Key considerations for employee management in the Middle East

Guidance from tax authorities

Many countries grant some form of tax relief to those who remain in the country for unforeseen circumstances, usually when the person is unable to leave. These situations are more concentrated in circumstances where the individual is physically unable to leave the country, rather than when he or she chooses not to leave. Health problems, for example, can prevent someone from leaving a country, while caring for a sick family member is a choice.

Because countries are not issuing specific guidance for those leaving the Middle East, reliance on these rules may not offer protection against income taxation for relocating people. Unlike the exceptional situation created during the Covid-19 pandemic (when borders were closed, flights between countries were canceled and travel restrictions prohibited certain people from traveling), flights to the Middle East are still available, albeit on a more limited basis.

In the absence of specific concessions announced, people will need to determine whether they are barred from leaving and unable to return to their residence in the Middle East, or whether they are choosing not to return.

United States Considerations for Taxpayers

Individuals living and working in the Middle East benefit from the absence of personal income tax in many countries, such as Saudi Arabia and the United Arab Emirates. Residents of the United States, both citizens and green card holders, however, continue to be subject to U.S. federal income tax. The federal tax liability can be reduced for people eligible for the Foreign Earned Income Exclusion (FEIE), an exclusion of up to US$132,900.00 in 2026 on taxable income from working abroad.

EFSI eligibility is based on being a bona fide resident of a foreign country or meeting the Physical Presence Test, which requires staying 330 days or more outside the United States. U.S. expatriates who return to a U.S. residence, either temporarily or permanently, may no longer be considered residents in the country from which they departed, and similarly may not meet the minimum number of days required to apply for EFSI.

The IRS may grant relief regarding the number of days requirement and the bona fide residency test for specific disasters and conflicts by suspending the obligation to comply with these tests as long as the individual can demonstrate that they would otherwise have met the criteria.

The challenge for international contributors looking to benefit from this type of grant is that it may not be confirmed until early 2027, as these exceptions are often announced before the start of the next U.S. tax filing season. Thus, they end up having to decide to leave the region without the certainty that tax relief may be available.

Risks for international companies

Uncertainty about whether a country's tax authorities will grant tax relief to individuals leaving the Middle East due to conflict creates potential exposure to a range of tax obligations. From the point of view of individual taxation, people who work in a country with income tax and without a clear exemption granted by the tax authority will find that their income from work becomes taxable from the day they arrive in the country.

As a result, these individuals may have to file tax returns to register with the tax authority, declare their taxable income, and collect the taxes owed. For U.S. taxpayers, if, for example, the IRS does not include the conflict as a specific situation that grants exemption from compliance with the FEIE's tests, people may face the full loss of the exemption and have a significant amount of income subject to U.S. federal income tax.

 Alternatively, if the exemption is granted for a specific period, those who remain in the United States for an extended period may find that the number of days that can be excluded for relief eligibility purposes is insufficient, resulting in the loss of EFSI for the year. Returning to the Netherlands, individuals leaving countries like the UAE "may face adverse tax consequences," according to Sander Agterhof, Global Mobility Partner at Grant Thornton Netherlands.

The tax treaty between the UAE and the Netherlands can only be invoked by UAE nationals, and therefore for expats working in that country and traveling to the Netherlands to work temporarily, their income can become taxable at rates of up to 49.5%, compared to zero in the UAE. For employers, employees working outside their home country in the Middle East can generate payroll reporting obligations, as well as withholdings of taxes and social security contributions.

Failure to comply with these obligations may result in the employer being charged taxes that were not withheld from the payroll, generating financial exposure. Thus, employers need to keep track of where their employees have relocated, where they are working, and proactively address the tax exposure that may arise. For both employees and employers, uncertainty about whether tax authorities will grant tax relief complicates compliance. Additional compliance obligations may still arise.

Tax compliance challenges in destination countries

In Ireland, for example, although an individual may not be subject to taxation based on a treaty, there is still an obligation for the foreign company to obtain approval from the Revenue to apply for relief from the obligation to operate Irish payroll withholding. As stated by Jane Quirke, Director of Grant Thornton Ireland, "an application must be submitted within 30 days of the commencement of the employee's activities in Ireland; otherwise, payroll taxes must be applied from day one."

Finally, corporate tax exposure can also occur when an individual's presence in a country creates a presumed corporate presence, a "permanent establishment." While the Organization for Economic Co-operation and Development released comments in late 2025 that reduced some of the risk for situations where employees work from a home office, the risks will still exist.

Employees who work from a company office in another country, performing responsibilities such as signing contracts, actively prospecting for business opportunities, working with local customers or simply performing their usual function in the country to which they relocated, represent exposure for the employing company.

Conclusion

The conflict in the Middle East presents a number of complexities for multinational companies with operations and employees impacted by the ongoing situation. As some employees seek to live and work in other countries, tax, finance, and human resources leaders need to be aware of potential tax risks and implement measures to mitigate financial exposure.