Recorded on 26th January 2021. (UnaTerra regularly hosts webinars on a range of international expansion topics – to sign up for the next one, visit our Webinar page.)
In this webinar we learned about how to expand your business internationally and the ways in which UnaTerra can help your business to grow.
Thank you for joining our webinar on international payroll and managing international operations. This webinar is the start of a rolling series of webinars and videos, which are designed to provide technical and practical advice on all aspects of ensuring our prospects and customers manage their people and corporate entities in a compliant way.
By way of a brief introduction to my name is David Wall and I am the CEO of UnaTerra. I am joined today by my co-founder and CRO Julian Christmas. I am a lawyer by background but have been working in the international expansion space for over 15 years. Julian is an accountant and we founded UnaTerra seven years ago after working with a number of fast growth companies wanting to build an international footprint.
Notable projects that we have supported include Tesla’s European rollout and Airbnb’s global expansion. Not all of the customers we work with are household names, but invariably, a lot of the questions we are asked have similar themes, particularly, around hiring and employing people internationally. It is important to note at this point that whilst I do reference household names, most of the work we do at UnaTerra is for customers with 1 to 10 employees in multiple international locations.
UnaTerra is a UK headquartered business with operations in the US, India and the Philippines. We currently support customers in over 70 countries and provide a range of services around international payroll, HR, PEO and other business critical back-office services. We are proud to say that we act as an extension of your HQ team. We are very familiar with the challenges you will face when managing international operations on top of you doing your day job.
In this webinar, we’ll go over…
What we’ll talk about today is built on our practical experience as well as a lot of the situations that we have dealt with over the years with our clients. The material for today is informed by the questions that we are asked most often. It is very much informed by the wider global audience of your peers who want, and need, to understand how to go about hiring and payrolling people in other countries.
Some common questions are:
The different options available to engage and payroll talent internationally
There are various options and it is helpful to understand the associated pros and cons for each option. We will cover a variety of scenarios, such as trying to engage a particular type of personnel talent in a country. This will help you make an informed decision about which solution to implement.
Which option makes sense for the different types of business activity you’re doing in another country
The solutions that we recommend to our clients are based on various scenarios and the key pieces of information we need are:
In particular, we need information about what the local employees are going to be doing. This will help inform us when guiding our clients.
The compliance exposure for each option
There are some hiring options which carry certain tax risks or employment law risks. It is important to understand what the trade off is between each solution, the type of risks they represent and what the potential costs are.
Employment law considerations and expats
We deal with expats relatively frequently. Expats are a different type of proposition in regards to the solutions we implement and how we employ and payroll them in other countries.
The options for engaging talent internationally fall into three main categories.
It is common for our clients to want to fall back on the simplicity of engaging people as independent contractors in different countries. There are pros and cons to that option. The key thing to understand is that, although we reference it as hiring, it does not technically create an employer-employee relationship. This is akin to treating the individual like a vendor.
This is sometimes referred to as a PEO or employee leasing. This solution involves outsourcing the ownership of your employee within a different country. This means an employee will have an employment contract and be contracted to a third-party company, who provide fully compliant local employment in that country. Your company will then be invoiced for their service, typically this will be the cost of the employee plus a fee for that service.
Although we are able to advise on implementing the previous two solutions, UnaTerra is mainly geared towards direct employment. This involves engaging directly with employees, pay-rolling them in the name of your business, connecting and contracting them directly to your company. There are a few different ways of achieving this which we’ll mention later.
This is something that invariably comes up in the conversations we have with our clients and prospects. It does inform which solution we implement and it is not the case that everybody understands or has heard of PE risk. What is a PE risk, if you ask a lot of senior finance and HR people they often have a notion of what permanent establishment is; although it can be difficult to define.
A permanent establishment is a business presence which triggers a tax exposure within a country
This can be done on purpose by creating a legal entity within a country. A lot of international expansion involves intentionally creating a permanent establishment by opening a legal entity, opening an office, or hiring lots of people. It is also possible to trigger permanent establishment by mistake or create a permanent establishment to try and fly below the radar of the local tax authorities, which is risky.
PE RISK is the type of risk in which you inadvertently create an exposure to certain forms of taxation within a country. The implications to this are that local tax authorities will attempt to levy tax, whether it be corporate income tax, or VAT on the activity that you are conducting in that country. What creates PE risk?
Commercial activity is activity that generates revenue, like sales activity
If you hire somebody in a different country where you do not have a legal entity this will generate a permanent establishment. Therefore, you will run the risk of exposure to taxation and tax assessment in that country. It is a relatively theoretical risk and in our experience does not often crystallize. However certain countries, such as Sweden, are very hot on it. SO if you have salespeople and you then employ them in a manner which does not recognize the activity they are undertaking.
Senior management activity can create PE risk in a country, even in a zero-revenue market
If you have people in a country that are VP, director or founder level then those decision making and business management functions can create a permanent establishment risk.
A fixed place of business can create permanent establishment, even if the employee works out of a co-working space
If you have an office, even if it is a co-working space, then that also can create permanent establishment.
We will now look at the main options for hiring people internationally. I think that most people are aware what the different options are. The key points I want to discuss are the advantages and disadvantages as well as the use case scenarios.
When hiring international contractors or domestic contractors in the UK some of the advantages are that it is very quick and there is a small amount of administration this is because they are simply invoicing for their time. This will then get processed through accounts payable and is treated like a vendor. There are no administrative costs. What the contractor charges is the cost of the business. There may be VAT on top, although, this is not a cost to the majority of businesses: what they invoice is what gets paid. There are no on costs and no benefits.
There are many situations where independent contracting is appropriate, but there are also many situations that we come across where it is not. There are companies that are seeking a simple and cheap solution, which may appear to avoid exposure to employment law. It is limited in what you can achieve correctly.
High potential for liability (employer and employee)
This is linked to independent contractors who are, on paper independent contractors, but look and feel as if they are in an employment relationship. They often get classified as de-facto employees. There are all sorts of exposures and liabilities that can flow for both the employer and the contractor. For you as an employer, there is a risk of exposure to various types of liability.
Quickly creates PE risk
PE risk is not just created by your employees, it can also be created by hiring contractors who represent your business in another country. They may be undertaking sales activity and they may be an employee or a contractor. However, if they are a contractor who is selling on your behalf then there is still a possibility that they may create a permanent establishment. Your business may be unintentionally exposed to some local risk.
For example, a use case scenario for this would be project specific work or hiring people for a short term; both of these are classic and legitimate contracting situations.
You should not engage contractors if they are long-term or if they are permanent. This also applies if they work for your business full-time and do not have other clients. Although this is a relatively common-sense situation it is something that we advise on frequently.
This is when your employment situation is with a third party in a different country. They will onboard and provide employment contracts. They will also payroll the individual and charge the business for the full cost of employment plus a fee for their PEO or employer of record service.
Quick market entry
The advantages to this are that it is almost immediate to switch on. If you have identified that you want to payroll or onboard somebody in a country where employment is complex this can provide an immediate solution. This is useful in countries such as Brazil and China in which the timeline from pushing the button and being ready to employ somebody directly can be many months. A PEO represents an immediate market entry option.
Little administrative burden
The PEO provider invoices your business for all the costs and you pay them. You will own the time and service of that individual but they will be contracted to a third party.
Less expensive up-front
It is a relatively inexpensive upfront cost. The upfront cost of implementing a solution with PEO or employer of record service providers is low.
Compliance “grey area”
The concept of PEO or employer of record is ahead of the curve in terms of tax compliance. There are risks, which I think a lot of people are not necessarily in tune with.
Limited benefits options
PEO providers will usually only have a certain range of benefits that can be extended. If you want to extend your typical suite of benefits to these employees there can be difficulties.
Corporate culture issues
If they are not your employee, because they are contracted to a third party, this can create an issue with employees feeling disconnected from your business. Integrating them into your corporate culture can be more difficult. This is because they do not have the same direct connection as directly employed team members do.
Gets expensive quickly
It can make sense to employ one person through a PEO in a country. However, as soon as you increase the head count, the costs will multiply, there aren’t economies of scale with PEO. Even in complex markets, where it does make sense to have one person on a PEO arrangement, if a single employee then becomes three it will be unlikely from a cost perspective that it will be the most efficient solution. These are situations that we deal with regularly. We are always advising clients about when to use PEO and when to stop using PEO’s as well as when not to use them in the first place. We recognize that this is a valuable service.
Use case scenario
The cost of hiring one person in a complex market under a PEO, although expensive will not be as expensive as setting up a legal entity which includes payroll services, accounting, compliance and local representation services. We advise on regularly about what the real cost of employing somebody in a different country is tcompared against the cost of a PEO option. One point to mention is that if you want to hire somebody in Brazil the PEO service will probably cost between 10% and 15% of the individuals salary. Although this sounds reasonable, it is not the salary but the total cost of employment. On costs in Brazil can run at about 80%, this would be applied to 180% of the salary., which is a lot more than the headline cost of 10%. On top of that a 13% VAT levy is charged, so this includes the cost of the employee, their on costs, as well as their PEO fees. Your business will not be able to recover that cost so it is important to understand what the total cost is when engaging with this type of solution.
This is a service that we provide directly to our clients and is an interesting option because a lot of our clients and prospects are not aware this option exists. It involves employing somebody in a different country where you do not have a legal entity, pay-rolling them in a way which is fully compliant with tax rules, social security and employment law. This is not an option which is available in every country.
We implement this solution regularly, especially in Europe, as well as various other countries such as Canada and Australia. However, there are a lot of countries where it does not work. In those scenarios we take a non-resident company, we then register it for a limited suite of tax and social security registrations in another country. For example, in Germany, we could register a UK company then run a payroll, onboard the employee, provide them with benefits. This can all be done in full compliance without the need to set up a legal entity.
Fully compliant with HR law
One advantage is that it is a fully compliant option. It will be fully compliant with employment law and local tax law.
Direct relationship with employee
Culturally, employees will often feel like they are part of your business.
Stock options and benefits
It is also compliant from the point of view of stock options and benefits. Although, PEO and stock options are an interesting discussion point in regards to exactly how compliant they really are as a bundle.
Quick and low-cost
Usually the lead time is four weeks and is a low cost option, aside from charging a monthly cost for running the payroll, there are no other regular fees involved. Typically, there are no local accounting requirements. There is also no requirement to make VAT filings and registrations. There are also no big-ticket annual compliance or corporate tax returns etc. It is a very light touch solution. A lot of our clients have not heard of this and are often pleased to hear that it is possible to hire people in the Netherlands, Sweden, Italy or Spain without a legal entity.
Not available everywhere
It is principally a European concept. There are a lot of countries where there is a similar concept but they can be so complicated as to not be viable options. There are a lot of countries where you have to have a legal entity to even hire a single person.
Doesn’t mitigate PE risk
It does not mitigate PE risk. This does not work if you are hiring senior sales or director level people, they will need to be accommodated through a legal entity in order to have protection from permanent establishment.
Use case scenario
This will work for small teams, which are below four or five people, who are engaged in non-commercial activities such as customer support, sales support, or engineering. It does not work with people who are above sales-people or who are senior management.
When using this option we incorporate a legal entity and make tax registrations. This creates local tax exposure as well as corporate tax and VAT. It will be completely compliant and you will not have to work within any gray areas or run any uncontrolled risks. Creating a legal entity gives you the ability to control and deal with all tax risks and manage the situation exactly as you would like to.
Fully compliant with HR and corporate tax law
The advantages are that it is fully compliant, not only with HR law, but also with the full gamut of tax laws. This means you will be able to control your corporate tax exposure.
Direct relationship with employees
You will also have a direct relationship with the employees.
Can sponsor worker visas
If you want to transfer people other countries or set up a new office somewhere, for work visas to be dealt with, you will have to do this through a local legal entity.
Take advantage of tax incentives
A lot of companies that come to the UK want to do so in order to take advantage of our R&D tax credits. There are countries, such as Canada, where setting up a legal entity and enjoying the benefits of their R&D tax credits is a good objective to have.
Higher up-front costs
This is a relatively expensive option. We have to incorporate legal entities as well as some local representation costs.
Relatively high administrative burden
This is something we deal with every day. We incorporate legal entities and provide support to our clients by taking care of local VAT filings, corporate tax filings, payroll filings or local compliance.
Use case scenario
If you are building bigger teams of more than five, who may be permanent, have an office, or incorporate senior management this should be accommodated through a legal entity.
In terms of compliance I will address what each option can give you from a HR, finance, and tax perspective.
Independent contracting, by definition, does not give you any sort of employment. It is not compliant with employment law, you cannot offer benefits and it does not protect you from PE risk. Visas are not relevant. You should not be providing stock or share options to independent contractors because if you do this presents a strong indication of an employment relationship.
PEO ticks a big box for employment law. It will provide you with a compliant local hiring solution but you cannot offer all of the benefits you may wish to. It also will not protect you from PE risk. In some cases, you can provide a visa sponsorship option but this is a difficult area. It also does not provide compliance from a stock option perspective.
Employment through a local legal entity will tick all the boxes. It will give you the ability to control and protect yourself against all of the things listed here. Regarding compliance and employment law: you will be able to provide any benefits you wish to give. It also gives you the ability to protect against permanent establishment risk; including sponsorship and visas. It is fully compliant from a stock option perspective.
The only difference between the employment without a legal entity and employment with a legal entity option is that you do not have a legal entity. This means you will not have the protection that a legal entity provides, either against permanent establishment, or visa sponsorship without a legal entity. You will not be in a position to sponsor visas and transfer people from one country to another.
From an employment law perspective it is important to cover the headlines. Some of the people on this webinar may already understand employment law. However, for some people there may be some question marks. If you are employing people directly, whether you have a legal entity or not, there are some important points to consider.
If a UK company hires somebody in another country that employment relationship will always be governed by the employment law in that other country. The number of times where we have dealt with companies who have come to us and said that they have found a new employee in a country such as Spain. The company will then tell us that they have given them a normal UK employment contract, because they happen to have one, and they will be employed by a UK company. This is a big problem and cannot be allowed to happen.
It is critical to have an employment contract which is compliant with local employment law. In the UK we are somewhat protected from the complexities of employment contracts. Our employment contracts tend to be very simple. It is not uncommon when hiring people in other countries for them to engage with their lawyers in order to review their employment contracts and make sure that they are fully compliant.
In some countries there are union requirements and collective bargaining agreements that need to be assessed and complied with. Sometimes the employee will engage their lawyer to confirm that the assessment is correct. We do not have to deal with this in the UK and as a result we often do not always understand what the risks are. It is very important to be fully compliant.
Local employment contracts are an area that we deal with through our HR consulting team. We provide fully tailored and compliant employment contracts which will close any exposures that a company may be running with local employment law.
As part of this, local statutory minimum benefits will apply alongside the requisite employer insurances. An example of this can be seen when hiring in France. You have to understand that French employees always get French benefits and tax-free benefits. Holiday allowances will be dictated by French law.
As an employer, you will have to provide certain insurances as you would if somebody came to the UK and hired people here. They would need to provide employee liability insurance and public liability insurance. These are the types of insurances which must be provided when taking on people in other countries.
If you are based in the UK there are certain things that come up which you are not even aware of as concepts. Typically, this can occur when you attempt to hire people in countries where there is holiday loading. This is when you pay a salary and they get extra salary when they take holiday. In countries like Italy, all employees qualify for 13th and 14th month salaries. In some countries this is just a 13th. In other countries, such as Norway, you will have a half extra salary within a particular month.
If you do not understand what is required locally they can sometimes become marginal costs to business. They need to be dealt with correctly within the employment contract. Take Italy, if you have an employee with a 13th and 14th month salary, and you do not address this correctly through the employment contract. You may have to pay 14 months of salary instead of 12 months. The employment contract can circumvent that and make the 13th and 14th months part of the base salary. It can be quite complicated. The point is, is that there are risks which can result in a real cost to the business.
There are other forms of exposure. In the UK, if we hire somebody it is quite easy to say ‘start today’ and ‘we will sort your employment contract out tomorrow’ and ‘we will backdate it to the beginning of the month because you will have been working for us’. In the UK it is relatively common for there to be a disjointed timeline in terms of onboarding. In countries such as Spain and Italy you cannot do that. Employment contracts, or abbreviated versions of the employment contracts, need to be filed with the social security for each employee. They need to be filed on, or before, the start date which the employment contract states. The idea of hiring someone today and then putting in place the various payroll registrations that are required after the event would not be compliant. This can invalidate some of the clauses within the employment contract and can open your business up to exposure and litigation.
We do deal with clients who want to set up in other countries and then immediately transfer people from HQ.
If you want to transfer somebody to Singapore to start at a new office you would need to first set up a legal entity. That legal entity needs to apply for the ability to sponsor visas and then the visa needs to be put in place. This requires planning. Typically, people who work in HR are very in tune with this but sometimes hiring plans are rolled out by people who work in sales or business development and they do not have any sensitivity to some of these issues.
There is a planning opportunity here in terms of savings on social security. Sometimes, the tax planning can result in the ability to provide some positive benefits to employees without them being taxable. There is also the concept of a shadow payroll which involves moving somebody to another country and pay-rolling them in their home country. The purpose of this is to make sure that they maintain continuity of social security benefits.
You will also have to run a payroll in their home country because that is where they will be taxed and exposed to their local income tax regime.
This is a point which we came across this week with a client who was setting up a legal entity in Thailand. They wanted to transfer somebody there immediately, but they ran into issues because in order to hire an expat they must first hire three or four locals. The ratio of three to one needs to be maintained. If they then want to take on a second ex-pat they would have to have six or eight local hires. We can support you with this through our HR consulting practice.
Although they are obscure, we do have situations where people live in one country and work regularly, or permanently, in another country. We had a recent client who has an office in Germany but wished to hire somebody who lived in the Netherlands to head up that office. This individual is going to be driving down the motorway into Germany every day to work. This is a case study about how to deal with payroll when you have an individual who is resident in the Netherlands but who provides their services in Germany. Complications such as this do not often occur but it is important to consider how to treat and tax people; particularly when they travel extensively for business and visit the same place repeatedly.
Is it possible to have the direct employment (No Legal Entity) solution in Spain?
Spain does have this light touch solution of employment without a legal entity. It is often more complex than some other countries, but it is certainly possible. It is actually a country where we provide a lot of support. It is a slightly heavier weight than in the UK where you simply set up and run a payroll. We would need to provide tax representation and fiscal representation services in Spain. In terms of countries in Europe, where it is not possible to use this option, I am only aware presently that it cannot be used in the Ukraine. However, in general, it is available in all European countries.
How many employees can you put on a PEO before a PE risk may be triggered?
Depending on what they are doing, one person on a PEO can represent a PE risk. A lot of companies use PEOs as a means to expand their sales capability quickly. Hiring salespeople in multiple countries at the same time is often when PEO services are usually used by companies because it is quick. Unfortunately, this is when it creates the most risk. This is because sales activity or commercial activity represents permanent establishment. The more people that you have the more likely they will be recognized by the tax authorities. However, fundamentally, one person can create a PE risk through a PEO. Although, one person is less likely to crystallize it than ten people who are working in sales.
We are looking to hire an individual in Spain. What is the lead time for onboarding and getting somebody paid?
If we go without a legal entity and try and create a light touch solution for Spain. The COVID situation has made things a bit more difficult because there are face-to-face meetings that have to happen between our team and government officials in Spain in order to have the registrations made. It has been variable over the last 12 months. Typically for Spain there is extra admin that is required, I would say that the process could take between six to eight weeks. With a good process it can be quicker.
How does UnaTerra provide multi-country payroll?
We are a UK based business and all our services are fronted and delivered through our UK team. In some situations we have clients that we provide support for as many as 15 countries of payroll. Part of the advantage of offering multiple payrolls to our clients through one small team lies in the relationship that our client will develop with one specific person for multiple international payrolls. We have an online portal which is the tool through which we communicate, seek approvals, deliver and distribute sensitive data regarding new starters and payroll.
Thank you for your time today. Should you have any specific questions or challenges please take a look at our website where there is helpful information related to specific countries. We will be scheduling a series of webinars throughout the year.