The length of an expatriate’s assignment is just one of the many items to consider when administering expatriate payroll. The length of an employee’s assignment may affect reporting requirements in the home and host country. Assignment length may also impact the taxability of your assignee’s compensation components. Below are some benchmark time frames to keep in mind.
During the first 183 days, the assignee is generally exempt from paying taxes in the host country. However, countries have different rules on how the 183 days are counted. Some countries use a calendar year, some use a rolling 12 month period, and some take into consideration time spent in the host country from 1 to 2 years prior. There are also countries that consider an employee to be taxable much sooner than 183 days.
Generally, a short term assignment is shorter than one year but longer than 183 days. This type of assignment does not usually include a move, but is considered an extended business trip. There could be some tax advantages for this type of assignment that vary from country to country.
Long Term assignments usually exceed one year, with most assignments in the two to five year range. The employee moves to the host country which becomes their ‘tax home’, meaning that they are taxable in the host location.
If an assignee is in their host country for more than 5 years, they typically need to be treated as a local employee with all the taxes, benefits, social cost of the host country. At this point the employee can either return to their home country or become localized. Localization is the process through which an assignee transitions from an expatriate assignment to a local employee in their host country. Localization can occur as part of the initial expatriate policy or as an extension to the assignment.
Curious about what other companies are doing? According to a recent study conducted by Brookfield Global Relocation Services, the vast majority of participating companies have policies for employees on long-term assignments. Short-term assignments are slightly less prevalent but still very common.