Shadow Payroll & Expatriation: Here’s What You Need to Know

Posted on 10 November 2021 by IRIS FMP

For companies operating in multiple countries, it’s important to be aware of the HR and payroll implications of expatriation. Sending employees abroad to work, whether it’s temporary or for the foreseeable future, may seem like an obvious solution to a problem.

However, employees working abroad can present a whole host of new issues. Read on to get a thorough understanding of what expatriation means for a business, specifically when it comes to shadow payroll.

What is Shadow Payroll?

The term ‘shadow payroll’ refers to when payroll information needs to be recorded in two countries – or ‘shadowed’. In many countries, the local tax law demands that all income is at least recorded, even if it does not need to be taxed there. Regardless of the source of the income, whether from the home or the host country, it still needs to be recorded for tax administration purposes.

What happens when income is paid by the home country, but taxed in the host country?

Different countries have different laws regarding income and tax administration. Some countries demand that the income of any individual living and working there is taxed, even if it is derived from another country. In return for this, the individual will enjoy certain benefits, from sick pay to public services.

If pay is recorded in two countries, does that mean it will be taxed in two countries?

The short answer is no, not usually. Most countries have tax treaties in place to ensure that expatriates don’t get taxed twice on their income, even if the information is recorded twice.

What happens if income is not recorded in the host country?

If a company operating anywhere other than their home nation, neglects to properly file the tax information for their employees, there can be considerable penalties. It’s a good idea to understand the costs of non-compliance, in order to appreciate just how important it is to abide by local employment law in other countries.

This is true not only for the company but also for the expatriated employees. They would want reassurance that they are paying the correct amount of tax that they owe. For specific information about international employment, see our in-country guides.

Does the responsibility of shadow payroll and tax administration fall on the employer?

Where in the US most employees need to take the responsibility to file their own taxes annually, and ensure the right amount gets paid, this is not the case for many other countries. In Europe in particular, in many countries tax is automatically paid out of employee wages each time they are paid – whether it’s weekly or monthly. This is set up via the employer, who is responsible for accurately recording pay information so that the tax jurisdiction takes the correct amount. It’s for this reason that employers need to know about shadow payroll when sending employees abroad.

Payroll Considerations for Expat Staff

Running payroll for expatriated employees is known to be a complex undertaking, especially for payroll teams that have no experience in international employment. For companies just starting out in a new location, or for those slowly operating in more and more foreign countries, it’s highly advisable to procure the services of a global payroll service.

At IRIS FMP, our team has experience in navigating HR and payroll legislation all over the world. Operating in 135 countries, we know how to make sure companies of all sizes stay compliant with local law, as well as properly incentivising expatriated employees. Find out about our international payroll services.

Offering appropriate compensation and benefits to expatriated employees

In addition to getting the pay right, companies that send workers abroad also need to think about what benefits they offer those employees. Shadowing benefits as well as payroll, from the host country, may not make sense. Some common examples to consider include:

  • Company car – an employee working abroad may not want – or need – to drive in their host country. In London, for instance, most commuters make their way to work via the tube (subway) because there is too much congestion to drive.
  • Access to training – depending on the type, employees working abroad may not be able to partake in the same development training as their colleagues in the home nation. Think about if it’s online or in-person, and also time zones if it’s an interactive session.
  • Gym membership – many companies offer employees membership at a local gym or spa facility; however, this may not be an option for those working abroad unless there is enough local knowledge to find one.
  • Private healthcare – this can be an interesting benefit to think about because when expatriated employees pay tax in their host nation, they are often then entitled to local, public healthcare. Of course, there will still be the option to offer private healthcare as a benefit, however, in some countries this is not necessarily worthwhile.

It’s also worth considering public holidays. Would it be best for an expatriated employee to have days off on their home nation’s public holidays, when few of their colleagues are working? Or local public holidays when their new friends and neighbors will be off work? Before setting out policies on this, however, be sure to double-check local employment law so that you remain compliant.

Ensuring all employees have access to fair benefits packages

Another aspect to think about is making sure all employees – whether based in the home country or a host country – have fair and equal access to compensation.

When a standard employee benefit, like a company car, does not make sense to offer an employee abroad, they should be offered something else. Or, in the event that a company decides to offer their expat the public holidays of the host nation, but there are fewer of these than in the home nation, they should be offered additional days off to make up the difference.

Having said this, in some instances, it might be advisable – or even necessary – to further incentivize expatriation by offering more benefits to an existing employee. In addition to taking care of resettlement costs, some companies offer monetary bonuses, local language lessons, or perks for the family such as membership at children’s clubs, or private education.

Running Expat Payroll

To successfully run expat payroll, the HR and payroll team must understand the nuances of working in the host country. Not only does this mean working within local law, but it also means understanding a bit about the lifestyle and cultural norms in that country. If it’s common to finish work at 4 pm or take paid time off to look after relatives, then maybe an expatriated employee working there should be able to do the same.

It’s also worth thinking about the way in which employees get paid. To help take care of shadow payroll concerns, it might be beneficial to pay expats their salary into two accounts – one in their home currency and one in that of the host nation. This can also be helpful for the individual if they have financial commitments at home, as well as the day-to-day living costs where they’re working. This method of payment is known as salary-splitting.

How IRIS FMP can help

It can be challenging for busy, modern companies to truly get to know the implications of expat payroll, especially when they’ve only just begun their journey in international expansion. Making sure that shadow payroll is accurately processed is just one aspect of paying staff overseas. Keep your company working well within all relevant laws – both at home and abroad – by acquiring the services of a reliable international HR and payroll company like IRIS FMP. Get in touch today to find out more about what we offer.