Glossary
Tax equalisation
Global-mobility policy mechanism by which an employer guarantees an assignee that their post-assignment tax burden will be no more and no less than the hypothetical tax they would have paid in their home country. The employer pays actual host-country tax; the employee bears a hypothetical home-country deduction.
Tax equalisation is the mobility policy that keeps an assignee's tax burden equal to the hypothetical tax they would have paid at home.
For global payroll and mobility teams, the real question isn't whether the policy is fair. It's how much the guarantee actually costs the employer once host-country income tax, employer social charges, and shadow payroll are added to the assignment line.
The mechanic is straightforward on paper. Payroll deducts a hypothetical home-country tax from the assignee's gross. The employer then pays the actual tax due in the host country, whatever that figure turns out to be.
That difference is the employer's exposure. On a UK-outbound assignee posted to Germany or France, it can run into six figures over a three-year posting. Global mobility programmes that don't model it line by line usually underprice every new assignment.
What does tax equalisation actually cover in payroll?
In payroll terms, tax equalisation is a two-record operation. Home payroll runs a hypothetical deduction; host payroll runs the actual one. The employer absorbs the variance.
The hypothetical-tax deduction
Hypothetical tax (sometimes "hypo tax") is the figure the assignee would have paid at home on their assignment compensation if they had never moved. It comes off the gross via the home-country payroll, even though no money is remitted to the home tax authority.
HMRC's Employment Income Manual at EIM77000 sets out the UK shadow-payroll mechanics for this. The hypo line sits in shadow payroll alongside the actual home wages still being run for social security or pension continuity.
The actual host-country tax bill
The employer pays the real tax due in the host country directly, usually through a local payroll or a tax-services provider. Because that tax is itself a taxable benefit in many countries, the employer also has to gross up the payment so the assignee is whole after host-country tax on the tax payment.
The gross-up can compound into a 30 to 60 per cent uplift on the host tax bill. France, Belgium, and Italy sit at the painful end of that range.
What sits outside equalisation
Tax equalisation covers income tax on assignment compensation and usually social security where treaty coverage isn't available. It typically excludes personal investment income, spouse income, and any tax on benefits the assignee accepts personally rather than as policy.
The policy document needs to spell this out in a single page. Disputes almost always trace back to a vague "covers all taxes" clause.
How does hypothetical tax actually get calculated?
The hypo-tax calculation isn't a back-of-envelope number. It uses the assignee's actual filing status, dependents, and home-country bands as if the assignment had never happened.
| Policy type | Who carries the variance | When it suits the employer | When it suits the assignee |
|---|---|---|---|
| Tax equalisation | Employer (both ways) | Predictable assignee net pay; budget control | Posted to a higher-tax country |
| Tax protection | Employer pays when host > home only | Short, one-off assignments | Posted to a lower-tax country (keeps the gain) |
| Laissez-faire | Assignee | Domestic transfers; commuter cases | Rarely; only if host tax is materially lower |
| Gross-up only | Employer pays a tax-on-tax uplift | One-off benefits like relocation | Short trips with no full assignment |
The annual reconciliation
Most equalisation policies run an annual true-up. The mobility tax provider compares the hypo deducted across the year against the assignee's actual hypothetical liability, factoring in bonuses, equity vests, and any home-country deductions or allowances.
If the hypo deducted was too high, the employer refunds the assignee. If it was too low, the assignee owes the employer back. Both directions are common in the first year of an assignment.
Equity, bonuses, and trailing income
Equity vesting and bonuses earned partly in the home country and partly in the host country are the hardest line items. OECD Model Tax Convention Article 15 governs the sourcing for employment income, but the implementation rules vary by country pair.
For UK-outbound assignees, HMRC's EIM40000 series is the operational reference. Long-term assignees with equity grants should expect their hypo to keep moving for two to three tax years after they repatriate.
Which countries make tax equalisation more expensive?
The headline tax rate is only part of the cost. Employer-side social charges and the gross-up factor often double the visible income-tax line.
| Host country | Top marginal income tax | Employer social charges | Gross-up impact | Equalisation pain point |
|---|---|---|---|---|
| United Kingdom | 45% | 15% NI above threshold | Moderate | Statutory Residence Test split years |
| Germany | 45% plus 5.5% solidarity | 21% employer social | High; church tax adds variance | 183-day rule and habitual abode |
| France | 45% plus 4% high-income | 25% to 27% URSSAF | Very high | Impatriate regime if eligible |
| United States | 37% federal plus state | 7.65% FICA up to base | High for inbound; foreign tax credit complicates outbound | State-level residence; FBAR / PFIC |
Germany: solidarity, church tax, and habitual abode
Germany layers a 5.5% solidarity surcharge on top of the headline 45% top rate, with church tax of 8 to 9 per cent if the assignee registers. Employer social charges add roughly 21 per cent up to the contribution ceiling.
The 183-day test under Article 15 of the OECD model is the threshold most assignments cross. See the Germany country guide for the operational view.
United States: the foreign tax credit problem
US assignees keep filing 1040s while abroad. IRS Publication 519 sets out the wage-sourcing rules. The foreign tax credit usually prevents double tax, but it creates calendar-year mismatches that ripple into the hypo for two to three years.
Inbound assignments to the US look cheap on the headline 37% federal rate and turn expensive once state, FICA, and gross-up land on the employer's tab.
What should mobility buyers check before approving tax equalisation?
The decision isn't really whether to equalise. It's how to scope and price the guarantee so the assignment doesn't blow the mobility budget.
Mobility buyer checklist
- Is the policy document specific about which income is in scope?
- Has a certificate of coverage been applied for to avoid double social security?
- Is hypothetical tax run through home payroll or a separate shadow record?
- Who reconciles the annual true-up, and what does it cost?
- Does the policy cover equity vesting earned during the assignment?
- Is the gross-up factor modelled at policy design or only at year-end?
- Has permanent establishment risk been assessed for the host country?
- Does the EOR or in-house payroll handle hypothetical tax, or is it outsourced?
Questions for the tax-services or EOR provider
- How do you calculate hypothetical tax for a new assignee mid-year?
- What does your annual reconciliation cost per assignee?
- How do you handle bonuses paid after repatriation?
- Is shadow payroll included in the assignment service fee or billed separately?
- How long does the trailing-income obligation continue post-repatriation?
Tax equalisation worked example
Illustrative case: a UK-based employee on a £100,000 base posted to Germany on a three-year assignment with a 20 per cent assignment premium. Figures rounded; exact treatment depends on policy design and provider.
| Line | Amount (GBP) | Notes |
|---|---|---|
| Base salary | £100,000 | Home reference |
| Assignment premium (20%) | £20,000 | Mobility allowance |
| Hypothetical UK tax deducted | £42,000 | Approx. 35% on £120,000 |
| Actual German income tax paid by employer | £56,000 | Including solidarity surcharge |
| German employer social charges | £15,000 | Up to contribution ceiling |
| Gross-up on tax payment | £25,000 | Tax on tax, approx 45% |
| Total employer cost | £216,000 | 2.16x base salary |
The base salary line is barely half the total. Mobility buyers who sign off on assignments using the gross-salary figure alone miss 50 to 60 per cent of the real cost.
Accurate employment cost modelling for outbound assignees means counting every line on the policy, not just the visible base.
Whichapp view
Most EOR providers don't run tax equalisation as a standard service. Mobility tax sits with a separate Big Four or boutique provider, billed per assignee per year. Always check whether your EOR contract scopes shadow payroll and hypo deduction, or whether you need a second supplier.
For buyers running outbound programmes, see the best global payroll providers shortlist for in-scope shadow-payroll handling, and the best EOR providers shortlist for the providers that integrate mobility tax into the assignment workflow.
See our ranked shortlist of providers, scored across pricing transparency, country coverage, and contract flexibility. Updated for 2026.
View the shortlist →Tax equalisation FAQs
Is tax equalisation the same as tax protection?
No. Tax equalisation makes the assignee neutral both ways: the employer pays any excess host-country tax and the employee gives up any windfall from posting to a lower-tax country. Tax protection only reimburses the assignee when host tax exceeds home; if host tax is lower, the assignee keeps the gain. Equalisation is more common on long-term assignments because it gives the employer predictable budgeting.
Does tax equalisation cover social security?
Usually, but it depends on the policy. Most equalisation programmes equalise social security alongside income tax, especially when no totalisation agreement or A1 certificate applies. If a certificate of coverage keeps the assignee in home social security, the social charge line stays at home rates and only income tax sits inside the equalisation calculation.
How is hypothetical tax different from actual tax?
Hypothetical tax is the tax the assignee would have paid at home if they hadn't moved, deducted from gross pay through home or shadow payroll. No money goes to the home tax authority. Actual tax is what the employer pays to the host country on the assignee's behalf, including any gross-up to cover tax on the tax payment itself. See the shadow payroll entry for the mechanics.
Does an EOR handle tax equalisation?
Most EOR contracts run a single local payroll, not mobility tax. They handle local payroll, host-country tax withholding, and employer contributions, but hypothetical tax, annual reconciliation, and home-country shadow records usually need a separate mobility-tax provider. Check the scope before assuming the EOR covers the whole assignment workflow.
How long does tax equalisation continue after an assignment ends?
Trailing obligations typically run two to three tax years past repatriation. Bonuses paid after return, equity vesting earned during the assignment, and host-country audit adjustments can all hit after the assignee is back. Mobility policies should name a cut-off and a process for late assessments.