How to Do Businesses Deal with Taxes for International Employees Without Making Devastating Mistakes

Taxes for international employees: Considerations 

Avoiding double taxation

Many countries have agreements to avoid double taxation. These tax treaties usually specify provisions to determine which country should tax the income and what kind of income it can tax. Companies doing business abroad must have a good grasp of tax treaties and apply the relevant regulations accurately to remain compliant.

Withholding tax issues

Employers may be required to withhold taxes from international employees’ wages, similar to domestic employees. However, the withholding rates and requirements may vary depending on the employee’s tax residency status, visa type, and other factors.

Monitoring for the purpose of compliance

International tax laws and regulations are subject to change, so businesses must continuously monitor developments and adjust their tax compliance strategies accordingly to remain compliant. Partnering with a reliable payroll service will keep you in the loop. 

Tax protection

Some businesses offer tax equalization or tax protection to their international employees. Tax equalization ensures that employees pay a consistent amount of tax, regardless of where they are assigned to work. Tax protection guarantees that employees will not pay more tax than they would have paid in their home country.

Residency status

Determining an employee’s tax residency status is crucial for tax compliance. The rules for establishing tax residency vary by country and can depend on factors such as the duration of stay, ties to the country, and immigration status.

Social security and similar programs

Depending on the regulations of the host country, businesses may need to contribute to social security or other similar programs on behalf of their international employees.

Specific tax services 

For employees assigned to work in a foreign country for an extended period, businesses may provide expatriate tax services to assist with tax planning, compliance, and reporting.

Additional liabilities

In addition to salary and benefits, businesses may provide tax reimbursement or tax gross-up payments to cover any additional tax liabilities incurred by international employees due to their assignments.

Taxes for companies operating internationally: Best countries

According to the 2023 International Tax Competitiveness Index Rankings, Estonia’s tax code is the best of all countries that are members of the Organization for Economic Cooperation and Development (OECD). A number of features are behind its top score. Its 20% corporate tax rate applies only to distributed profits. Its territorial tax system exempts domestic companies’ foreign profit from domestic tax. Its 20% income tax is not charged on personal dividend income. Finally, its property tax is only levied on the value of land, not capital or real estate property such as buildings. 

Two other countries with great tax codes are Switzerland and New Zealand. Switzerland’s income tax partially exempts capital gains, and its corporate tax is relatively low at 19.7%. New Zealand does not tax financial transactions, property transfers, or inheritance and largely exempts capital gains.

Worst countries 

Colombia is at the bottom of the index. It has a 35% corporate income tax, a net wealth tax, and a financial transaction tax. Its value-added tax reveals enforcement and policy gaps, covering less than 40% of end consumption. 

Italy has one of the worst tax systems among OECD countries. It has a wealth tax on select assets and numerous property taxes with separate levies on financial transactions, estates, and real estate transfers. Its VAT is relatively high at 22%, considering the tax base is one of the narrowest in the OECD.

FAQ 

What are the most common mistakes you can make with international employee taxes?

One of the most common mistakes is incorrectly categorizing employees as contractors or the opposite. Failing to identify and apply the correct employment type can lead to tax issues. Another common mistake is overlooking tax treaties or reciprocity agreements. This can result in inaccurate withholding tax or in overpaying tax. 

Do US tax laws apply to citizens of foreign countries who work abroad?

Generally, any income nonresident aliens earn for performing services outside of the US is considered income from a foreign source. As such, it does not have to be reported and taxed in the US. 

What is the capital gains tax for people living abroad?

The capital gains tax for people living abroad will increase from 12.5% to 15%, effective January 1, 2025. The withholding threshold will drop to $0 for real estate property disposals, also effective from that date on.