India: Employment contracts for expats

published on 16 February 2023 | reading time approx. 4 minutes

During the establishment or expansion of an Indian subsidiary, employees from the foreign parent company are often deployed to India. Employees from the parent company are already familiar with existing group structures and group values and know how departments within the group work best with each other. In addition, many employees see a foreign assignment as an opportunity in their career, as this is often accompanied by increased demands and areas of responsibility. Previous international experience will determine how much support the employee will require on site. Therefore, in addition to tax law and legal aspects, individual contract components should also be agreed in employment contracts for expats. This article is intended to provide an overview of the usual contract components in employment contracts for German expats in India.

Structuring of the assignment abroad »
General contract components »
The Salary Package »
Social Security »
Tax aspects »
Summary »

Structuring of the assignment abroad

Before the contract is drawn up, the foreign assignment is generally structured. In order to implement a foreign assignment successfully, it is important to structure it carefully from the onset. From a German point of view, a basic distinction is made between short-term assignments (up to six months) and longer assignments (over six months). A short deployment time is usually referred to as a secondment or business trip and a longer deployment as transfer of employment. Each of these terms is based on a different process.

In the case of secondment , the employer remains in Germany and the employee is deployed to India for a limited period of time via a secondment agreement, but can change his economic employer to India (depending on the individual case). In the case of a transfer of employment, on the other hand, both the legal and the economic employer change abroad. The German employment contract is either suspended or terminated. Accordingly, either secondment contracts, local employment contracts and/or suspension agreements must be made with the expat.

General contract components

General contract components based on the structuring of the assignment abroad must be created. These include, among other things, the duration of the contract, areas of responsibility and powers, reporting lines, rights of termination/protection against termination/consequences of termination and applicable law.

The Salary Package

Once the structure of the employment contract is in place, the salary package is often an important negotiation point. If the gross annual income including bonus agreements is fixed, a so-called salary split is carried out in the case of a local employment contract in India. This should largely correspond to the salary splits of other Indian employees.

Furthermore, additional benefits have to be negotiated. Common components of expat employment contracts are rent-free accommodation (possibly including domestic help), a company car, a driver, relocation allowances, exchange rate adjustments, school fees for accompanying children, entitlement to flights home, etc. All of these salary components must be checked with regard to their tax liability.

Social Security

German employees have the option of remaining covered by social insurance in Germany during the foreign assignment via the Social Security Agreement between Germany and India. However, this only includes pension insurance and unemployment insurance. Whether and to what extent social insurance continues to apply to these branches of insurance in Germany depends on the type and duration of the assignment abroad. If necessary, corresponding applications must be submitted to the statutory health insurance company or the DVKA. If the Social Security Agreement does not apply, international workers in India are required to pay into the Indian retirement insurance , the Employees' Provident Fund. International workers are required to pay contributions to Indian social security, regardless of the level of pay. However, an international worker coming from a country of origin with which there is a social security agreement and who has paid into the Indian social security system can withdraw the amount upon leaving India.

Depending on how the expat's social insurance is designed, appropriate clauses must be included in the employment contract.

Since the social security agreement does not cover health insurance, the agreement should also cover as to what extent the expat should have health insurance (through an international expat insurance or locally through an Indian health insurance) and who should bear the costs.

Tax aspects

A consequence of the foreign assignment is usually the change of tax residency. This does not necessarily have to be part of the contract, but should be taken into account in the general structuring of the assignment abroad and the general drafting of the contract.

Similar to German tax law, the tax liability of a natural person in India is based on their tax residency. This follows from Section 6ff. of the Income Tax Act, 1961 (ITA). Unlike in Germany, it is not the provision of a place of residence that is decisive, but only the physical presence in Germany. The purpose of the stay or nationality is irrelevant. A basic distinction is made between "resident and ordinarily resident", "resident but not ordinarily resident" and "non-resident". It should be noted when assessing tax residency that the Indian Financial Cear begins on April 1st of each year and ends on March 31st of the following year. For example, if the employee is predominantly resident in India during the Indian Financial Year and maintains a residence in Germany, they can be treated as residents by both states.

In such cases, the Double Taxation Avoidance Agreement between the Federal Republic of Germany and the Republic of India (DTA) decides on the residence and taxation rights of the states. DTAs also seek to avoid double taxation on the same income by providing either appropriate exemptions or tax credits. The applicability of the provisions of the DTA is particularly important in the year of departure and the year of return, as there is usually a risk of double taxation. Therefore, these aspects should be assessed and planned in advance in order to avoid any double taxation.

A so-called tax equalization policy can also be introduced at group level, which – if necessary – provides for tax equalization for the employee in order to ensure that the assignment abroad does not lead to a tax disadvantage for the employee.

Summary

An employment contract for an expat differs significantly from standard employment contracts. There are many aspects to consider regarding the salary package, social law and tax law. To ensure that neither the employer nor the employee takes any risks, external consultants should be consulted when drawing up such a contract.

Source: CT EXECUTIVE SEARCH, Newsletter February 2023