Hypothetical tax (hypo tax)
is the notional home-country tax withheld from a tax-equalised assignee’s pay: the amount they would have paid had they stayed home. It replaces actual withholding in the assignee’s pay calculation, while the employer settles real taxes in both countries.
Setting and running hypo tax
The calculation mirrors home payroll on stay-at-home pay: base salary and bonus at home rates, home deductions and family status, updated for rate changes and life events. It excludes assignment-caused items (allowances, host premiums) the policy shields.
Because hypo tax is policy, not law, documentation must be explicit: the employment amendment states the deduction, the method, annual reconciliation and exit treatment — courts read ambiguity in favour of the employee. See tax equalisation.
FAQ
Is hypo tax an actual tax payment?
No — it is an internal deduction the employer keeps as a contribution toward the taxes it pays on the assignee’s behalf. Authorities receive real taxes through home and host payroll processes; the hypo figure never reaches a tax office as such.
What happens at year-end reconciliation?
Actual returns are prepared, and differences settle per policy: over-withheld hypo returns to the employee, under-withholding is collected within agreed limits. The reconciliation also trues bonuses, equity events and mid-year rate changes — skipping it quietly breaks the policy’s fairness promise.