Key considerations for managing employees in the Middle East

Tax authority guidance

Many countries provide some relief for individuals present in that country for unforeseen reasons, typically when a person is unable to leave. These situations focus more on circumstances where an individual is physically incapable of leaving rather than choosing to leave. Ill-health, for example, may prevent an individual from leaving a country, while caring for a sick relative is a choice not to leave. 

With countries not issuing specific guidance for individuals leaving the Middle East, reliance on these rules may not provide protection from being subject to tax on income for individuals relocating. Unlike the exceptional situation created during the COVID-19 pandemic when borders closed, flights between countries were cancelled, and travel restrictions put in place prohibited certain persons from traveling, flights continue to be available to the Middle East, albeit on a more limited basis.

Without specific concessions being announced, individuals will need to make a determination on whether they are prevented from leaving and unable to return to their home in the Middle East, or whether they are choosing not to return.

U.S. considerations for taxpayers

Individuals living and working in the Middle East benefit from the absence of individual income tax in many countries, such as Saudi Arabia and the United Arab Emirates. U.S. residents, both citizens and “Green Card” holders, however, remain subject to U.S. federal income tax. Their federal tax liability can be reduced where they are eligible to claim the Foreign Earned Income Exclusion (FEIE), an exclusion of up to $132,900 in 2026 of taxable foreign employment income. Eligibility for the FEIE is based on being a “bona fide resident” of a foreign country or meeting the Physical Presence Test, spending 330 days or more outside the U.S. 

U.S expatriates returning to a home here on a short- or long-term basis may no longer be regarded as resident in the country they have departed and may similarly not meet the days threshold required to claim the FEIE. The IRS can provide relief from the days threshold and the bona fide residency test for specified disasters and conflicts, waiving the obligations to meet the tests provided an individual can demonstrate they otherwise would have met the criteria. 

The challenge for international employees in seeking to benefit from such a concession is that it may not be confirmed until early in 2027, with such exceptions typically announced ahead of the start of the forthcoming U.S. tax season. Individuals are therefore put in a position of choosing to leave the region without certainty on whether relief may be available.

Risks for international companies

Uncertainty about whether a country’s tax authority will provide relief from taxation for individuals leaving the Middle East due to the conflict creates potential exposure to a range of tax obligations.

From an individual tax perspective, individuals working in a country with an income tax and without a clear exemption from the tax authority will find their employment income is taxable from the day they arrive. In turn, individuals may have to file tax returns to register with the tax authority, declare their taxable income and remit taxes.  

For U.S. taxpayers, if for example, the IRS does not include the conflict as a specified situation that provides an exemption from meeting the FEIE tests, individuals could be faced with losing the exemption in entirety and having a significant amount of income subject to U.S. federal tax. Alternatively, if the exemption is provided for a specified period, individuals remaining in the U.S. for an extended period may find the number of days they can exclude for purposes of qualifying for the relief may be insufficient and they lose the FEIE for the year. 

Looking to the Netherlands, individuals leaving countries such as the UAE, “could face adverse tax consequences.” according to Sander Agterhof, Global Mobility Partner at Grant Thornton Netherlands. The tax treaty between UAE and the Netherlands can only be invoked by UAE nationals and so for expatriates working there and traveling to the Netherlands to work temporarily, their income may become taxable at rates up to 49.5% versus zero in the UAE. 

For employers, employees working outside their home country in the Middle East may trigger payroll reporting and both tax and social security withholding obligations. Failure to meet company obligations could result in taxes due that are not withheld in payroll being assessed on the employer, bringing financial exposure. Employers therefore have a need to track where their employees have relocated to and where they are working and to proactively address the tax exposure that could arise.  

For both employees and employers, uncertainty in whether relief from tax will be provided by the tax authorities complicates compliance. Additional compliance obligations could still arise. In Ireland, while an individual may not be subject to tax under a tax treaty, there is still an obligation on the foreign company to obtain Revenue approval in order request relief from having to operate Irish payroll withholding. 

As Jane Quirke, Director at Grant Thornton Ireland said, “an application must be made within 30 days of the employee commencing work in Ireland, otherwise payroll taxes are required to be operated from Day 1."Finally, corporate tax exposure can similarly occur with an individual’s presence in a country creating a deemed corporate presence, a “Permanent Establishment.” While the Organisation for Economic Co-operation and Development released commentary in late 2025 that removed some risk for situations where employees are working from a home office, risks will exist. Employees working from a company office in another country, exercising responsibilities such as signing contracts, actively pursuing business opportunities, working with local clients, or simply working in their normal business role in the country they have relocated to all present exposure for the employing company.

Conclusion

The conflict in the Middle East presents a myriad of complexities for multinational companies with operations and employees who are affected by the continuing situation. As some employees seek to live and work from other countries, Tax, Finance and HR leaders need to be aware of the potential tax risks that exist and put in place measures to mitigate financial exposure.

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