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Nowadays many companies do business with foreign individuals or companies, which often involves relocating employees to other countries. Along with relocation come numerous employee tax issues.

The primary issues center on the amount and types of compensation. When an individual relocates overseas, his or her pay and benefits package may be far more extensive (and expensive) than it would have been in the United States.


Employers that relocate employees overseas often reimburse them for the added taxes they may incur in a foreign country. There are two main types of reimbursement policies.

Tax protection. The employer reimburses the employee for the taxes paid beyond an estimated amount, based on the employee's base salary, U.S. federal income tax rates, individual personal exemptions and itemized deductions.

Tax equalization. The employer guarantees the employee will pay the same tax that would have been paid had he or she remained in the United States. Any tax, U.S. or foreign, exceeding the employee's tax liability is paid by the employer.


Several events have an impact on an overseas employee's tax situation.

Sale of a principal residence. An individual who sells a principal residence when relocating outside the United States may have up to four years to purchase (or build) and occupy a new principal residence to defer the gain on the former residence's sale; the normal 24-month period for investing in a new home may be frozen for up to two years after the date of the former residence's sale. If this replacement period is exceeded, the ultimate tax bill, including both the tax on the gain and the interest due on that tax, can be substantial.

Rental of a principal residence. As is the case with other taxpayers, an individual who rents out his or her principal residence while overseas may have to take into account the rules governing the treatment of taxpayers who make personal use of a home in the same year they rent it out. In addition, the passive loss rules on rental real estate (in particular, the $25,000 passive loss allowance available for certain taxpayers) may be affected by a taxpayer's equalization.

Note: The temporary rental of an employee's residence while he or she is overseas should not change the home's character as a principal residence as long as he or she reoccupies it on return (or, in the event of extenuating circumstances, can evidence the intent to reoccupy it).


State tax ramifications often are overlooked or ignored when a compensation package is put together for an employee assigned overseas. Understandably, this can be a difficult task since for large employers it may involve employees from many (if not all 50) states, as well as municipalities or other entities that incorporate their tax rates into a state tax rate. Because of the inherent complexity of compensating for state taxes, most employers omit it completely as a specific part of compensation and leave all state tax matters to the individual employee. This can be a hardship for the employee in terms of the actual tax payment and the records that must be kept.

Another facet of the state tax problem involves state tax conformity with federal tax law. Since the states may or may not adopt the same treatment for certain income items, expenses, gains or losses, these items may have to be calculated separately.


Obviously, the foreign tax implications of income earned by an employee working overseas also must be examined. These include how the foreign country differentiates between resident and nonresident status; what income types are subject to withholding; the applicable filing requirements and deadlines; the treatment of pension and profit-sharing plan contributions; what income types (other than compensation) are subject to taxation, if any; special treatment of assignment-related expenses and reimbursements; and the status and treatment of Social Security benefits.

For a discussion of these issues and strategies, see "Relocating Employees Overseas," by Janet Brooks, in the April 1993 issue of The Tax Adviser.

E. note: The material discussed provides general information. Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.
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Title Annotation:from The Tax Adviser; U.S. companies abroad
Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Apr 1, 1993
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