Understanding tax equalization, tax protection, and net salary guarantee

Publication date: October 19, 2025

When an employee goes on an international assignment, their remuneration and taxation often become complex.
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To prevent a change of country from leading to an unjustified increase or decrease in net salary, companies implement tax compensation mechanisms:
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🔹 Tax equalization
🔹 Tax protection
🔹 Net guaranteed salary
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‍These mechanisms are not provided for by law — they stem from a contractual agreement between the employer and the employee.

In large international groups, the global mobility policy generally defines which scheme applies depending on the type of assignment (long-term, short-term, commuter, etc.), with variations specific to each company.
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In smaller organizations, such clauses are often negotiated on a case-by-case basis.All share the same goal:
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👉 To ensure the employee’s financial neutrality with respect to tax differences between the home and host countries.

🔸 Equalization may also cover social contributions, or be both tax and social.

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Tax equalization ensures that an employee on international assignment ultimately pays the same amount of tax they would have paid had they remained in their home country.

💡 How does it work?
Several methods of applying tax equalization exist, depending on the type of assignment.

👉 In the case of long-term assignments (LTA)

The most common and widespread method consists of applying a “hypothetical tax” (or hypotax) directly deducted from the employee’s monthly payslip.

Here are the main steps of the mechanism:
1️⃣ The employer withholds a hypothetical tax equivalent to the home-country tax that the employee would have paid on the income they would have earned in a theoretical situation without an international assignment — in practice, this usually includes the base salary and bonuses.

2️⃣ Assignment-related elements (expatriation premium, housing allowance, etc.) are paid net and excluded from the calculation of the hypothetical tax.

3️⃣ The employer bears the actual foreign tax liability, either directly or through a shadow payroll (if applicable).

4️⃣ An annual adjustment (TEQ – Tax Equalization Calculation) is carried out to reconcile the initial estimates.

💡 Example 1
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A French-based employee is assigned for three years to the Netherlands:
➡️ Theoretical French tax: €25,000
➡️ Actual Dutch tax: €30,000

The company deducts a “hypothetical tax” of €25,000 from the employee’s pay and pays the €30,000 due to the Dutch tax authorities.👉 The difference (€5,000) is borne by the company.
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Thus, the employee neither gains nor loses from a tax perspective — their taxation remains equivalent to what it would have been in France.

⚠️ This €5,000 difference may be considered a taxable and social security benefit, which sometimes requires a “gross-up” calculation to ensure the employee receives the amount net of tax.
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💡 Example 2
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A French employee is sent to the United Arab Emirates:
➡️ Theoretical French tax: €25,000
➡️ Actual UAE tax: €0

The company still withholds the “hypothetical tax” of €25,000 but pays nothing locally.

Once again, the employee pays exactly what they would have paid in France.
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👉 Special case: “Commuter assignments”

For commuter-type assignments, tax equalization can also apply without any hypothetical tax withheld on the payslip.

💡 Example
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A French employee makes regular business trips to Belgium.They are taxed in Belgium on the days worked there.
The employer bears the Belgian tax due on those Belgian workdays.

At the same time, the portion of remuneration related to workdays in Belgium is not taxed in France under the France–Belgium tax treaty.

The French tax saving is then recaptured by the employer through the Tax Equalization Calculation (TEQ) so that the employee neither gains nor loses from a tax standpoint due to the assignment.

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🔹 Employee’s tax residence
If the employee remains a tax resident of their home country, certain practical difficulties may arise.

🌍 Foreign employees coming to work in France under a tax equalization scheme (impatriates)
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👉 It may be necessary to combine the tax equalization mechanism with the French impatriate regime, which can be complex.

When the international mobility policy so provides, only the portion of French tax related to employment income is borne by the employer.

💡 In this case, it is often necessary to determine the portion of French tax relating to employment income to be covered by the employer, while tax on personal income generally remains the employee’s responsibility.

✳️ A tax allocation or tax split calculation must therefore be performed to clearly distinguish each party’s share of tax liability.

👤 As a tax lawyer specialized in international mobility, I assist both:

🔹 Employees benefiting from a tax equalization scheme — to review TEQ calculations, the treatment of hypothetical tax, and their French tax returns;
🔹 Companies implementing such schemes — to help them design their global mobility policies, secure their practices, and anticipate double taxation risks.

👉 Feel free to contact me for personalized advice adapted to your situation.

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Tax protection is a more flexible version of tax equalization.

Under this system, the employee pays taxes in the host country, and the company only compensates if the total tax burden exceeds what the employee would have paid in their home country.

👉 If the foreign tax is higher, the company reimburses the difference.
👉 If the foreign tax is lower, the employee keeps the benefit.

💡 Example
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A French employee is assigned to Luxembourg:
Theoretical French tax: €25,000
Actual Luxembourg tax: €30,000

➡️ Since the foreign tax is higher, the company reimburses €5,000 to the employee.

➡️ Conversely, if Luxembourg tax had been €18,000, the employee would have kept the €7,000 difference.

Market practice:
This mechanism is commonly used for short-term assignments (Short Term Assignments – STA)
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The company guarantees the employee a fixed net-of-tax amount and covers all taxes due, regardless of their amount.

This calculation, known as the “U-curve method”, is performed in reverse:
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It starts from the reference net salary in France, then reconstructs the equivalent gross salary in the host country by adding the local taxes and social contributions, in order to ensure a net-of-tax salary abroad.
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