Step by step - expatriation

making choices

Estimating the cost of an expatriation is a very important part of the expatriation process for human resources. First, they need to validate the budget with the people who have requested the expatriation. Secondly, it is important for the human resource department to be able to make the appropriate choices prior to the beginning of the assignment.

It is important to note that the cost of an expatriation is much more difficult to determine then the cost of a regular local employee since for a local employee the cost is usually the base salary, plus the employer social security contributions.

If we take an expatriate’s standard package with a tax and social equalization guarantee, a cost of living allowance premium and an expatriation premium, the cost of the assignment will be determined approximately as such:

Gross compensation
< theoretical social charges >
< theoretical income tax >
Expatriation premium
Cost of Living Adjustment
------------------------------------------------
Net compensation guaranteed
+ employee and employer social security contributions (France and / or foreign)
+ income tax abroad
------------------------------------------------
Employee cost without benefit-in-kinds
+ housing cost
+ school for the children
+ car

Some of these package elements can be optimized for social security or income tax purposes in the host and home country.

Social status

As previously mentioned, the employee seconded abroad remains subject to the mandatory social security scheme of his home country. Therefore, similar employee and employer contributions are paid on the gross package of the employee. For this reason, one of the largest cost relating to a secondee’s assignment is the social security cost, especially in France because of the high rates of contributions for both French employees and employers contributions (i.e. contributions on base salary, housing, car allowance, income taxes abroad, expatriation premium, employee social security contributions paid by the employer on behalf of the employee, etc).

A French employee expatriated has to pay French voluntary social security contributions and foreign social security contributions in the host country. Unlike for the seconded employee, not all elements of compensation need to be subject to French voluntary social security contributions. Indeed, the basic concept is that, at least the base salary and the bonus need to be subject to French voluntary social security contributions for the employee to be neither advantaged or disadvantaged by the expatriation. The employee will also need to pay foreign mandatory social security contributions. Therefore, it is necessary to determine the foreign social security contributions rules, rates and brackets to determine the total host cost.

Once all this has been taken into consideration, the human resources will be able to determine the least costly option. 

Tax rules in the host country

It is one of the other major components of an expatriate’s assignment cost. If we consider a standard expatriate’s package where the employee is tax equalized and is a tax resident in the host country, the employer will be responsible for 100% of the employee’s host income tax.

For this reason, it is necessary to determine the host income tax to determine the cost of the expatriation. Therefore, you must be aware of the income tax rules applicable in the host country and optimize or make modifications in the package if necessary.

In most countries, when tax resident, income tax is calculated on the worldwide income. Therefore, it is not because the employee is paid by a French employer, for example, that he is not subject to income tax abroad on his French paid income. Indeed, it is often believed that by declaring a theoretical income in the host location, you are only subject on this fixed and pre-determined income but this is incorrect. To avoid a tax audit (corporate and individual), worldwide income must be declared (i.e. home and host paid).

Unless a special tax status is applicable, the employee will be taxable on base salary, premiums, benefit-in-kinds, etc. Knowing the tax optimizations available in the host country is therefore key to reducing the total expatriation’s cost.

The social status can have a large impact on the tax cost especially if social security contributions are deductible or if voluntary social security contributions are considered as benefit-in-kinds in the host country.

For example, we will consider a country where mandatory social security contributions are deductible but where voluntary social security contributions are considered as a benefit-in-kinds:

- The employee seconded for social security purposes is subject to the home country social security contributions (under the condition that a certificate of coverage has been obtained). Employee paid contributions are deductible from the taxable compensation in the host country. The social equalization will have no impact for tax purposes since what is paid by the employer on behalf of the employee is also deductible for tax purposes.

- The employee expatriated for social security purposes will be able to deduct the host social security contributions from his taxable income. However, employee contributions paid by the employee will not be deductible since there are not mandatory and employer contributions will, in many countries, be considered as a benefit-in-kind. Therefore, you will have a higher tax cost in the host country for a similar assignment package.


It is also important to note that numerous countries have implemented special impatriate scheme in order to attract foreign white collars.

For example, in France, it is possible to exempt from French income tax all elements of the expatriate’s package relating to his assignment (i.e. housing, income taxes, etc). this regime requires that certain conditions be respected (see our blog page on article 155b of the French general tax code).

Other countries have similar scheme such as Belgium, Spain, UK, Australia, etc. (more information on the section Fiches pays of our blog).

Benefit-in-kinds

It is necessary to know social and tax rules applicable in host and home country in order to optimize benefits-in-kind.

Indeed, rules applicable in one country be different applied in another country. Therefore, make sure to have understood the rules applicable in the host country prior to optimize from a French point of view your expatriate’s package.

For example, in France, it is possible to optimize for social and tax purposes the housing benefit (see our note in the blog on “social security optimization for an expatriate”). Depending on whether you pay the employee a housing allowance, which would be considered 100% subject to French social security and income tax, or you lease the house for your employee (i.e. lease under the employer’s name), the social and tax cost can be reduced by more than 60% of the total housing cost.

Therefore, prior to having an employee sign an expatriation annex to his work contract or prior to sending him on assignment abroad, make sure that you have properly determined the cost of the assignment since the total cost can be two to three time that of a local employee.