Alternatives to setting up overseas entities
Put the employee on the home-country payroll
Keeping an employee on home-country payroll can result in compliance risk once they become resident there. But home-country payroll can sometimes be legal.
If your employees simply make business “visits” to a location without establishing local residences, signing contracts, or generating in-country revenue, the employer likely isn’t crossing the “doing business” threshold in that jurisdiction, so creating a permanent presence may not be necessary.
Another way to do this is with a host country workaround. Some countries (not the U.S.) allow workarounds for offshore employers without any in-country presence or place of business.
These workarounds generally fall into three categories:
- Foreign Employer Exception
Available in the UK and Thailand, if you don’t do business or have a permanent establishment locally, you can hire and pay local staff without making local withholdings and contributions. The local employee bears the burden of tax and social security filings as if self-employed.
- Payroll Only Registration
Estonia, France, and some other countries offer a payroll law compliance option for employers. This option allows foreign employers with no in-country premises to make special “payroll only” registrations with in-country tax and social security bodies so they can issue a legal local payroll.
- Payroll law option for the employee
Other countries allow an individual employed by a foreign employer not doing business in-country to self-declare as “foreign payrolled” to the local tax agency. This again puts the onus on the employee and allows them to be paid by a foreign company.
Make the worker an assigned or leased employee
This is a form of secondment to an entity that has the registration in the country you need. The employee is employed by entity A but doing work on a daily basis for entity B. An organization may need to send an employee to another country to handle customer service and can ask its in-country customer to payroll that person.
If there is no local business partner, temporary agencies often provide leased employment. During this time, the US-based employee typically resigns or their employment is suspended and they become “floating employees”. They go abroad to work and are paid by an agent, who second the person’s services back to your company.
“Shadow payroll” is another means of leasing an employee, but you keep them under the company umbrella. In this version, Division A of a US company may do something completely different from Division B, which operates solely in another country, for example, the UK. If Division A needs to send someone to the UK, it can ask Division B to fill out the paperwork and report wages to HMRC and can reimburse Division B for doing the payroll.
From the UK payroll perspective, it looks like the employee is being paid by Division B, so you maintain payroll compliance.
Register or make the person an employee of a local affiliate
If you send someone to a country in which your organization is already registered or has a subsidiary there, you can put that person on your payroll. Alternatively, you can “second” them to an affiliate or business partner who is registered in that location. This option isn’t the most practical just for payroll, but it can be an option in certain circumstances.
Visas & Immigration
If you are considering a long term strategy and need to send key stakeholders into foreign markets, applying for visas and supporting your employees’ immigration is the logical step. Given the level of commitment involved, this is often part of a long term global strategy.
Deciding which approach is best for your business will depend on a variety of factors. Part of the challenge of establishing your business overseas is understanding these complex options and knowing which one is best for you.
Employment Status & Contracts
Every country’s revenue service has a variety of requirements for all employees, and this will include US nationals. Depending on your needs and market, you may have to comply with specific or unique case requirements, but all countries have standard, established requirements for all employees.
Every country has a different take on employment contracts, so you need to be able to meet a variety of legislative requirements.
In Spain, it is illegal to employ any foreign individual without a Foreigner’s Identity Number (NIE) and new employees must be registered as company workers with the Social Security Office before they can commence work. Late registration has a negative effect on certain employee rights.
There are a number of potential pitfalls for US companies, especially those that like to use a rolling short-term contract model for overseas employees. In order to establish an overseas presence, it is important to understand the payroll requirements of each country and make changes to your contract policy accordingly.
Security & Data Protection
For US companies looking to expand into European markets, the General Data Protection Regulations (GDPR) will need to be taken into consideration. These data security regulations put very specific duties upon any company that holds the data of EU citizens. This includes EU customers and any local EU staff you may choose to engage to do work for you on the ground.
Understanding the regional security and data protection rules of other markets is key to safely doing business there. You must also take into consideration that, as you grow globally, you data has the potential to be stored in more and more disparate places. Unifying your data stores and managing a globally standardized policy of data storage will keep you secure as your business expands.
For US organizations looking to deploy staff overseas, it will be important to recognize the potential impact of a higher – or lower – taxation regime on their earnings. While Federal Tax rates in the US vary from 10% to 39.6%, in the UK, the minimum rate is 20%, rising to 45% for the highest earners, with additional taxes due at both local and regional level.
In Germany the model has additional complexity because, in addition to social security contributions, employees must pay payroll tax and a solidarity surcharge, as well as church tax to the German tax office. Furthermore, the amount of income tax payable depends on the amount of taxable gross income, the tax grade and the number of dependent children.
Understanding the taxation regime will be essential to ensure employees receive comparative salaries globally.
There are huge discrepancies in tax rates from country to country. Understanding this is crucial to legally compliant, comparative and competitive salaries for all employees.
Withholding Tax rates vary from country to country and one of the most common occurrences of double taxation in overseas employee wages. Understanding your tax obligations and international tax treaty opportunities is an essential part of managing payroll for overseas staff form a business finance perspective.
Depending on the residency status of an employee, some, all, or none of the US rules for withholding and reporting on income apply.
US citizens and green-card holders who work abroad for US companies remain subject to US payroll taxes and Form W-2 income reporting. Substantially present residents remain subject to these rules until they are away long enough to become nonresident aliens.
Qualifying US expatriates can use foreign earned income exclusions and foreign tax credits to avoid double worldwide taxation while working abroad. Foreign nationals who are nationals of a treaty country may also be eligible depending on their circumstances.
Special payroll rules allow for reductions in wage withholding for employees who expect to qualify for IRC §911 foreign earned income exclusions or whose wages are subject to foreign wage withholding.