It goes without saying that tax liabilities vary enormously from one country to the next. However, tax liabilities can vary significantly from one person to the next in the same country, even if they earn the same income. Several countries offer tax concessions to expatriates that fit certain criteria, resulting in lower tax liabilities compared to a local national.
The main aim of expatriate concessions is to attract highly skilled assignees and encourage foreign investment in the country. They are typically found in high-tax jurisdictions since high taxes can be discouraging to mobile talent. However, in low-tax jurisdictions there is no real need for the authorities to provide further fiscal incentives for inbound assignees.
A tax concession can take many different forms. Some countries, such as Denmark, Finland, Korea Republic and Spain offer significantly lower tax rates while others, such as the Netherlands, offer additional tax deductions which are not available to locals. Alternatively, countries such as France, Belgium and Taiwan may allow certain assignment-related benefits and allowances to be provided tax-free or at a reduced rate of tax.
One of the most prominent examples of an expatriate tax concession is the ‘30% Ruling’ in the Netherlands, which offers qualifying expatriates a tax-free allowance equal to 30% of gross income. This is currently available for up to eight years but from 1 January 2019 the maximum duration will be reduced to five years. No transitional arrangements will apply, meaning that the reduction will affect new and existing assignees.
Unsurprisingly, such a generous concession is not available for everyone. Among other things, qualifying individuals must earn above a certain income threshold and cannot have lived within 150km of the Dutch border for more than eight months of the previous two years. Such criteria are not uncommon for expatriate concessions and in some cases employer-related conditions may also apply, such as a minimum number of employees.
The chart below gives the respective tax liability for local nationals and expatriates earning a gross income of EUR 150 000 in a selection of countries which offer concessions to the latter. While the 30% Ruling reduces the tax liability by about a third, the most generous reduction is in Italy. Since 2017, qualifying expatriates have enjoyed a 50% deduction from gross income, meaning that an individual earning EUR 150 000 would see their tax liability fall by over 60%.
© Employment Conditions Abroad 2018
Often considered a tax haven, Cyprus has one of the lowest tax liabilities in our analysis yet offers assignees a 20% deduction from gross income (up to EUR 8 550 per annum) for five years. At the other end of the scale, the concession available to assignees in China (a standard deduction of CNY 4 800 per month, compared to CNY 3 500 for locals) barely makes any impact. The government recently revealed that a draft amendment to the Individual Income Tax Law is under review, which would increase the standard deduction to CNY 5 000 per month for all taxpayers, including expatriates. If enacted, preferential treatment for assignees would therefore become a thing of the past.
While many countries make no tax distinction between an assignee and a local national, expat concessions don’t really matter if the overall burden is low. For example, individuals working in the oil-rich Persian Gulf states pay no income tax whatsoever, whilst Hong Kong has a top tax rate of 17%. Singapore has a top rate of 22%.
Furthermore, social security contributions may also be required, which could negate the benefits of low taxation. For example, the individual income tax rate in Romania is 10% but the employee social security liability is 35%. Some countries, such as Hong Kong, do not require inbound assignees to contribute, but in general these liabilities are an extra factor that needs to be considered.
Aside from reducing the tax liability of an assignee, the one constant among these concessions is that they are not granted automatically. They must be applied for, and any appropriate documentation must also be submitted. Therefore, as always, careful planning is required to ensure that an assignee’s remuneration package is as tax efficient as possible.
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ECA’s hypothetical tax data is built into our various assignment calculators and cost projections, including our assignment management system, ECAEnterprise.