International employment: when does your payroll become a salary split case?

You are an employer based in the Netherlands. Your employees work for you in multiple countries. In that situation, a salary split may apply to their remuneration. A salary split means that the right to tax employment income is divided between two or more countries. 

Understanding when a salary split arises is essential for managing international payroll, avoiding double taxation, and staying compliant with local tax regulations. 

What is a salary split?

Your employee is a tax resident of country A. In their country of residence, the employee is generally taxed on their worldwide income, meaning all income earned anywhere in the world. 

At the same time, the employee performs their work physically (also) outside their country of residence, in country B. In that case, country B often has the right to levy income tax on the portion of the employee’s salary attributable to the work physically performed on its territory. 

This situation leads to double taxation: 

• Country A taxes the employee’s total worldwide income. 
• Country B taxes the part of the salary related to work performed in that country. 

To prevent or mitigate double taxation, many countries have concluded double tax treaties. 

OECD Model Tax Convention and the salary split

Most double tax treaties are based on the OECD Model Tax Convention. The general rule under this convention is that the country of residence has the primary taxing right, unless the employee physically exercises their employment in another country. 

In that case, the work country may tax the portion of the salary attributable to the work performed there, while the country of residence must grant relief from double taxation. This allocation of taxing rights is commonly referred to as a salary split. 

Exception: the 183-day rule

To avoid an immediate salary split when employees work abroad for a short period, many tax treaties include the 183-day rule. 

The 183-day rule applies only if all of the following cumulative conditions are met: 

An employee remains fully taxable in their country of residence if: 

• The employee physical presence in the other country does not exceed 183 days in a calendar year or a rolling 12-month period (depending on the treaty); and 
• The remuneration is not paid by or on behalf of a treaty employer in the other state; and 
• The remuneration is not borne by a permanent establishment of the employer in the other state. 

Key concepts such as “presence”, “treaty employer” and “permanent establishment” require careful interpretation. These interpretations may differ per country. Therefore, it is crucial to assess the applicability of the 183-day rule on a case-by-case basis and from the perspective of both involved countries. 

Situations where the 183-day rule does not apply

Cross-border workers

For regular Dutch employees working temporarily abroad for a Dutch employer, the 183-day rule often applies. 

However, cross-border workers are employees who live in one country and are employed by an employer established in another country. 

In the case of cross-border workers, the 183-day rule generally does not apply. The treaty does not allocate the taxing right exclusively to the country of residence. 

If your employee qualifies as a cross-border worker, be particularly alert to a salary split. A salary split may arise as soon as the employee performs work outside the Netherlands, including remote work from home abroad or business travel. 

Employees working for multiple group entities

Within multinational groups, employees may perform activities for multiple group companies, such as HR, marketing or IT functions. 

If employees work for a foreign group entity and travel to that country for these activities, a salary split may arise. The host country may take the position that a treaty employer exists in that country. As a result, the 183-day rule does not apply, because the second condition for applying the rule is not met. 

Administrative consequences of a salary split

A salary split has direct implications for your international payroll administration. 

If an employee is liable to income tax in the work country, local rules determine how taxes must be paid. This may be through: 

• Payroll withholding in the work country; or 
• The employee’s personal income tax return.

It is therefore essential to carefully assess per country how tax withholding and reporting obligations must be fulfilled to remain compliant. 

Conclusion

Salary splits are often complex in practice. They do not only depend on the number of working days abroad, but also on concepts such as presence, treaty employer, permanent establishment, and the way these are interpreted by each country involved. 

Do you want to avoid your employees facing unexpected tax assessments or your organisation being confronted with additional payroll obligations? Bol International is here to help. We support you in assessing cross-border employment situations and, where necessary, in implementing a compliant salary split structure.