Secondment tax in Iraq is a recurring issue for multinational groups that send employees from a foreign parent or affiliate to work in their Iraqi subsidiary or branch. Secondments allow groups to deploy experienced staff, transfer knowledge and maintain control of key functions. The seconded employee typically remains employed by the foreign company, keeps home country benefits and is paid through home payroll, while working under the direction of the Iraqi entity. This arrangement raises several tax questions: who is liable to withhold Iraqi tax on the employee's income, how the cost recharged to the Iraqi entity is treated, and whether the secondment creates a taxable presence for the foreign parent.
Well-structured secondments address each of these questions in advance. Poorly structured ones can result in unpaid tax, disallowed recharges and unexpected exposure for the parent.
The Income Tax Law No. 113 of 1982, as amended, taxes employment income arising in Iraq and governs employer withholding and deductions, administered by the General Commission for Taxes. The Labour Law No. 37 of 2015 governs employment in Iraq, and residence and work permits are governed by the Residency Law No. 76 of 2017 and labour regulations. The Workers Retirement and Social Security Law No. 18 of 2023 governs social security. Tax treaties, where applicable, may affect the taxation of employment income and business profits.
Employee income tax in secondment tax in Iraq
The seconded employee's income for work performed in Iraq is generally taxable in Iraq. The Iraqi host entity, as the entity for which the work is performed and often the residence permit sponsor, is commonly expected to calculate and withhold tax, even if salary is paid by the parent. A shadow payroll allows the host to compute and remit tax. The employee's home country may also tax the income, and relief may depend on home country rules or a treaty.
Recharge of secondment costs
The parent usually recharges the cost of the seconded employee to the Iraqi host. The recharge should be documented in a secondment agreement specifying the employee, the duration, the role, the costs recharged and any mark-up. The Iraqi host will seek to deduct the recharge. The tax authority may examine whether the recharge represents employment costs, which are deductible as staff costs, or a service fee, which may raise different questions. Recharges with a mark-up may be viewed as service income of the parent. Tax advisory services in Iraq can assist with structuring recharges.
Permanent establishment risk for the parent
If the seconded employee performs work for the parent rather than for the host, or if the parent retains control over the employee's work and bears the risk of results, the authority may consider that the parent is providing services in Iraq through the employee, potentially creating a taxable presence. To reduce this risk, the secondment agreement should provide that the employee works under the direction and control of the host, that the host bears the risks and rewards of the employee's work and that the parent's role is limited to employing and paying the employee.
Drafting the secondment agreement
A secondment agreement should cover:
- The parties, the employee and the duration.
- The employee's role and reporting line within the host.
- Direction and control by the host.
- Cost recharge mechanism and payment terms.
- Responsibility for Iraqi tax withholding and social security.
- Compliance with Iraqi immigration and labour requirements.
- Termination and repatriation arrangements.
Commercial contract advice in Iraq can help draft secondment agreements.
Employment law and immigration
Seconded employees working in Iraq need residence and work permits. The host typically sponsors them. Labour law requirements may apply to aspects of their employment in Iraq, including working conditions. Employment law advice in Iraq can assist with compliance.
Social security
The social security position of seconded employees should be considered, including whether they remain covered by home country social security and whether Iraqi contributions or exemptions apply.
Tax equalisation
Many groups operate tax equalisation policies, under which the employee pays a hypothetical home tax and the company bears actual taxes in both countries. The company should account for Iraqi tax paid under the policy as part of the cost of the secondment.
Practical checklist
- Sign a secondment agreement before the employee starts in Iraq.
- Confirm that the employee works under the host's direction and control.
- Obtain residence and work permits sponsored by the host.
- Implement a shadow payroll for Iraqi tax on the employee's income.
- Document the recharge basis and avoid unexplained mark-ups.
- Review social security coverage in both countries.
- Keep records of the employee's work for the host.
- Plan for the end of the secondment, including final tax and permit cancellation.
Short secondments and business travel
Not every assignment is a formal secondment. Employees may travel to Iraq for short periods to support projects or provide training. These visits may still create Iraqi tax obligations and, depending on their nature, contribute to permanent establishment risk for the employer. Groups should apply a simple policy: track business travel to Iraq, assess whether visits involve productive work, and include significant travel in shadow payroll calculations. Formal secondment agreements should be used whenever an employee will work under the Iraqi entity's direction for an extended period.
Managing the tax cost of secondments
For the group, the total cost of a secondment includes salary, benefits, Iraqi tax, home country tax and social security, and administrative costs. Where tax equalisation applies, Iraqi tax borne by the company may itself be taxable, increasing the cost through gross-up. Groups should estimate the total cost before deciding on a secondment and consider whether alternative arrangements, such as local employment by the Iraqi entity or shorter assignments, would be more efficient. Accurate cost estimates also support appropriate recharges to the Iraqi entity.
Illustrative example. A European engineering group seconds its finance director to its Iraqi subsidiary for three years. The finance director is paid in Europe, and the parent recharges full cost plus ten per cent to the subsidiary. No Iraqi payroll tax is filed. The tax authority questions both the missing payroll tax and the mark-up. The group introduces a shadow payroll, revises the agreement to recharge costs without mark-up and confirms that the finance director works under the subsidiary's direction, reducing the risk of a taxable presence for the parent.
Key takeaways
- Secondment tax in Iraq involves employee income tax, recharge treatment and permanent establishment risk.
- The Iraqi host is commonly expected to withhold tax, often through a shadow payroll.
- Secondment agreements should establish host direction and control and document recharges.
- Mark-ups on recharges may change the characterisation and should be considered carefully.
How Etihad Can Help?
Effective secondment tax planning in Iraq protects the employee, the Iraqi host and the foreign parent. A clear agreement and compliant payroll arrangements are the foundation.
Etihad Law Firm advises multinational groups on secondment structures, expatriate taxation, recharges and permanent establishment risk in Iraq. We help clients deploy staff to Iraq with confidence.