Both employers and their globally-mobile employees need to understand their legal and tax obligations when working across borders.
In my previous article, I outlined 5 essential tax issues for expatriate workers. Now, let's take a deeper dive into the first point from that list – legal structures, their different taxation methods and exposures.
Why is this important? Because no two expat work contract situations are the same. It's essential that both employers and their globally-mobile employees understand their legal and tax obligations. Of course, these obligations differ across the world. You should use this article as a general guide. To discuss your specific situation, make an enquiry with our accounting, tax, HR & payroll experts.
1. Expat on assignment
This is probably the most well-known and internationally-used legal structure for an expatriate worker.
'Assignment' generally means that a person has citizenship in a country but is living and working in another country. Most expatriates stay in the foreign country for a limited time and then return to their home country. Another characteristic of an assignment is that the person's activity is connected to the activity of their employer/employment. This is an important point as it has a serious tax impact: in which entities' interest is the assignee working?
An 'assigned' or 'posted' worker is an employee who is sent by their employer to carry out a service in another country for a temporary period. This suggests that the employee will not have a local employment contract with the host (foreign) entity they are assigned to.
In this commonly-used structure, the following legal documents are required:
- employment contract between the employee and the employer (home entity)
- assignment letter between the employee and the employer
- service agreement between the employer and the foreign entity (host entity) where the expatriate is sent to
- certificate of coverage – where applicable – outlining the social security position of the employee.
The assignment letter itself is usually a temporary addendum to the employment contract. It provides specific details that are valid during the assignment period. Any other terms and conditions not mentioned in the assignmet letter remain valid as per the employment contract.
The service agreement is between the two companies and details the service that will be performed by the employee, the costs of the services, payment terms and so on. If the assignment is between two related parties, the service fee should be set at fair market value to avoid corporate tax exposures. The proper transfer pricing method should be used to set this service fee correctly, and transfer pricing documentation should be prepared.
2. Dual employment – split payroll
We do see cases when – for various reasons – a local employment contract is created for the expat worker beside the home country employment contract. The reason can range from a local legal requirement, confidentiality, financial etc. but it is generally not tax-driven. The creation of a local employment contract complicates tax compliance as both 'actual home' and 'actual host country' payroll is required. In the first, 'assignment' scenario, a shadow payroll is generally sufficient ie. there is no need for the host entity to file payroll returns. Actual compliance should, of course, be checked in each location.
A local employment contract complicates not only the payroll (personal income tax) but social security compliance as well. It's even more complicated when there is no international social security agreement between the home and the host country, as dual social security compliance may apply. The local employment contract should be avoided – compliantly – wherever possible.
Here's an interesting question for legal counselors/employment law specialists to discuss: is it possible to have two employment contracts for the same job/position?
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3. Employment without establishment
When the employment without establishment (EWE) structure is used, the home entity does not have any legal presence in the foreign country. Due to whatever business reason, it would like to employ someone locally ie. there is only one employment contract in place. The contract is generally tied to the foreign country's law rather than the home country's law. The place of work is also generally in the foreign country's territory. Since there is no local/host entity under EWE, special registration, compliance and reporting rules apply.
The EWE structure can pose a corporate income tax risk, so careful planning is recommended.
Need more information about these, or other expat employee legal structures? Contact us today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.