What exactly is a salary split?
What exactly is a salary split?
Many people talk about a salary split when talking about wage costs optimisation: the best way to gain a tax advantage when you have or do “something” abroad.
“Setting up” a salary split may indeed be interesting and may even result in a net advantage, but this is not always the case. Moreover, in practice this entails some arrangements and quite a lot of paperwork, in several countries. It is therefore important to balance the costs against the advantage to be gained. Of course, we will be happy to help you set up such a scenario, but in this article we want to look more closely at a situation that we often see in our everyday practice, where, often unintentionally, a salary split “occurs”. Simply because an employee starts working for his employer in several countries, as a result of which tax liability also arises in countries other than just the country of residence and/or the assignment country.
When will a salary split occur?
The main rules for the payroll and income tax stipulate that an employee pays tax on his work in the country where he works. If work is carried out in several countries, tax liability may therefore also arise in several countries (apart from exceptions such as the 183-days rules, see the main rules for the payment of taxes).
At the same time, this is the essence of the salary split: a situation in which tax is paid on an employee’s salary in several countries.
A salary split is about taxes, not about social security!
What if tax liability arises in several countries?
What should the employer do in this case?
The employer will have to register with the tax authorities in these countries, and a payroll administration will have to be run. In this respect, it is important to make clear “who has to do what”, in other words, how the income is divided across the different countries, but also, especially, what payments are processed on the payslip in what country.
Furthermore, social insurance contributions will only have to be paid in one country, i.e. the country in which the employee is covered by social insurance. Some social insurance premiums (or parts of these) are tax-deductible and can also be deducted on the foreign payslips, to reduce the taxes to be paid.
In conclusion: coordination between the payroll administrations in the different countries is of the essence, to prevent the payments from being incorrect or the employee from receiving a net salary that is too high or too low. Corrections afterwards are time-consuming and frustrating, so they had better be prevented. How? By analysing the situation beforehand and putting a clear working instruction on paper for all colleagues involved.
And what if something changes in the meantime? If, for example, the employee starts working in another country as well or from home, or moves to another country? In that case, the situation will have to be assessed and implemented again. In any case, a salary split should cover reality: who, on paper, says that he spends 60% of his time working in e.g. Belgium, but in practice only does so for 40%, meaning two working days, may have to face serious problems in case of inspections by the authorities in the different assignment countries.
What should the employee do?
Even if the employee’s wage has to be taxed with payroll taxes in different countries in case of a salary split, the employee will finally be taxed on his worldwide income in one country only. The worldwide income is the total income earned by the employee in the different countries. This concerns more than wages earned; property or other assets may also play a part. The tax treaties referred to in the main rules for the payment of taxes give employees a right to reduction of the income tax due because of taxes paid abroad. This is called double tax relief.
To avoid problems arising afterwards, it is advisable to:
- have a calculation made at the beginning of the cross-border activities, to see if the salary split will also yield a net advantage after the tax return of the worldwide income (to avoid any unpleasant surprises)
- offer the employee assistance in filing his tax return in his country of residence and/or employment. Click here for more information on the income tax and personal income tax return in the Netherlands and Belgium respectively
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Since 1972, Interfisc has offered international HR & Payroll solutions in the Netherlands, Belgium, Germany, France, the United Kingdom, and Italy. We do this from our offices in the Netherlands and Belgium, and with an international team of around 45 committed and caring employees.
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