6 Questions and Answers About International Payroll

Managing international payroll involves much more than simply calculating salaries. When a company assigns employees abroad or employs professionals providing services in different countries, it must properly assess employment, tax, Social Security and immigration matters.

Furthermore, since 2023, the rise of international remote working and the entry into force of the European Framework Agreement on cross-border telework have introduced new criteria that companies need to understand.

In this guide, we answer six of the most common questions about international assignments and provide updated guidance in line with current regulations.

If you need to manage payroll in Spain, contact our specialists and resolve all your questions about our payroll management services in Spain.

What should a company assess before assigning an employee abroad?

Before any international assignment takes place, companies should review at least the following:

• The applicable employment legislation.
• Whether a bilateral Social Security agreement exists.
• The tax regulations of the destination country.
• The expected duration of the assignment.
• The need to obtain Social Security coverage certificates (A1 or equivalent certificates).
• Immigration requirements and work permits.

Every international assignment requires an individual assessment, as the legal and practical implications may vary significantly depending on the destination country.

1. Can an employee have two employment contracts (Spain and the Philippines)?

A company with operations in Spain has a Spanish employee who lives and works in the Philippines for a local company (under a different corporate name). The Spanish company owns the Philippine company. Does it make sense for the employee to have two employment contracts, one in Spain and another in the Philippines? What would be the correct approach?

From a Social Security perspective, it is important to note that Spain and the Philippines have a bilateral Social Security Agreement. Article 6.1(a) provides that an employee working for a company established in one Contracting State who is temporarily assigned by that company to the territory of the other Contracting State shall remain subject to the Social Security legislation of the sending country, provided that the expected duration of the assignment does not exceed five years, the employee has not been sent to replace another posted worker whose assignment has ended, and the assignment is approved by the competent authority or designated institution.

Consequently, there is no obligation to register and pay Social Security contributions in the Philippines for a maximum period of five years.

For this purpose, the TA300 posting notification must be submitted to the Spanish Social Security authorities before the assignment in order to obtain the corresponding A1 certificate, which confirms that Spanish Social Security legislation continues to apply.

However, the situation in the Philippines presents a particular complexity. Although the bilateral Social Security Agreement exists, the Philippine immigration authorities generally require the local entity to provide a local employment contract in order to obtain the employee’s work authorisation, even where the employee is formally assigned from Spain.

In practice, this local employment contract is usually required for administrative purposes only. Therefore, the Spanish employer should also execute an assignment letter as an annex to the original employment contract, regulating the employee’s working conditions during the assignment abroad.

This assumes that the employee already has an employment contract with the Spanish company and that the temporary assignment is justified by business reasons.

Although this example refers specifically to the Philippines, the same general principle applies whenever a bilateral Social Security agreement exists: companies should assess whether the assignment allows the employee to continue contributing to the Spanish Social Security system throughout the planned assignment period.

2. What happens when the destination country does not have a bilateral Social Security agreement? (Indonesia case)

A Spanish employee with an employment contract in Spain is assigned to Indonesia to work at a commercial representative office. Does it make sense to maintain the Spanish employment contract while also signing a local employment contract in Indonesia? What procedures should be followed?

In this case, it is important to note that Spain and Indonesia do not have a bilateral Social Security agreement. Depending on the specific circumstances of the assignment, particularly its duration and whether it is temporary or permanent, different scenarios may apply:

• Maintaining the employment relationship with the Spanish company while temporarily assigning the employee to Indonesia. In this case, it is generally necessary to sign a local employment contract with the Indonesian entity. Since there is no bilateral Social Security agreement, the employee must be registered and pay Social Security contributions in Indonesia. In Spain, pursuant to the Order of 27 January 1982, the employee may remain in a status equivalent to active registration, maintaining the obligation to contribute to the Spanish Social Security system while working abroad, subject to the conditions established by that regulation. The employer must notify the Spanish Social Security authorities in writing of this situation.
• Terminating the employment relationship with the Spanish company and hiring the employee directly through the Indonesian company. In this scenario, it may be advisable to enter into a special agreement with the Spanish Social Security system in order to preserve the employee’s future benefit entitlements. The employment relationship would then continue exclusively with the Indonesian employer.

In countries without a bilateral Social Security agreement, it is particularly important to assess whether maintaining a special agreement with the Spanish Social Security system is advisable in order to protect the employee’s future Social Security benefits.

3. How do travel allowances and the Article 7.p) Personal Income Tax exemption currently work?

Travel allowances and the gross salary earned during assignment days are exempt from Personal Income Tax (IRPF), as is the specific assignment allowance. Is the combined amount of these exempt items subject to the annual limit of €60,100? Referring to the example shown, is the monthly allowance of €400 considered a specific assignment allowance? If so, why has it not been included in the exempt amount? Are there any rules governing the amount of the specific assignment allowance? Should it be linked to the number of assignment days or to the income generated by the work performed? Is it sufficient simply not to exceed the annual limit of €60,100?

It is essential to distinguish between the excess remuneration regime and the exemption under Article 7.p) of the Spanish Personal Income Tax Act. If the Article 7.p) exemption is applied, the excess remuneration regime cannot also be applied, as both systems are legally incompatible. Consequently, even where a specific assignment allowance is agreed, it will not automatically qualify for exemption in all cases. It will only be exempt where the excess remuneration regime applies instead of Article 7.p).

Using the example provided, the exempt amount would include:

• Travel allowances not exceeding the nine-month limit: €13,500.
• Calculation of the Article 7.p) exemption. The calculation is based on the annual salary of €50,000 plus the assignment allowance (€2,000). Therefore: €52,000 / 365 × 150 effective assignment days = €21,370.
• Total exemption: €34,870.

As illustrated above, the €2,000 assignment allowance is not directly included in the exempt amount because the Article 7.p) regime has been applied. However, it is included when calculating the employee’s daily remuneration, which serves as the basis for determining the exempt amount under Article 7.p).

Regarding the exemption limits, it should be noted that the €60,100 threshold applies only to the maximum amount of income that may benefit from the Article 7.p) exemption. It does not limit the employee’s total annual employment income. Therefore, the €60,100 cap is applied only after calculating the exempt amount using the methodology described above.

If the excess remuneration regime is applied, it is important to note that there is no exemption limit. Therefore, any amounts received by the employee in excess of the salary they earned prior to the assignment will be exempt, regardless of the income generated by the work performed or the number of days spent on assignment.

Article 9.A.3.b.4 of the Personal Income Tax Regulations (LIRPF) provides that the following may be treated as exempt employment income: “the excess remuneration received by employees assigned abroad over the total remuneration they would have received in Spain by way of salary, wages, seniority, extraordinary payments, including profit-sharing bonuses, family allowances or any other remuneration corresponding to their position, employment, category or profession.”

Key points to remember

• The excess remuneration regime and the exemption under Article 7.p) remain mutually exclusive.
• The €60,100 limit applies exclusively to the exemption under Article 7.p).
• The choice between the two regimes should be assessed individually for each international assignment.

4. What happens if an employee receives a bonus during the assignment?

Does receiving a bonus or other variable remuneration after the assignment has begun affect the daily calculation under Article 7.p), and therefore the amount to be included in payroll, if other Article 7.p values have already been applied in previous months?

Provided that the bonus is not linked to an international project, the bonus or variable remuneration (which is not exempt) forms part of the employee’s annual remuneration and must therefore be taken into account when recalculating the daily amount used for the Article 7.p) exemption. This means that the exempt amounts previously applied may need to be adjusted.

In practice, it is advisable to review the Article 7.p) calculation periodically whenever salary changes, bonuses or variable incentives arise during the tax year.

5. What are the latest developments regarding international assignments within the European Union?

Long-term postings

Since the transposition of Directive (EU) 2018/957 through Royal Decree-Law 7/2021, where an assignment generally exceeds 12 months (extendable to 18 months through a reasoned notification), employers must guarantee employees almost all of the employment conditions applicable in the host country.

In addition, the legislation has strengthened the rules concerning:

• salary and remuneration conditions;
• travel, accommodation and subsistence expenses;
• accommodation provided by the employer;
• transparency regarding assignment-related allowances.

6. What happens if an assignment exceeds nine months?

Travel allowances are no longer tax-exempt if the assignment exceeds nine months. Does this loss of exemption apply only after the ninth month, or does it affect the entire assignment from the beginning? If tax-exempt travel allowances have already been paid and the assignment ultimately exceeds nine months, must payroll be regularised?

Travel allowances are not exempt where an employee is assigned to the same destination for a continuous period exceeding nine months. In such cases, the loss of the exemption applies from the beginning of the assignment. It is therefore essential to assess from the outset whether the assignment is likely to exceed this maximum duration in order to avoid incorrectly applying an exemption that may later prove unavailable.

If the assignment unexpectedly exceeds nine months after exempt travel allowances have already been paid, the situation should be regularised. This may require the submission of amended tax returns for the periods already reported.

It is important to remember that the employer is responsible for correctly withholding tax on the amounts paid to employees.

Where an assignment was originally expected to last less than nine months but is subsequently extended, the tax treatment should be reviewed as soon as possible to avoid future adjustments.

The new reality: international remote working and payroll

One of the most significant developments since this article was originally published concerns international remote working.

Since July 2023, the European Framework Agreement on cross-border telework has allowed, in certain cases, employees to remain covered by the Social Security system of the country where their employer is established, even when working remotely from another EU Member State for less than 50% of their working time.

This exception changes the traditional application of the European Social Security coordination rules and requires employers to assess each situation carefully before implementing international hybrid working arrangements.

For companies with employees working across multiple countries, this has become one of the key challenges in managing international payroll.

Key recommendations for managing international payroll effectively

Before starting any international assignment, companies should:

• assess the applicable employment legislation;
• review the tax regulations of the destination country;
• verify whether a bilateral Social Security agreement exists;
• obtain the appropriate posting or coverage certificates;
• properly document the assignment conditions;
• review the employee’s situation periodically if the assignment is extended.

Careful planning helps prevent issues for both the employer and the employee.

Do you need help managing international payroll?

International payroll management requires coordination between employment law, Social Security, taxation and global mobility regulations.

Our international mobility team helps both domestic and international companies manage international assignments, expatriations, cross-border remote working and international payroll with full legal certainty.

If your company manages internationally assigned employees or teams distributed across different countries, we can help you design the solution that best fits your needs.