International contracting has its own set of terminology due to the cross-border nature of the client relationship. It is very different from contracting with clients inside your own country, where the standards and terms are well known. Here is a glossary of terminology for international contracting.
An umbrella company (also known as a contractor management company) is an established corporate entity in a foreign country set up to assist contractors. The umbrella company is a third-party intermediary between you and your client ensuring performance, payment and correct tax withholding.
Your client will be the company that contracts with you for services and then remits payment at agreed intervals. You will either work for them onsite in their country or remotely from your own country. The term-end client is used to designate who you are working for in case you use an umbrella company or agency.
Gross vs Net Income
Gross income is the total invoiced amount, paid by your client, calculated monthly or annually. Net income is the retained earnings after taxes and any social contributions are deducted.
Pay Rate vs Salary
Pay rate is the agreed contractual rate negotiated with your client, while the term salary is typically reserved for employees.
Remittance refers to the method that your client uses to send you payment, either via bank transfer or third-party payment services. Services and fees differ depending on what countries or regions are involved in the transfer.
This should not be confused with legal residency in a foreign country. Tax residency is triggered when you stay longer than a set statutory period and are then liable for taxes on income regardless of source. Non-residents only pay tax on income generated inside the country.
Remote work is performed from a location outside the client’s home office, either from the contractor’s home country or in a third country. Typically, remote work is limited to roles that can be performed online.
Work permits are issued by foreign governments to valid local company sponsors to hire foreign workers. Without a work permit, you cannot engage in gainful work activity, even if you already have another type of visa or immigration status. One of the only exceptions to this is EU citizens working in other EU countries.
A tax treaty between your own country and the country where you work will determine how taxes and social contributions are allocated. There are no global tax treaties, so it will depend on the two specific countries and their agreement.
Double taxation can occur if there is no tax treaty in effect. In this case, you are liable for taxes in both your home country and the foreign country. For this reason, researching tax treaties before contracting abroad is essential.
Anyone working in a foreign country will need to file a personal income tax return, subject to income thresholds. Filing can often be accomplished online or through a local tax professional. You may also need to file a tax return in your home country, even if there is a tax treaty in place.
Pay As You Earn (PAYE)
PAYE is when your taxes are withheld each month from your pay, just as with an employee. This can occur if the client is required by law to withhold for contractors, or if you use an umbrella company.
Social Security/Pension Contributions
Each country has its system of social security and pension, which may require contributions from foreign contractors. If you are still covered and contributing at home, there may be exceptions to this requirement, or you may elect to contribute for health insurance or other local benefits.
Expat Tax Schemes
Some countries have specific expat tax regimes which will apply a lower flat tax rate to your earnings, but disallow deductions. Often, you will have a choice to use the expat scheme or the standard progressive rates based on income level. The optimal choice will depend on net retained earnings for each.
13th and 14th Month Payments
Clients in countries that mandate by law (or custom) 13th and 14th-month salary for employees, may offer you these bonuses. It is not recommended to receive these payments as it could result in being classified as an employee, rather than self-employed.
Contractors may work with clients through a limited company, set up either in their home country or a foreign location. It has the advantages of limited liability and more available corporate tax deductions. However, you as the contractor are still subject to personal income tax rules.
Each country defines self-employed differently, but generally, it means you work independently as a sole proprietor and are not an employee of your client. Self-employed contractors may also be referred to as freelancers, or independent contractors.
Digital Nomad Visa
A recent development is digital nomad visas that countries may offer to contractors (or employees) who work remotely for companies abroad. A good example of this is Malta. The visa does not permit work with local clients in the issuing country but does avoid local personal income taxation.
Value Added Tax (VAT)
If you earn more than a certain amount per annum, you may need to pay VAT in addition to income tax. If you are aware of this before setting your contract terms, you can add it to your rates to offset the cost.
Invoicing is the regular submission of completed hours or projects to the client, along with the corresponding payment amount which is due. This is an important element of establishing your business structure s as a self-employed to avoid misclassification.
Misclassification occurs when your client hired you as a contractor but treats you as an employee. This can be avoided by making sure you meet all self-employed criteria and operate independently. Otherwise, your client might be forced to hire you as an employee, and then pay all employer-related contributions and entitlements.
Agencies may assist a contractor with recruitment, matching your skills and experience with clients. They can also be a part of the contracting, invoicing and payment processes if they offer those as part of their service.
As a contractor working in a foreign country, you are subject to all of the tax, immigration and professional registration laws. Failure to meet those requirements will result in non-compliance, along with fines, penalties and possible deportation.
How Contractor Taxation Can Help Contractors
Contractor Taxation has a global network of umbrella companies that can assist you with your international contracting journey. An umbrella company can sponsor your work permit, help set up the contract, withhold taxes and makes sure that you remain in compliance at all times. Please contact us for more information on how an umbrella company can be an advantage for international contractors.