Hiring Abroad? Why the Right Employment Setup Comes Before Payroll

The first step is to thoroughly analyse the intended employment setup. This means examining the employee’s residence, their work location, the employing legal entity, and the company’s market objectives. 

While payroll often receives the most attention, it is the outcome of earlier decisions that determine:  

• Applicable social security legislation: Within the EU, the general rule is that an employee is subject to the social security system of the country in which they work, though several exceptions may apply. 
• Taxation obligations: The countries where employees live and work, along with international tax agreements, determine where income taxes are due. The standard employment-income article, found in many tax treaties, usually assigns the tax burden to the country where the employee works. An exception may apply if all the conditions of a treaty’s 183-day rule are met.  
• Labour law requirements: European rules determine which employment law applies. These rules are designed to avoid situations whereby the employer tries to apply a less beneficial labour law of a country that has little connection to the employee’s actual place of work.     
• Payroll structure: Payroll requirements are country-specific. Employers must determine the local registration, withholding, reporting and payment obligations in each relevant country. 
• Registration formalities: Before hiring employees in a new country, employers should check whether they need a local legal entity or specific registrations. Even when a local entity is not required, setting up social security and other mandatory registrations can take time. In some countries, such as France, the process can take several weeks, making early planning essential to avoid delays and compliance issues. 

Skipping this initial analysis can lead to significant issues later, often after the employee is hired and expectations are set. 

A thorough analysis of the employment situation is crucial, as it dictates social security, tax, labour law, and registration requirements.

From a tax and payroll perspective, many organisations begin payroll execution without fully understanding the broader compliance framework, which can lead to complications. A compliant payroll requires clarity on several key questions: 

• Does the company have a legal presence in the relevant country? Is a local representative required?  
• Where is the employee fiscally resident? Which countries have taxing rights? Does a double taxation agreement apply? 
• Are local employer registrations and periodic payroll withholdings required, or can employees settle part of the tax through their personal tax return?  
• How should different salary components be treated? 

These challenges typically arise in common international employment scenarios, making it essential to assess applicable situations before payroll implementation:  

• Simultaneous employment. For instance, a Belgian employee works for a Dutch company, spending two days working remotely from home in Belgium and three days a week physically in the office in the Netherlands. 
• Secondment. For instance, a Spanish employee is sent by the Spanish company to work in Croatia for two years.  
• Local employment in the employee’s country of residence, which differs from the employer’s country. For instance, a Belgian company recruits a German employee who is allowed to work remotely from Germany full time. 

Each scenario has different implications for tax, payroll, labour law, social security and formalities. Understanding these distinctions is crucial before proceeding. 

Understanding the tax and payroll impact, including fiscal residency, taxing rights, and specific employment scenarios, is vital for compliant international payroll. Employees’ personal circumstances may change over time, and employment arrangements often evolve accordingly. It is therefore important to review the payroll setup on a regular basis to ensure that it continues to reflect the actual employment situation. 

Once the initial analysis is complete, simulations become invaluable for choosing the preferred employment setup including the corresponding payroll structure. Simulations allow businesses to compare potential scenarios by calculating the total employer cost and the net result for the employee.  

These insights, combined with the service costs for each scenario, enable informed decisions before implementation. This ensures the decision is based on a clear view of the impact on both the business and the employee, rather than guesswork or assumptions. 

Simulations provide clear data on employer costs and employee net pay, enabling informed decisions on the optimal international payroll setup. 

Once the right setup has been chosen, payroll execution becomes the final crucial step. 

Payroll must run correctly in every country involved. The objective is to remain legally compliant with correct presentation of the salary package, accurate social security and tax withholdings, timely payments, and proper salary documents for the employee. 

These documents are not just nice-to-have admin. They are important for tax return preparation and for potential audits. 

The final step is accurate and compliant payroll execution, ensuring all legal and documentation requirements are met in each country. 

SD Worx offers in-house expertise on social security, tax, labour law, formalities and payroll to simplify the complexities of international employment.  

International employment can feel like trying to solve a puzzle with pieces from five different boxes. Social security, tax, labour law, payroll, registrations, contracts, timelines, employee expectations. It all matters, and it all needs to fit. 

SD Worx can assist with:  

• Analysing your plans and the consequences of hiring internationally. 
• Running simulations to identify optimal scenarios. 
• Registering with relevant government agencies if necessary. 
• Drafting employment contracts. 
• Setting up payroll, including gross to net simulations. 
• Providing information sessions on HR and payroll in your new market. 

Our goal is to help you reduce uncertainty, anticipate administrative requirements and implement a compliant international employment setup. Hiring abroad should open doors, not create avoidable compliance issues. 

Jo Lavrysen is an international Employment Consultant at SD Worx, specialising in social security, labour law and cross-border employment structures. 

Koen Putzeys is an International Employment Consultant at SD Worx, specialising in Belgian and international employment taxation, global mobility, payroll tax compliance and cross-border employment solutions. 

If an employee lives and works in different countries, where is the employment income taxed?  

Which country has the right to tax an employee’s income depends on the employee’s tax residence, where the work is physically performed and the applicable tax treaty between the country of residence and the country of work. Double tax treaties help prevent or relieve double taxation and typically allocate taxing rights to the country where the employee works.  However, the 183-rule exception may preserve taxation in the residence country when all the conditions of the applicable treaty are met.  

What is the 183-day rule? 

The 183-day rule is a common exception in many international tax treaties. It may allow an employee’s income to remain taxable in their country of residence rather than in the country where they work. To qualify, several conditions must be met, including how long the employee is physically present in the work country, the identity or residence of the employer and whether the costs are charged to a local business presence in the work country. The exact rules vary by treaty, including the relevant counting period and how the 183 days are counted. The relevant counting period and the exact counting of days are dependent on the applicable treaty. For example, the Belgium-Germany treaty uses a calendar year, while the Belgium-Netherlands treaty looks at any 12-month period. 

What is salary split or split taxation?  

Salary split or split taxation occurs when an employee’s income is taxable in more than one country. This typically happens when the employee physically works in more than one jurisdiction or is employed by entities in different countries. The allocation must reflect the factual work pattern and the applicable treaty rules. A salary split can sometimes lead to tax advantages, though this is not guaranteed and must be assessed case by case. It can also increase administrative requirements, including payroll set-up, workday tracking, tax returns and a review of the applicable social security legislation.  

If my employee lives and works in different countries, where do they benefit from social security? 

Under European Regulation 883/2004, employees can only be subject to one social security regime. They are generally subject to the social security system of the country in which they work, regardless of nationality or residence. Exceptions include employees posted to another EU member state (secondment), where contributions may remain in the home country, and employees simultaneously working in several EU member states, where those spending at least 25% of their working time in their residence country are generally subject to that country's social security system. Special attention should be paid to employees who combine activities in more than one country, such as individuals holding two unrelated part-time positions in different countries, or working as an employee in one country while serving as a civil servant in another. Determining the applicable social security legislation in these situations can be complex and requires a careful assessment of the specific circumstances. 

What’s the impact of teleworking on international employment?  

Cross-border teleworking can have important implications. When employees work from home in another country, those days are generally treated as working days in that country. This can affect tax allocation, social security coverage, payroll withholding obligations, employment law, and reporting requirements. Employers should therefore keep track of where employees work and monitor cross-border remote working arrangements.