Offshore payroll for work in Iraq is common among international companies. Expatriates and rotational staff working on Iraqi projects are often employed by a foreign group company and paid into foreign bank accounts, in foreign currency, through a payroll run outside Iraq. From the company's perspective, this simplifies administration and keeps employees on familiar terms. But paying salaries abroad does not change where the work is performed. Employment income for work carried out in Iraq is generally taxable in Iraq, and the Iraqi entity that benefits from the work may have obligations to report and withhold tax.
When offshore payroll is not reflected in Iraqi filings, exposure accumulates. It may surface when the Iraqi entity applies for tax clearance, when residence permits are renewed or when the tax authority compares immigration and payroll records.
The Income Tax Law No. 113 of 1982, as amended, taxes employment income arising in Iraq and requires employers to deduct and remit tax, administered by the General Commission for Taxes. Residence and work permit procedures, under the Residency Law No. 76 of 2017 and labour regulations, connect foreign workers with sponsoring entities in Iraq. The Workers Retirement and Social Security Law No. 18 of 2023 governs social security, and its application to foreign workers should be checked. Kurdistan Region applies its own payroll tax rules.
Why offshore payroll for work in Iraq creates exposure
Iraqi tax on employment income depends on where the employment is exercised. An employee who works in Iraq earns income from Iraqi sources, regardless of which entity pays the salary or where it is paid. The tax authority will typically look to the Iraqi entity that hosts the employee, sponsors their residence or benefits from their work to ensure that tax is withheld and remitted.
Identifying affected employees
The first step is to identify all employees working in Iraq who are paid offshore, including:
- Expatriates on long-term assignments.
- Rotational staff working in Iraq on rotation schedules.
- Short-term business travellers who perform work in Iraq.
- Employees of foreign group companies seconded to Iraqi projects.
For each, the company should record days worked in Iraq, the paying entity, the Iraqi entity benefiting from the work and the residence permit sponsor.
Calculating Iraqi tax
Iraqi tax should be calculated on the portion of remuneration attributable to work in Iraq. Remuneration includes salary, allowances and benefits, which may include housing, transport and bonuses. The company should determine how to apportion remuneration for employees who work partly in Iraq and partly elsewhere, using a consistent basis such as working days.
Shadow payroll
A shadow payroll is a common solution. The Iraqi entity runs a payroll calculation for offshore-paid employees, computing Iraqi tax on their Iraqi remuneration, and remits the tax to the authority, even though the salary is paid abroad. The cost of the tax may be borne by the company under a tax equalisation policy or recovered from the employee, depending on the employment terms. Shadow payroll requires reliable data from the offshore payroll and travel records.
Recharging costs
Where a foreign group company employs the staff and the Iraqi entity benefits, the foreign company may recharge salary costs to the Iraqi entity. Recharges should be documented in a secondment or service agreement and supported by evidence of the employees' work. The tax treatment of the recharge for the Iraqi entity, including deductibility, should be considered. Tax advisory services in Iraq can assist with recharge arrangements.
Residence permits and immigration records
Residence and work permits link foreign employees to sponsoring entities. The tax authority may compare these records with payroll filings. Employees sponsored by an Iraqi entity but omitted from its payroll filings are an obvious red flag. Employment law advice in Iraq can help align employment, immigration and payroll.
Social security
The application of Iraqi social security to foreign employees, including those paid offshore, should be reviewed. Practice and exemptions may vary, and changes under the new social security law should be monitored.
Regularising past exposure
Where offshore payroll has not been reported in past years, the company should assess the exposure, consider voluntary regularisation and prepare supporting calculations. Regularisation before an audit or clearance application is usually preferable.
Practical checklist
- Identify all employees working in Iraq who are paid outside Iraq.
- Track their working days in Iraq through travel or rotation records.
- Determine the Iraqi entity responsible for withholding.
- Implement a shadow payroll calculating Iraqi tax on Iraqi remuneration.
- Agree how the tax cost is borne, under tax equalisation or employment terms.
- Document recharges in secondment or service agreements.
- Align payroll filings with residence permit records.
- Review social security treatment for foreign employees.
Rotational and short-term staff
Rotational staff, who work in Iraq for several weeks and then rotate out, are a frequent gap. Their days in Iraq may add up to a significant portion of the year even if they never stay for long continuous periods. Short-term business travellers performing work in Iraq may also create small but cumulative exposure. Employers should apply a consistent policy, based on working days, for calculating Iraqi tax for these groups, and should keep the travel data that supports the calculation.
Communicating with employees
Employees paid offshore may not expect Iraqi tax to apply to them, especially if their home payroll already deducts home country tax. Employers should explain the Iraqi position at the start of the assignment, describe how the shadow payroll works and clarify whether the company or the employee bears Iraqi tax. Employees should receive statements of Iraqi tax paid on their behalf to support home country credits. Clear communication reduces disputes and helps employees understand why the company needs accurate travel records.
Illustrative example. An oil services company employs twenty expatriate engineers through its regional hub and pays them abroad. The engineers work in Iraq on rotation and hold residence permits sponsored by the company's Iraqi branch. The branch files payroll tax only for local staff. When applying for clearance at the end of a contract, the branch is asked to explain the expatriates' tax. It implements a shadow payroll, calculates tax for prior years based on rotation records and settles the liability before clearance is issued.
Key takeaways
- Offshore payroll for work in Iraq does not remove Iraqi tax on employment income from work performed in Iraq.
- The Iraqi entity hosting or sponsoring employees is often expected to withhold and remit tax.
- Shadow payroll is a practical solution, supported by travel and payroll data.
- Residence permit records are compared with payroll filings, exposing omissions.
How Etihad Can Help?
Managing offshore payroll for work in Iraq requires aligning foreign payment arrangements with Iraqi tax obligations. Shadow payroll, documented recharges and consistent records protect the company and its employees.
Etihad Law Firm advises international employers on expatriate taxation, shadow payroll, secondments and regularisation in Iraq. We help clients comply without disrupting their global payroll arrangements.