Both parties agree that the employee will receive a net salary while abroad, with the employer deducting the social security contributions of the home country, as well as a so-called hypotax. This is a deduction that equals the wage tax the employee would have paid had they stayed home.
Impact of tax equalisation for international assignments
The employer keeps this hypotax and uses it to pay the foreign taxes of the employee. This is beneficial for employees going to countries with higher taxes. But for expats working in the United Arab Emirates, for example, where there is no wage tax, this is a disadvantage.
The German Labour Court has now ruled that net pay agreements are not allowed for employees who are union members and are, therefore, covered by collective agreements. It argues that these collective agreements are based on a gross salary and the TEQ disadvantages employees.
This means that companies who are subject to collective agreements should re-evaluate their policies to see if they need to adjust them.
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