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Unlocking Opportunities: Hiring and Working With International Talent

The world is getting smaller due to technology advancements and transportation efficiencies (among many reasons), and many domestic companies are starting to consider hiring people to perform work from locations outside the U.S. As with many tax issues, there are often complications that could arise and it’s important for U.S. companies to plan and discuss with their U.S. and possibly foreign tax advisors prior to hiring foreign persons as employees or independent contractors. Below are a few areas to consider.

Employee Versus Contractor

The determination of employee versus contractor is critically important and could control whether – and how much – the U.S. company has tax exposure in the foreign jurisdiction. One important nuance to consider is that the determination of employee versus contractor in the foreign jurisdiction may not follow the same rules as the U.S.

In the U.S., the determination of employee versus contractor is a common law determination and rests on the evidence related to the degree of control and independence that the individual demonstrates. There are three components of a fact and circumstance based analysis:

  1. Behavioral – Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial – Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, what (if any) expenses are reimbursed, who provides the tools/supplies, etc.
  3. Type of Relationship – Are there written contracts or employee-type benefits (pension plan, insurance, vacation pay, stock options, etc.)? Will the relationship be ongoing and is the work performed a key aspect of the business?

Unfortunately, the analysis isn’t always clear-cut, and an individual may be treated as an employee for one country and an independent contractor in another. Foreign employee status can lead to many unintended consequences that U.S. companies may not have considered. For example, European employees are entitled to many rights and benefits that American employees are not. However, a U.S. company with a European employee must typically follow the local jurisdiction requirements.

Once a determination is made as to the status of the individual, the next step is determining what the potential tax exposure might be (see treaty considerations below). If a U.S. company is deemed to have an employee in a foreign country, they may have to register and remit payroll taxes in that foreign country. Additionally, depending on the specific activities being performed by the individual, the U.S. company may face exposure for foreign income taxes and even sales/VAT-type taxes and possibly other taxes established in that country.

It’s critically important for any U.S. company considering hiring in a foreign country to get a local country advisor before any work begins. There are country-specific registrations – and even exemptions – that can be obtained to help address and mitigate any foreign country taxation. However, many of the foreign tax benefits must be addressed prior to the start of the foreign person’s work for a U.S. company.

Treaty Considerations

When a foreign employee is hired, it’s important to understand what they are doing and where they are doing it. With a few exceptions, U.S. companies are generally protected from income taxes in foreign countries with which the U.S. has an income tax treaty as long as they don’t have a permanent establishment in the foreign country.

A permanent establishment generally looks at whether the U.S. company has a fixed place of business (ignoring show rooms and inventory storage) or has employees with the ability to sign and/or execute contracts. If a U.S. company does not have a permanent establishment, they are generally exempt from income taxes (but are not exempt from payroll tax registration/collection/ remittance, sales/VAT taxes, etc.).

One exception to the above definition of a permanent establishment can be found in several treaties (specifically but not limited to the Canada and U.K. income tax treaties). Certain countries extend the definition of a permanent establishment to include merely having an employee in the country providing services.

This is known as a service permanent establishment and a fixed place of business is not required to trigger a foreign tax filing obligation. This could lead to the U.S. company being exposed to income tax filings and payments in the foreign country.

Once a U.S. entity believes it may have a permanent establishment in a foreign country, it’s important to talk to local country advisors before the work starts. There may be ways to mitigate or even be exempt from filing in countries where the U.S. has an income tax treaty. Effective local country planning is critical to success.

Additionally, it is critically important to have an advisor both in the U.S. and in the foreign jurisdiction that is familiar with the specific treaty being analyzed. Every treaty with the U.S. is different, and any analysis will need to consider the specific facts and circumstances of the arrangement. Also, remember that treaties are focused on income tax and may not impact other types of taxes that may be associated with having employees or contractors in a foreign jurisdiction.

Travel to the U.S.

An additional point to consider is whether the foreign individual will be expected to travel and work from the U.S. for periods of time. It’s very important that the U.S. company have processes in place to track when and where their employees are working. If the individual is a U.S. nonresident alien, any services provided in the U.S. will be subject to 30% withholding unless a valid Form 8233 is filed and approved by the IRS. Form 8233 must be filed annually before any services are provided in the U.S. The form certifies that an income tax treaty may lower or eliminate the required income tax withholding. However, it’s important to note that the individual must have an ITIN or Social Security number for this filing.

Navigating International Hiring With Expert Guidance

With proper planning, hiring employees or contractors outside the U.S. can be a beneficial addition to a company’s workforce. The first step is to seek expert guidance and advice both in the U.S. and in the foreign jurisdiction before any work is performed or any foreign persons are hired. This would include determining the employee versus contractor status, analyzing any relevant treaties, and understanding the roles and travel requirements of the foreign individuals.

Please reach out to a KSM advisor for additional information on hiring foreign employees or complete this form.

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