A shadow payroll, sometimes called a notional payroll, is a bookkeeping mechanism used when an internationally assigned employee's cash salary continues to be paid entirely from the home country, but a tax obligation arises in the host country. The host entity runs a payroll calculation on the allocated portion of the employee's income to determine the correct wage tax and social-security contributions due in the host country, even though no additional salary is physically disbursed there.
The shadow payroll produces the necessary payroll reports and tax filings for the host jurisdiction without creating a second physical pay cheque. The home employer typically then adjusts its own withholding to avoid double-collecting from the employee. This mechanism is essential wherever the assignment triggers host-country payroll registration obligations and where the tax treaty does not fully exempt the income from host-country taxation.
In the Netherlands, a foreign employer without a registered establishment may still have a loonbelasting (wage tax) registration obligation if their employees work there. The shadow payroll approach satisfies this obligation while keeping the operational payroll running from the home country. Companies under a tax-equalisation policy (see related entry) often run shadow payrolls to calculate the hypothetical home-country tax and the actual host-country liability simultaneously.