Properly planting an employee in a new country comes with some due diligence as it relates to legal and tax obligations. Those obligations differ across the world and there is a complex interplay of company policy and employment laws of both the home and host countries that affect the terms and validity of each employee situation. On top of that, inevitably no two expat work contract situations are the same.
This article highlights three of the more common legal structures for expatriate employees.
- Expatriates on assignment
- Dual employment - split payroll
- Employment without establishment (EWE)
As a global relocation management company (RMC), we are most involved with our clients as it relates to supporting the expatriate assignment structures, whether that is a short-term (12 months and under) or long-term (12+ months) duration. Each of these assignments best starts with an upfront discussion between the business and the tax partners, immigration partners and the RMC. This is the best way to make sure that the following items are properly addressed for these assignments:
- The employment contract between the employee and the employer (home entity)
- The assignment letter between the employee and the employer
- The service agreement between the employer and the foreign entity (host entity) where the expatriate is sent to
- The certificate of coverage – where applicable, outlining the social security position of the employee
Frequently in assignment situations, a shadow payroll is run as the host entity is not required to file payroll returns.
It is usually a local legal requirement that creates the need for the split payroll, dual employment structure. According to the article, "The creation of a local employment contract complicates tax compliance as both actual home and actual host country payroll is required...A local employment contract complicates not only the payroll (personal income tax) but social security compliance as well."
The last of the three, the EWE, is likely the least utilized, primarily due to the risk factor and is used in cases where the home entity does not have any legal presence in the foreign country. "Since there is no local/host entity under EWE, special registration, compliance and reporting rules apply."
One structure not discussed, but one that has been heavily relied upon over the last 10 years is the permanent one-way transfer. In this situation the employee is removed from home payroll and moved to a host-based salary. In the ECA article "Is this the end of the long-term assignment?, they reference their latest Permanent Transfers survey, where they found that nearly 40% of international transfers lasting more than one year are made on a permanent basis, where there is no expectation or commitment for the employee to return to the home country, primarily because they are less expensive and employees have been willing. The main reasons companies use permanent transfers are to fill skills gaps and to manage operations, which are also common purposes of international assignments. According to ECA, "Broadly speaking then, companies are more likely to use assignments for strategic purposes whereas permanent transfers are more suitable when there is simply a job that needs to be done."
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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.