A note written by Compandben’s CEO, John Tinsley
These comments have not been submitted to a lawyer and they may not apply in every country. They represent my understanding of the law, regulations and practices worldwide.
If you have found an employee you want to employ or located a business need outside your “home” country there are several ways in which you can proceed.
1. Branch or Subsidiary Formation
Your company can form a Branch or Subsidiary in the country concerned. It is usually recommended to form a subsidiary rather than a branch because this limits legal liability to the limited company in the country concerned. If you form a branch the head office is technically fully liable.
With a branch or subsidiary you can carry out any form of business, employ staff, take out local contracts with suppliers- for instance for company cars, offices, cell phones. Your employee can take decisions, sign deals, offer prices and generally the unit can operate as a profit centre. The employee will get an employment contract from your company and can be put on the e mail listings, can work full time for you, is excluded from working for other firms, can be asked to sign non competition clauses etc.
There are some bureaucratic hurdles including getting Apostilled copies of certificates of incorporation, and passports. In a lot of countries it is required that a local bank account be established which entails bank recommendations. The local branch or subsidiary is a legal taxable entity. It will be taxed on the profits. The finance department may not relish creating taxable entities elsewhere in the world, subject to tax rules with which they are not familiar. There is a need for quarterly or annual returns, and accounts have to be kept and filed with the local country authorities. In general I would not recommend a branch unless you are planning to expand the operation to 10 or more employees. In terms of employment the local branch is fully legally responsible for the actions of its employee(s) and must employ and terminate staff in line with employment legislation, which may be a lot different to their “home” location.
2. Registration as an Employer
This is the same as setting up a Representative Office. The idea is that the head office (or a branch in another country) is registered as a foreign employer with the local social security and for employment tax withholding.
No legal or taxable entity is created. There are no accounts to keep. The employee will get an employment contract from your company and can be put on the e mail listings, can work full time for you, is excluded from working for other firms, can be asked to sign non competition clauses etc. This is the cheapest solution.
The employee cannot sign contracts, issue prices, credit terms etc without Head Office approval. (In fact you might see this as an advantage not a disadvantage!). Because there is no legal entity established your company cannot take out local contracts for company car, mobile phone, maintenance, local benefits and insurance etc. The Employee can have a mobile phone and your company would have to reimburse the costs. The tax authorities MAY claim that the operation is really a Permanent Establishment and should be subject to taxation like a branch. But in practice as long as employee income taxes are paid and social security is paid this is unlikely. In 10 years I have only seen this once – in Slovakia – and the company successfully said “no we are not a branch”. The comments above about having to employ and terminate staff in line with local laws apply in this case too but in this case the Head Office is legally liable.
3. Employment through a Third Party
This is sometimes referred to as PEO (Professional Employment Organisation). A local company will employ the employee on your behalf.
The local company will be legally liable for the employee (although their contract will ensure that any final costs – for instance in a termination case – are paid by you the client). The local employer will be able to offer extra insurances and other benefits (although we tend to warn American clients in particular not to be in a rush to offer USA style benefits like private health coverage, 401k, private pension, life insurance as these are not required in the local labour market). If there are disputes involving the employee it is the local firm’s job to manage this -even if you end up paying the bill.
This solution is the one favoured by the “social media” companies and we have a client that employs 400 employees in UK but employs its entire staff outside UK using this “PEO” method, including 27 in USA.
The authorities may still say that your company is really an employer and that there is a permanent establishment – but in practice your firm is less liable to this approach. The EMPLOYEE may be a little disappointed at getting a job offer from a company he has never heard of rather than your company. But he will be on your company’s e mails, will have your company’s business card etc. This solution will on an ongoing basis be the most costly. Tariffs vary from …say 10% of salary and social charges in Portugal to 20% in Japan. There are sometimes minimum charges inserted.
4. Using a Consultant or Contractor
Your firm can decide to have the employee work as a contractor or consultant. The employee is paid on presentation of invoice. The invoice will normally cover the employee’s salary and the employee and employer social charges payable.
Your firm has technically no legal liability. The consultant is liable for his own taxes and social security charges .
In some countries individuals are very uncomfortable with this approach. They worry that their social security coverage will be lessened, and that their health care and state pensions may suffer. British employees are usually quite relaxed about such arrangements but Italians and French are less keen. There is also the potential problem that may arise if the consultant does NOT fully declare his revenues and pay his taxes and social charges and this is found out by the authorities in the country. They will attempt to get the funds from the consultant – but they may well also decide that he “was really an employee” and therefore will deem you the company deemed to be his employer for back taxes and social security – so you will end up paying twice.
If you do follow this route you should NOT put the employee on telephone lists and e mail lists as these will be used as evidence that “he was really an employee”. And most important, the consultancy contract must say somewhere that the employee may work for other companies at the same time as working for your firm. You cannot say that he must devote himself 100% to your firm because he will then be getting treated as an employee.
Contact Compandben or visit Compandben Main Website – International Employment Services for more information.