What is hypotax?
Hypotax – short for hypothetical tax – is the estimated tax amount an assignee would have paid had they stayed in their home country. It is not the assignee's actual tax liability but an internal settlement figure used in assignment payroll: instead of the real tax, the hypotax amount is withheld from salary so the assignment stays tax-neutral for the individual. According to BDO Global, the calculation base is the so-called "stay-at-home" (SAH) income: "For an assignee that is tax equalised, you would expect hypothetical tax (and potentially social security) to be deducted from their stay-at-home (SAH) income rather than having actual tax and social security withheld via the host county payroll." BDO recommends a comparison tool in practice – "a balance sheet or a mocked-up payslip" – so the assignee can follow the deductions.
How is hypotax calculated?
According to an analysis in the AICPA's Tax Adviser, the calculation runs in two steps: before or at the start of the assignment, an estimate is made that "consider[s] only income and deduction items that the assignee would have incurred had he or she stayed" at home. This amount is withheld on an ongoing basis through payroll as hypothetical withholding. After the actual tax return is filed, the hypothetical tax is recalculated and compared against the real tax liability: if the hypothetical tax exceeds the actual tax, the assignee is refunded the difference; if the reverse is true, they owe the shortfall. This additional withholding exists specifically, per the Tax Adviser, "so that in the event that the hypothetical liability exceeds the actual liability, the assignee does not have to settle the entire liability" in one lump sum.
Hypotax under tax equalization
Under a tax equalization policy, the employer bears the full difference in both directions. The Tax Adviser describes the mechanism: "If a 'hypothetical tax' exceeds the actual tax as filed on the assignee's [...] tax returns, the assignee would owe the employer the difference. If the actual tax exceeds the hypothetical tax, the employer would reimburse the assignee for the difference." The goal is complete tax neutrality: the assignee always bears, economically, exactly the hypotax amount – no more, no less – regardless of whether the host country taxes higher or lower than the home country. Any benefit from a more favourable host-country tax system stays with the company, not the individual.
Hypotax under tax protection
A tax protection policy works asymmetrically. Per the Tax Adviser: "When the hypothetical tax exceeds the actual tax, the employee retains the benefit and is not required to reimburse the employer the difference; when the actual tax exceeds the hypothetical tax, the employer will reimburse the assignee." The assignee therefore never bears more than the hypotax, but keeps the upside of a more favourable host-country tax rate. In practice, per the Tax Adviser, this also means "there generally is no hypothetical withholding" – the full real tax is initially paid directly by the assignee, with settlement happening only afterwards. BDO Global observes a clear market shift here: companies are increasingly moving away from pure tax equalization toward (partial) tax protection on individual assignment benefits such as housing, relocation, or schooling – not least for cost reasons.
Equalization vs. protection compared
| Feature | Tax equalization | Tax protection |
|---|---|---|
| Goal | Complete tax neutrality – neither advantage nor disadvantage | Protection against higher tax; benefit of lower tax stays with the assignee |
| Who keeps the benefit of lower host-country tax? | Employer | Assignee |
| Who bears the cost of higher host-country tax? | Employer | Employer |
| Hypothetical withholding during the assignment? | Yes, ongoing through payroll | Generally no, settlement only after the tax return |
| Market trend (BDO, 2025) | Declining as the default model | Increasingly common, often as partial protection on specific benefits |
A third, simpler option also exists: "laissez-faire" – no equalization calculation at all, with the assignee bearing the full tax risk themselves. Per the Tax Adviser, "a lot of smaller companies" choose this route because equalization and protection are time-consuming and expensive to administer – but the risk of double or excess taxation then rests entirely with the individual.
What this means for companies
Hypotax is a payroll and contractual construct, not a legal requirement and not something reported to tax authorities. What matters for HR and global mobility teams is which model is documented in the assignment contract or assignment policy, since hypotax, tax protection, and local contract models frequently coexist for different employees within the same company. For documentation, this means the contract type per person needs to be tracked clearly, independent of whether a 183-day threshold or an economic employer question also applies – both run independently of the hypotax question and must be assessed separately. Tools like premote help track contract type and the relevant assignment data per international assignment in a structured way – as a basis for clean reporting and compliance processes, not as a substitute for individual tax assessment by a tax advisor or in-house mobility tax specialist.
FAQ
Is hypotax the assignee's actual tax liability?
No. Hypotax is an estimated, internal settlement figure that mirrors the real tax at the home location. The actual tax liability in the home and host country is determined independently.
What happens if the real tax is higher than the hypotax?
Under tax equalization, the employer covers the full difference. Under tax protection, the employer also covers the excess cost – the difference between the two models lies in the reverse case of a lower real tax.
Who keeps the benefit if the host country taxes less?
Under tax equalization, the employer. Under tax protection, the assignee.
Is hypotax deducted from salary on an ongoing basis?
Under tax equalization, generally yes, as ongoing hypothetical withholding through payroll. Under tax protection, settlement usually happens only after the tax return is filed.
Does hypotax also affect social security?
Depending on company policy, the calculation can additionally include hypothetical social security contributions – but this is policy-dependent, not a legal requirement. The A1 certificate and similar social security proofs are assessed independently.
The information provided on this website does not constitute legal advice and is not intended to address any legal issues or problems that may arise in individual cases. The information on this website is of a general nature and is provided for informational purposes only. If you need legal advice for your individual situation, you should seek the advice of a qualified attorney.