Sending an employee abroad for a project? It is worth knowing how employment income is taxed under Article 15(2) of the OECD
In today’s business reality, overseas secondments have become routine: projects at customer sites, technical support, system implementation, setting up a temporary operation, or reinforcing a team in another country. Alongside this, the ”183-day rule” has become a rule of thumb for many employers and employees: if the employee stays under 183 days in the host country, they assume the salary will be taxed only in the country of residence and everything is in order.
In practice, in many tax treaties (inspired by the OECD Model), the 183-day rule does not stand on its own. For the host country not to tax the salary, three cumulative conditions are generally required. As a result, even a relatively short secondment can create tax and operational exposure if the accompanying conditions are not met. This is mainly around the question of who is considered the ”employer” for treaty purposes, and how the salary cost is attributed in practice.
This article is intended as a general framework for thinking and is not individualized advice. In any case, the specific treaty wording and the local law in the relevant countries should be reviewed.
Why 183 Days Alone Is Not Enough
The reason this mistake is common is that ”183 days” sounds like a clear and simple rule that is easy to apply: send the employee abroad, bring them back to Israel within a period of up to 183 days, and everything will be fine. In practice, in many treaties this number is only a starting point, and the analysis includes additional conditions that may shift taxing rights to the host country.
Tax treaties were designed, among other things, to prevent situations where the host country loses taxing rights in cases where the work is local in economic terms and in terms of control, even if the payslip is issued in another country. Therefore, tax authorities (in Israel and globally) look not only at an employee’s length of stay, but also at who actually performs the employer functions and derives the economic benefit from the work. They also examine whether there is sufficient presence in the host country to justify withholding tax obligations and reporting.
The Three Conditions in the Treaty
The wording varies between treaties, but in many cases all of the following conditions must be met together for the salary not to be taxed in the host country:
What does the condition test? | How does it fail in practice? | What can be done in advance to reduce disputes with the authority? |
Presence in the host country (usually a 183-day threshold) | Inaccurate day counting, a different reference period (tax year/12 months), recurring trips that build up | A day-count tracking and monthly reporting mechanism, and setting checkpoints throughout the period |
The identity of the employer for treaty purposes (formal vs. de facto) | The employee reports to a local manager, is integrated into the local team, and receives day-to-day instructions from the host location | A secondment addendum defining the reporting line, delimiting managerial responsibility, and aligning the documentation with what happens in practice |
Whether the remuneration is ”borne by” in the host country (and sometimes the link to a permanent establishment) | Salary cost recharges, budget allocation to local activity, agreements that resemble labor leasing | Structuring the cost recharge and agreements in advance, consistent accounting documentation, and a focused review in the host country |
Who Is the Employer in an Overseas Secondment?
In a classic secondment, the employee remains employed by the Israeli company, but works day-to-day in the host country. This is exactly where the question arises: is the ”employer” for treaty purposes the entity shown in the employment contract and payroll, or the party that manages the work and derives the economic benefit from it in practice?
It is important to be precise: in many tax treaties, the element that ”the remuneration is paid by, or on behalf of, an employer who is not a resident of the host country” is not examined as an isolated technical test of which account the money came from. It is tied to the question of who the relevant employer is for treaty purposes, and sometimes the recharge arrangements and operational structure serve as indicators of that.
Practice shows it is not enough to state that the employee belongs to the Israeli company. If, in practice, a local manager sets priorities, approves hours, assigns tasks, and fully integrates the employee into the local operation, an argument may be raised that the employer for treaty purposes is a party in the host country. This is not an automatic determination, but it is a common point of dispute.
Salary Cost Recharges and the Term ”Borne By”
Many companies recharge the customer or a group company for the employee’s salary cost during the secondment period. From a business perspective this makes sense, but from a tax perspective it can affect how the host country views the arrangement: is it a service with deliverables, or an arrangement that resembles labor leasing. The more the recharge structure and documentation convey that the cost ”sits” in the host country, the greater the importance of getting the agreements, pricing, and recording right.
To maintain professional accuracy: ”borne by a permanent establishment” is not necessarily synonymous with ”recharged” or ”recorded as an expense” in the foreign country. In many cases, the question is whether, under a functional and attribution analysis (inspired by PE attribution principles), the salary is actually attributed to the activity carried out through the permanent establishment (PE). In other words, is the PE the part of the business through which the relevant employer functions are performed in relation to the employee.
In addition, it is important to clarify that determining whether a PE exists at all is a separate question examined under the rules of each tax treaty. However, the mere existence of a PE can be relevant to the specific condition in the employment income article that addresses whether the remuneration is borne by that PE.
Key Risks – Beyond the Tax Itself
The main exposure is, of course, taxation of the salary in the host country. But sometimes the damage begins with the operational layers: withholding tax obligations, employer registration, payroll reporting, net salary adjustments, and sometimes retroactive reviews that burden both the company and the employee.
In addition, there are internal contractual aspects: who bears the tax burden if a local liability arises, whether there is a gross-up mechanism, and what happens when it becomes clear that the cost is higher than planned. These are issues that can be addressed in advance in a written secondment document, but are difficult to resolve after the fact, when everyone is already deep into the project.
How to Do It Right
The most effective way to reduce disputes is to carry out a short mapping exercise before the secondment. This should connect the legal, tax, and operational angles.
In the first stage, define the factual picture of the secondment: how long, where, what the tasks are, who the employee reports to, and what the interface is with local stakeholders. In the second stage, review the relevant treaty and the local interpretive points that affect the analysis (for example, the reference period for day counting). In the third stage, anchor this in basic documentation: a secondment addendum defining the role, boundaries, and authorities; a day-count mechanism; and the structuring of the service agreements and cost recharges, if applicable.
The message is not to overcomplicate a short secondment, but to make it manageable: when there is data and documentation, it is easier to make decisions, correct course in time, and defend the position if questions arise
Example for Illustration: A Project Specialist in Spain
An Israeli company sends a specialist to implement a system in Spain for 4 months (about 120 days). The salary is paid from Israel, but in practice the project manager in Spain gives daily instructions, approves hours, and defines deliverables. In addition, the company recharges the customer for the salary cost plus a markup.
Even if the employee stays in Spain for fewer than 183 days, questions may still arise around ”who is the employer” for treaty purposes, and around how the salary cost is attributed to the host location. Therefore, a sound decision relies on all three conditions together – and not on the number of days alone.
*(For illustration only. An analysis under the treaty and local law is required).
In conclusion, an overseas secondment involves three key variables: time, the identity of the de facto employer, and how the salary cost is attributed. Companies that manage these three variables in advance, with minimal documentation and operational coordination, can prevent disputes and turn secondments into an effective business tool rather than a source of uncertainty.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team consists of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law offices, bringing a combination of legal and economic perspective. We advise private and public companies, Israeli and foreign, global venture capital funds, and also clients seeking focused advice in clear, practical language. We also work with a professional network of accounting firms and law offices around the world, to provide a full scope solution in cross-border matters.
If you send employees abroad for projects, support, or setup, we would be happy to conduct a focused exposure review under the relevant tax treaty, assist in building Secondment templates and service agreements, and implement a day-count and documentation mechanism that reduces disputes. You can schedule a short strategic consultation meeting to review the existing model and improve it before the next secondment.
FAQ
Does 183 days always exempt you from tax in the host country?
No. In most treaties, two additional cumulative conditions are required.
How do you count 183 days?
It depends on the treaty and local law. The reference period and counting rules should be reviewed.
What is a ''de facto employer''?
The party that actually manages and supervises the work and derives the economic benefit from it in the host country.
If the salary is paid from Israel, is that enough?
Not always. The de facto employer and the method of attributing the salary cost may be examined.
Which documents are important for a secondment?
A Secondment addendum, a day-count mechanism, and a clear service agreement where there is a cost recharge.
