Payroll: Remuneration Elements During An Assignment

In this alert, we discuss remuneration elements during an assignment. Allowances during an assignment are a central component of the remuneration policy for assignments. They serve to compensate for additional expenses, risks, and differences in living standards between the home country and the country of assignment.

We will discuss some of these forms of remuneration below using an example and assess them from a Swiss perspective.

Example

Ingo Kleiner (German citizen), a management consultant at Consult AG in Munich, is being assigned to Zurich (Switzerland) for a period of two years (from January 1, 2024, to December 31, 2025). The reason for the assignment is a project at the Swiss subsidiary of Consult AG. The costs of the assignment will be passed on to Switzerland.

Mr. Kleiner is married and has two children, aged 3 and 15. His wife and two children accompany him to Zurich. His wife and children are American citizens and speak only English. Until July 2023, they all lived together in the USA.

In addition to his base salary and bonus, he also receives the following additional remuneration elements:

• Base salary: EUR 150,000
• Expat allowance: EUR 2,500 (gross) per month
• Cost of living allowance: +5% of base salary
• Housing allowance: EUR 5,000 (gross) per month
• School expenses: Reimbursement of actual costs
• 1 home leave
• Spousal support: Actual costs up to a maximum of EUR 800 per year

The base salary and all remuneration elements will continue to be paid from Germany. Mr. Kleiner will remain subject to social security contributions in Germany during his assignment in Switzerland and will be liable for tax in Switzerland. Since Mr. Kleiner works in Switzerland and the costs of his assignment are passed on by his employer, Consult AG in Munich, to the Swiss subsidiary, he is subject to withholding tax in Switzerland. This means that the Swiss subsidiary must set up a shadow payroll for him.

Expat allowance

One of the most important allowances is the expat allowance. It is usually paid in recognition of the willingness to work abroad for a certain period of time. This allowance is intended to compensate for the personal and family restrictions associated with an expatriate assignment. It is usually calculated as a percentage surcharge on the base salary.

Mr. Kleiner receives an expat allowance of EUR 2,500 gross per month.

• Social security assessment (Germany): The amount is defined as a lump sum and is subject to German social security contributions. Since the amount is defined as a gross amount, the applicable employee contributions are deducted from this amount.
• Tax assessment (Switzerland): The amount is defined as a lump sum and is subject to Swiss withholding tax. Since the amount is defined as a gross amount, the withholding tax incurred is deducted from this amount.

Cost of living allowance

The cost-of-living allowance is also known as COLA. This compensates for differences in the cost of living between the home country and the host country. In countries where the general price level is significantly higher than in the home country, the allowance is increased to maintain the employee's previous standard of living. The calculation is often based on international cost of living indices, which are adjusted regularly.

Mr. Kleiner receives a cost-of-living allowance of 5% of his base salary. This amounts to EUR 7,500 per year and is paid in 12 equal instalments of EUR 625.

• Social security assessment (Germany): The amount is defined as a lump sum and is subject to German social security contributions. As the amount is defined as a gross amount, the applicable employee contributions are deducted from this amount.
• Tax assessment (Switzerland): The amount is defined as a lump sum and is subject to Swiss withholding tax. As the amount is defined as a gross amount, the withholding tax incurred is deducted from this amount.

Housing allowance / rent allowance

The housing allowance is also of great practical importance. Since rent and real estate prices abroad can vary greatly compared to the home country, many employers cover the costs of adequate accommodation or provide company housing. Alternatively, a flat-rate monthly payment is often agreed upon to compensate for the higher housing costs.

Mr. Kleiner receives a rent allowance of EUR 5,000 gross per month.

• Social security assessment (Germany): The amount is defined as a lump sum and is subject to German social security contributions. Since the amount is defined as a gross amount, the applicable employee contributions are deducted from this amount.
• Tax assessment (Switzerland): The amount is defined as a lump sum and is subject to Swiss withholding tax. As the amount is defined as a gross amount, the withholding tax incurred is deducted from this amount. If Mr. Kleiner has not given up the apartment in Munich where he lived before his assignment in Switzerland, and if it is not sublet and the employer would pay the actual rent for a reasonable apartment directly, this could be paid out tax-free.

School expense reimbursement

In addition, expatriate employees with school-age children often receive a school allowance. This covers the costs of international schools or other suitable educational institutions in the host country. It is intended to ensure that the children can continue their education during the assignment without placing an excessive financial burden on the family.

Mr. Kleiner is reimbursed for the actual school costs for his children.

• Social security assessment (Germany): The reimbursement of school costs for children in the context of an assignment is generally not subject to social security contributions, provided that the assumption of school costs is exclusively due to the assignment.
• Taxable assessment (Switzerland): If the children cannot attend a local school, the school costs for an international school can be covered by the employer without being subject to taxation. In principle, in the case of Mr. Kleiner, as a German citizen, it would be assumed that the children can attend a local school. However, due to the fact that the family lived in the USA until six months before the assignment and if it can be proven that they did not attend a German school there, it is possible that the reimbursement of school costs will be tax-free.

Home leave

Another form of support is the travel allowance, known as the home leave arrangement. This enables employees and their families to travel home to their country of origin at regular intervals. This helps to maintain social ties and makes it easier to return home at the end of the assignment.

Mr. Kleiner receives home leave for himself and his family

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.