Successfully placing an employee in a foreign land requires careful attention to a multitude of issues.
“If it’s not properly coordinated, there could be significant negative ramifications for not only … the U.S. worker going abroad, but also the company,” says Caroline Westover, a Syracuse-based partner in the law firm Bond, Schoeneck & King, PLLC, which has offices in Rochester.
Timely, careful planning can yield a fruitful posting for the company and the expatriate—or “ex-pat”—involved. Without it, that time abroad could prove costly for the firm and its employee.
Such planning is becoming more important as firms around the country are looking abroad for new business or opportunities to expand.
“Even in the middle market, now you have companies acquiring or establishing operations across borders,” says John Lowe, a partner in the law firm Barclay Damon LLP.
Unfortunately, many firms that want to operate abroad lack the expertise needed to navigate the issues that can arise. Developing a plan to deal with the legal issues alone requires at least six months, according to Westover.
“As soon as they know that this is a realistic possibility, that’s when they want to call legal council,” she asserts. “The more time that we have to plan … the better off we can be to make sure that it’s a smooth process.”
First, there are the official requirements for traveling abroad. Treaties of commerce and navigation, which the United States has signed with a large number of countries, deal with some of the immigration issues a company and its employees might face.
“That’s actually our most ubiquitous form of bilateral treaty,” Lowe explains. “What they establish … is the principle of reciprocity—the idea that you’ll let my people into your country to do business, and I’ll let your business people into my country to do business.”
Individual treaties are tailored to the countries involved; those the United States has with the United Kingdom differ from those it has with Japan. As useful as they are, such documents only outline the reciprocal relationships they cover in general terms. Immigration laws on both sides of the border go much deeper.
To begin with, U.S. residents who wish to become ex-pat employees of their firms generally must obtain visas to do so.
“If they’re actually going over there to do some productive work, a work visa is required,” Westover explains.
Most countries’ work visa programs are designed to help foreign companies fill executive-level positions demanding expertise that might not be found locally.
“Essentially, it has more to do with the idea that it has to be something unique about the person you’re sending,” Lowe says. “If anybody can do it, let’s have somebody in-country do it.”
A host country’s desire to limit ex-pat employment can pose other hurdles, as well.
“Some countries have … certain limitations on who would be authorized to work in that country,” says John Sander, a principal in the law firm Jackson Lewis P.C., who is based in New York City. “It might be that the employee works in an area where there are certain quotas, in the local country, as to how many visas will be given out.”
Visa applications also can take months to process, or longer. Companies seeking to place ex-pat’s in critical positions need to plan well ahead or risk suffering potentially costly delays.
Foreign operations also pose direct challenges for the companies involved—starting with the need to obey host countries’ laws and regulations.
“In the U.S., we have corporate laws here, rules of how things get done,” Westover explains. “When somebody goes abroad, they need to make sure that they understand how different business models and business rules apply over there.”
A host country’s regulatory agencies might require information that U.S. companies are not used to sharing.
“Europe, in particular, has different standards, different regulations on privacy, intellectual property,” Westover says. “People need to be cautious about how they proceed there, how they’re protecting their corporate information.”
In addition, a U.S. firm needs to examine issues that could directly affect its bottom line when it reaches abroad, including its tax exposure.
“Is it a large exposure, and do we want to take that on?” says Kevin Hill, CEO of the accounting firm EFPR Group LLP.
Though the U.S. tax code should be consulted first when answering such questions, a tax treaty can override those statutes under some circumstances, according to Hill. The United States has signed such treaties with its heavy trading partners—Canada, China, Mexico and Australia, to name a few.
“The treaties are very comprehensive,” Hill says. “They cover things like how interest dividends are treated; what are the tiebreaker rules when you have someone who may be in a situation where you have dual residency and both countries think they need to tax you.”
The treaties, which are tailored to the countries with which they are signed, might also confer tax breaks upon U.S. firms that seek to operate in those countries, according to Hill.
Though tax breaks are always welcome, they can be particularly useful for a firm that has created a “permanent establishment” under a host country’s tax laws. If it does so, the firm is subject to taxation by the host country.
The standards for permanent establishment differ for each country, according to Hill. Sending people to the U.K. for more than a few months, allowing them to make contractual arrangements, renting space for them, storing company inventory in that country and other conditions could give a firm the status of a permanent establishment.
While looking out for itself, a U.S. firm should take care of its ex-pat employee’s tax issues as well. Due to the unique nature of U.S. tax laws, those posted abroad have to pay taxes in the host country and their native land. The firms that employ them generally take action to reduce or eliminate the extra burden.
“You have to balance out how much of a foreign income tax credit that employee would receive as an offset on their personal returns,” says Rick Kasperski, founder and managing partner of Kasperski Owen & Dinan CPAs LLC. “There has to be some form of a ‘true-up,’ or a compensation adjustment to make them whole.”
The firm also has to decide whether to keep an ex-pat employee on his or her original U.S. payroll or to place the individual on the payroll of its entity abroad. At the same time, it also needs to be borne in mind that living abroad is very expensive—many countries have higher costs of living than here—and can be a strain for the ex-pat financially and personally.
“If I’m an executive going to London, I’m going to want a cost-of-living adjustment,” Hill explains. “I maybe want a bonus. I’m going to ask you ‘Are you going to help rent an apartment or a house there?’”
The ex-pat might also have to pay for health insurance, retirement plans and other benefits both in the host country and in the United States. By covering the additional cost of the placement, a firm can help the employee be more productive while abroad.
Even just the relatively straightforward act of terminating an employee grows more complicated abroad. U.S. firms can hire and fire at will under most circumstances, but those in many other countries cannot because of their employment laws.
“If you terminate somebody in another country, you have to have cause,” Sander explains. “If you don’t have cause then different consequences can flow from that.”
Depending upon the host country involved and its laws, the firm involved could end up in court and be forced to pay damages or severance to the ex-employee, according to Hill.
To avoid such problems, companies seeking to post employees abroad should contract with them regarding the conditions of their placements, according to attorneys and accountants who specialize in international placement issues. Compensation, insurance coverage, the time to be spent abroad and all other conditions should be down in writing.
“If we can have a good agreement, or something that lays that out before they ever take the seat on that plane, that will go a long way to addressing the issues,” Westover explains.
A firm would do well to include a “choice of law” provision in the contract that states which body of law—the United States’ or host country’s—would principally govern the terms of the placement.
“If a U.S. employer neglects to identify a choice of law provision for an expatriate assignment and an issue arises, a court in the foreign host country will, in all likelihood, apply the laws of the foreign host country,” Westover says.
Application of the host country’s laws could prove costly if a legal dispute arose. While that country’s government or courts do not need to apply a U.S. firm’s choice of law to a dispute involving an ex-pat employee, the presence of the provision creates at least a chance that it will be applied, according to Westover.
Though the issues regarding ex-pat assignments might seem daunting, Rochester-area legal and accounting firms appear ready to help local firms avoid potential problems—and business is on the upswing.
“It’s really been a very rapid growth area, and pretty successful,” Hill says.
Mike Costanza is a Rochester-area freelance writer.
4/29/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.