Recent changes in expatriate taxation regimes in some key countries
Deloitte Belgium Tax Quarterly, Issue 43 - March 2011
Luxemburg – Introduction of a new expatriate tax regime
The Luxemburg authorities have introduced specific rules for expatriates qualifying as highly skilled workers, which could bring significant tax savings for both expatriates and their employers. Circular LIR n°95/2, which was issued on 31 December 2010, provides details of this expatriate tax regime which came into force on 1 January 2011.
Summary of conditions
The legislation applies to new expatriates coming to Luxembourg from 1 January 2011. The new rules do not apply to existing expatriates or contract workers, but apply to individuals already working within a group or individuals directly recruited from abroad, although slightly different conditions are applied to each scenario.
The general conditions for expatriates revolve around residency, education and salary among others. Additional conditions apply for intra-group secondments which are underpinned by certain criteria such as the existence of contractual relationships between home and host companies, and certain job characteristics of the seconded employee.
Also, the employer must satisfy a number of conditions. For instance, the Luxemburg entity must employ or commit to employ at least 20 full time employees in Luxemburg.
Benefits of the regime
If the above conditions are met, it is possible to obtain a tax relief for certain expenses relating to relocation, school fees and lump sum for recurring expenses. Moreover, rent (or utilities), home leave and tax equalization are also eligible for tax relief, subject to an overall cap.
This new legislation is an important development in the area of expatriate taxation and can significantly reduce the costs of what is widely known to be an expensive way to bring a necessary workforce to Luxemburg.
United Kingdom – Regular expatriate assignments could be hit by the draft legislation on “disguised remuneration”
On 9 December 2010, the U.K. Government released draft legislation which is aimed at so called “disguised remuneration”. It looks like the draft legislation will also apply to regular expatriate assignments. Where the rules apply, tax will need to be withheld (by the employer or host employer) under the U.K.’s “Pay As You Earn” (PAYE) system and National Insurance contributions (NICs). The effect can be to accelerate the tax point, increase the total amount of tax due and in some instances create a double charge to tax.
Overview of the draft legislation
Applicable from 9 December 2010, the draft legislation targets third party arrangements (involving the employer, employee and a trust or pension provider) which the government feels are avoiding U.K. tax, NIC liability or pension tax relief restrictions. The legislation operates by assuming that any arrangement which involves a payment, reward or loan is in breach, unless it can be excluded under one of a limited number of exceptions. HMRC considers that a third party arrangement exists where an employee is legally employed by one company but seconded to another under a typical international secondment arrangement. This legislation is intended to take precedence over the benefit in kind tax charges, and unless it is amended some common exemptions may be lost.
The draft legislation has a wide scope and unless substantial amendments are made, it will catch a number of innocent arrangements including some that commonly occur when employees are seconded to work abroad or simply work partly in the U.K. and partly overseas.
HMRC is currently consulting on the final scope of the rules and, subject to ministerial approval, commercial arrangements and those which cause employers significant difficulties may be excluded, as long as no avoidance possibilities are created. The sought changes are however not guaranteed.
Denmark – Important amendments to the Danish expat scheme
A new bill (L81) introduced important amendments to the Danish expat scheme. The new rules apply since 1 January 2011.
To benefit from the expat scheme, the employee must be a researcher or have a cash salary exceeding DKK 69,348 (2010) per month. Expatriates are taxed at a (low) flow rate, instead of the ordinary progressive rates.
Previously, the expatriate could opt for a 25% tax rate for 3 years or for a 33% tax rate for 5 years. The effective rates were 31% and 38.36% respectively, including the social tax of 8%.
Effective 1 January 2011, both the 25% and 33% rates have been repealed and replaced by a new 26% tax rate, applying for a maximum period of 5 years. The effective tax rate will be 31.92%, including the social tax of 8%.
Under the new rules, the scheme can only be applied by employees with no tax liability to Denmark in the past 10 years. Previously, the "quarantine" period was set at 3 years only. Danes who return to Denmark after a number of years abroad are targeted by this amendment.
India - Significantly increased costs for employers with assignees working in India
The Indian government amended the Provident Fund Scheme (PFS) to extend its applicability to ‘International Workers’ (IWs) with effect from 1 November 2008. As a consequence, most overseas employees assigned to India became liable to pay PFS contributions at the rate of 12% with a matching contribution by the employer. The accumulated funds plus interest charges paid by the Indian government would be repayable when the IW completed their assignment in India. The Indian government introduced further amendments to the PFS and has modified the Employee Pension Scheme (EPS) rules, which will have a significant effect when the PF funds can be withdrawn and on the amount of benefits payable from the accumulated funds. The changes took effect from 11 September 2010.
The amendments to the PF legislation are aimed at encouraging India’s trade partners to sign social security agreements, so as to reduce the amount of foreign social security payable by Indian employees assigned overseas. India has signed eleven social security agreements, but only two are in force at present (with Belgium and Germany).
The PF and EPS amendments will significantly increase the cost of Indian assignments and employers will have to factor this additional cost into their assignment budgeting processes. Without action, PF contributions will, in most circumstances, have to be regarded as a “lost cost” for employers assigning employees to India.