Employment, Tax, and Visa Issues Associated With the Overseas Telecommuter
Given the pandemic and all that has come along with it, telecommuting has become the new norm. Employers are increasingly faced with difficult legal issues pertaining to not only the out-of-state telecommuter, but also the foreign national who “telecommutes” from overseas due to travel and visa restrictions. U.S. employers may still want to utilize the foreign national’s services, but there are various issues to consider before doing so.
What Is a Permanent Establishment and Why Should Your Company Care?
Permanent establishment or “P.E.” is an international tax concept. In general, it means that a U.S. company has created a sufficient presence in a foreign country to allow a foreign country to attribute to a portion of the U.S. company’s worldwide income to that country. This in turn allows the foreign country to impose taxes on the U.S. corporation’s income allocable to that country. U.S. companies generally want to avoid the creation of a P.E. where their only presence is a service provider working remotely from that country.
What Can Create a P.E.?
While income tax treaties between the U.S. and the foreign country define how a P.E. is created in that country, it can generally be established in two ways: (1) if a U.S. company has a dependent agent overseas who exercises authority to conclude contracts on behalf of the company (the “Dependent Agent Test”), or (2) if a U.S. company has created a fixed place of business in the foreign country (the “Fixed Place of Business Test”).
Creation of a P.E. under the Dependent Agent Test generally depends on whether the agent is considered legally or economically dependent on the U.S. company and whether the agent has and habitually exercises authority to conclude contracts on behalf of the U.S. company while overseas. Generally, service providers working temporarily in a foreign country should not be permitted to regularly conclude contracts on behalf of the U.S. company while located in a foreign jurisdiction.
The Fixed Place of Business Test is generally met if a U.S. company has an office or fixed place of business in the relevant country. This can happen if the U.S. company has an agent present overseas who routinely works in the same location (i.e., a conference room, a factory, a hotel, even a home office) for the company. The office space could be in the facility of another enterprise entirely, and oftentimes it is not required that the agent have a formal legal right to use the space. Each of these tests may involve a highly fact-specific analysis and could be subject to differing interpretations depending on the applicable income tax treaty.
Although, as noted above, a fact-specific analysis is needed to determine whether the Fixed Place of Business Test is met, certain factors may help weigh against meeting that test: (1) the U.S. company does not pay for the office space overseas; (2) the U.S. company does not designate a specific office space for the overseas agent to use; (3) the agent utilizes several different and temporary work locations overseas; and (4) the agent works for the U.S. company overseas for a period of less than six months.
Should a Staffing Agency From the Host Country Be Used?
If the U.S. company has systematic and continuous business activities taking place in a foreign country, it should consider using a staffing agency in that country. The foreign national should be an employee of the staffing agency in the host country, and the staffing agency would then “staff” or supply the U.S. company with the foreign national(s) to perform services. The foreign nationals should not have the ability to conclude contracts in the name of the U.S. company. The staffing agency should handle employment, tax, payroll, and other requirements under the host country’s laws. Nevertheless, there is no guarantee that the staffing agency will insulate the U.S. company from having a P.E.
In addition, regardless of P.E. issues, if the country has strict rules on when a service provider is an employee, rather than an independent contractor, a staffing agency may need to be used to help avoid classification of a service provider as an employee.
What If No Staffing Agency Is Used?
Assuming no misclassification, the arrangement between the U.S. company and the foreign national working overseas pursuant to a foreign vendor services arrangement or agreement similar to an independent contractor arrangement should not create a P.E. provided that the arrangement is not such that an employer/employee relationship is created and the foreign national does not have the ability to conclude contracts in the name of the U.S. company. The foreign national should declare his income as taxable revenue in his own country for consulting work performed there. He or she would not need a U.S. Social Security number or an individual taxpayer identification number since he or she is not working in the U.S. and is not a U.S. tax resident. Further, the foreign national would not have to file a U.S. tax return, nor would the U.S. company issue him or her an IRS Form 1099 since he or she is not a U.S. person and not performing services in the U.S.
How Should the Foreign Vendor Services Agreement Be Structured to Help Limit Creating a P.E.?
Again, while the existence of a P.E. often involves a fact-specific analysis, there are ways to help limit the creation of P.E. For example, the foreign vendor services agreement could expressly note that the vendor is not authorized to conclude contracts on behalf of the U.S. company. It could also expressly note that the U.S. company is not responsible for providing the vendor with a workspace outside the U.S. or reimbursing the vendor for the cost of any such workspace.
Can the Foreign National Visit the U.S. Company?
Yes. The foreign national can visit the U.S. for business meetings, training, etc. using the ESTA visa waiver (Electronic System for Travel Authorization) if they are from a visa waiver country, or by way of a B-1 visitor visa. Foreign nationals visiting the U.S. company should limit their visit to 2-3 weeks. Otherwise, the U.S. Department of Homeland Security and U.S. Department of Labor could question whether the foreign national is engaging in day-to-day productive work in the U.S. which would require that the U.S. company sponsor them for a U.S. work visa. While there is no bright-line rule regarding how often they can visit, more than 3 trips per year might raise questions. Therefore, visits should be short in duration.
The U.S. company should also consider any U.S. federal or state and local income tax reporting and withholding consequences that may arise as a result of U.S. visits by the foreign national.
When Your Telecommuter Does Visit, What Is the Difference Between a Visa and an I-94, and Why Does It Matter?
If the foreign national is visiting the U.S. company, it is important to understand the difference between a visa and I-94.
A visa is used to travel and enter the U.S. It is inserted in the passport by the consular officer at the U.S. Embassy or Consulate abroad. However, a visa does not control how long one may stay in the U.S. An I-94, on the other hand, controls the length of stay in the U.S. and is issued by U.S. Customs and Border Protection (CBP) at the port of entry.
If you have a foreign national working for you overseas as a telecommuter, consult with counsel so that they can:
Review the relevant income tax treaty
Analyze the likelihood of your creating a P.E.
Consider any service provider classification issues
Advise on the use of a staffing agency in the host country
Review and revise your foreign vendor services agreement