Paying Employees Overseas
When your business decides to make its first foray overseas and payroll incorporates countries other than your own, paying employees suddenly becomes a much more complex affair. Paying employees overseas can put a considerable strain on your HR and payroll people, who until how have only dealt with domestic payroll, while having impacts across all aspects of your business.
From strategically deciding which country to start up in to setting up an overseas presence, and deciding on your payroll mechanisms, businesses need to navigate compliance rules unique to every country. Keeping payroll costs manageable, while maintaining a consistent service is certainly a challenge, but by no means an insurmountable one.
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Key Points When Setting Up Overseas Payroll
- Ensure HR contributes to strategic country plans
- Have a scalable expansion plan
- Understand your legal standing in the host country
- Ensure your employment contracts are compliant
- Ensure taxes meet in-country legislation
- Understand nuances on pay, leave and sickness
- Find out about pension and social security payments
Implications of Paying Overseas Employees
In the majority of countries, it is difficult to make payments to both local and US citizens unless the business has registered a branch, representative office or subsidiary with local authorities.
In addition, to undertake business, recruit and pay staff, an organization will require a local taxpayer ID in some countries.
In Australia organizations require an Australian Business Number (ABN) in order to run a payroll, as this is required for Pay As You Go (PAYG) tax purposes. To obtain an ABN, the organization must either set up a new company legal entity in Australia with foreign ownership, or register the overseas entity as a foreign company running a foreign business in Australia.
Essentially, overseas payroll & HR management is both expensive and complex.
- Should you set up an overseas entity?
- Alternatives to overseas entities
- Visas & Immigration
- Employment Status & Contracts
- Security & Data Protection
- Double Taxation
- Withholding Tax
Do you want to know more?
Learn more about the complexities surrounding International Payroll, including tax requirements, in our brochure
Establishing an Overseas Presence
Should you set up an overseas entity to pay employees overseas?
Their is no straightforward way to enter a new country. You could establish a commercial presence inside its borders by registering with applicable authorities, acquiring a local taxpayer ID, and putting overseas employees on an in-country payroll.
This option obviously comes with a significant upfront cost and may not be suitable for all businesses. If a company is only testing the waters for potential expansion into an international location, investing time, money, and effort into establishing an in-country presence can be an unwise use of resources.
The key to global payroll compliance is to respect the unique circumstances of each situation. The scale of what constitutes “doing business” in a new country tips at a different point depending on the country and the intentions of the overseas engagement.
In instances of short-term assignments or individual outliers, it’s up to HR and payroll teams to ensure that the pay strategy is appropriate for the organization and the individual assignments.
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.
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.
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.
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.
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.
Payroll for Overseas Employees
Key payroll dates differ from country to country, so logistics is as essential in payroll as it is in any other aspect of a global enterprise.
You must also consider currency conversion rates, as well as the need to track payments across multiple borders.
Payments into overseas bank accounts
While in the US there is no statutory minimum paid vacation or paid public holidays, with employers able to determine their own paid vacation offers. The vast majority of industrialized nations have very clear requirements for paid vacation. Many countries also have a number of paid public holidays.
Paid sick days for short-term illness of an individual or family member are also not required within the US but must be taken into consideration overseas.
Organizations need to be able to effectively track and manage employee absence, whether from vacation or sickness and ensure that any compensation is accurate.
US employees who work overseas have unique tax challenges that include the treatment of pension contributions made while working abroad. Pensions such as IRAs and 401(K)s have specific contribution limits and rules that may be affected by an expat worker’s presence in another country.
There are several key factors that must be considered when deciding how to contribute to a US pension while overseas, but there is no hard fast rule that will apply in every situation.
Social Services & Contributions
Without doubt, one of the most complex areas of payroll is managing the diverse social service and healthcare contributions. Whilst in some countries the process appears transparent, for others, it is much more challenging.
In Spain, employee payroll tax is paid quarterly, by the 20th of the month following the respective quarter. All companies and all employees are subject to Social Security contributions payable to the State and payments are processed by an employer on their own behalf and on behalf of employees, monthly, in arrears. Every country has its own rules.
In Germany, employees can receive a continued payment during his/her sickness for a maximum of six weeks, after which there are sickness benefits.
Hong Kong specifies 12 statutory holidays that must be granted to all employees who have been employed continuously for three months and work at least 18 hours a week.
In Australia, the current social security rate stands at 11.5%, plus a 2% Medicare Levy on the employee’s taxable income. In Italy, employee contracts and social responsibilities change on a regular basis and need to be kept up to date.
Keeping overseas payroll & HR under control
Establishing an overseas presence requires careful planning and strategy before you set foot outside your borders. Questions regarding immigration approaches, compensation and benefits strategies and potential mergers with other entities all need to be answered well ahead of your first placement of personnel.
As you engage your HR & payroll teams to develop a global people management strategy, you will inevitably identify new opportunities, additional levels of detail that expand beyond your initial global objectives.
It’s important to rollout a global payroll & HR strategy so workloads scale with complexity, not volume. Your global people management strategy should be iterative and with opportunistic transitions in mind so you can scale your payroll effectively.
Get Expert Support
For businesses taking their first steps into global markets, trying to work out the best approach can be challenging and costly. Unlike domestic payroll, compliance penalties and costs for mistakes overseas can be very large. HR consultancies with a focus on global strategy can offer advice and help you develop an effective HR management process.
Consider engaging an outsourced payroll service that has expertise in managing global payroll. Not only will this give you the expert knowledge you need to manage your payroll overseas in one country, they can help you as you grow further.
This can help you ensure payroll compliance through tested, standardised processes. Disparate manual processes in each market, across the globe gives you less governing oversight. With a truly global delivery team we can manage the entire process of employing and managing international staff, ensuring your organization can focus on the most important part of expansion, whether that be sales or strategic operation
What to look for in an
overseas payroll & HR provider
Global payroll is complicated. Country-specific requirements, multiple service providers, different formats and processes, and potentially significant compliance penalties can create extra work and extra hassle. You need an international payroll solution that:
- Works for all your employees, no matter where they’re located
- Simplifies complex payroll processes country by country for your entire international footprint
- Gives you ready access to your complete multinational financials
Why choose IRIS FMP?
Overseeing multiple payroll suppliers in multiple languages, combined with the complexities of different legislation in each country, can make coordinating international payrolls difficult or even unmanageable.
Payroll procedures and regulations vary greatly in each country. We are there to guide you through the different rules and regulations, and to deliver on your behalf a smooth payroll service to all of your international employees.
You need confidence that the advice will generate an effective, compliant resolution, regardless of the complexity. That’s where we come in. We give you access to multiple tools to manage international employees effectively, organize processes efficiently, and keep your business compliant 100% of the time.
Simplified, Accelerated People Performance
Seamlessly, compliantly onboarding your organization and people to rapidly unlock your talent investment by reducing their time to value.
Trusted Excellence in Global Payroll & Benefits
We take the complexity away from local pay & benefits, ensuring your growing global workforce are paid accurately on-time, every time.
Global Expertise, Local Knowledge
Our qualified & experienced global HR specialists work in partnership with you to maximize your global workforce’s full potential.
Solutions That Flex With Your Growth
Flexible people-led pay & HR solutions supporting you across the employee & global expansion lifecycle.
Discover more about International Payroll & HR Consultancy
Everything you need to know about global payroll management