time abroad and where they are working should be monitored carefully.
Where should an expat be paid?
There are often no rules which govern where and how salaries are paid to expats. This may allow you to continue paying an expat their salary in their home country or wherever they wish. However you should remember that you will still need to pay payroll taxes and social security overseas irrespective of where salary is paid.
What currency should I pay an expat in?
When choosing the currency in which to pay your expat, I recommend this normally be driven by the country where the salary is paid. So if the expat is paid overseas, try to ensure they are paid in the common currencies of the country where they are working. Otherwise this can lead to extremely complicated payroll calculations and it may not be possible for other reasons.
Who sets the rules for expats?
There are three types of rules which govern how expats are treated, namely the host country, the home country and any treaties between the two countries.
Host country (i.e. where the expat has relocated to work) – Usually the host country will set the rules which govern how expats are treated. They will specify under which conditions an expat needs to pay taxes in their country. They will also determine if social security payments are also needed, which filings need to be made, the amount and timing of payments and so on.
Home country (i.e. the expat’s usual country of citizenship and/or residence) – often the expat will still need to file and pay taxes in their home country even if they have been working abroad for the full tax year. The USA for example requires citizens to file tax returns based on their worldwide earnings. There is a lot of complexity relating to citizens who have lived outside their home country for a long time or have changed nationalities. Payroll should ensure they have a full understanding of the expat’s nationality and tax residency status.
Treaties between the two countries – Country can individually enter agreements with other countries to harmonize trading and tax matters between them. These can affect the treatment of expats who could otherwise be liable to tax in both countries. As an example, double tax treaties are agreements between two countries which usually mean that expats only pay tax in one of these countries.
Other expat FAQ’s
Here are some free links for answers to other common expat questions:
How do work permits and visas affect expats and their payroll?
How do expats pay tax split over multiple countries?
How do other companies like us handle expats?
How can I find a one-stop expat service that provides all we need?
John Galvin is a UK-based Global Consultant for Blue Marble Global Payroll.