If you are a contractor seeking clients in foreign countries, there are distinct differences from working at home. You are probably aware of your home country’s tax obligations, business registration and self-employment rules. But all of this changes as soon as you cross borders to offer your services.
‘Compliance’ can seem like a daunting term, bringing images of stern, bureaucratic hurdles barring your success. But like most business regulations, there are fairly standardized steps to take. Foreign authorities are not trying to stand in the way of your work. There is just an expectation that you will learn and follow the rules, the same way that residents must.
There will varying levels of efficiency and clarity as you enter a new regulatory environment, but there are always local resources to help. This global compliance checklist should help to guide your planning to remind you of the areas to pay attention to.
Immigration: Legal Permission to Stay and Work in a Country
Immigration is where it all begins, because without permission to stay and work you are relegated to remote positions. Most every country will require a sponsored work permit for any stays beyond 90 days. A few places like Spain will offer DIY self-employment visas, but most of the time your client or an umbrella company will have to be your visa sponsor.
Compliance Risk: Failure to secure a work permit while earning from local clients is a violation of immigration law. When discovered, you will likely be deported unless you have a good excuse, and possibly blacklisted from future entry to the country.
Income Taxes: How Your Net Earnings Will be Taxed
Once you have secured your work visa the next compliance issue is the income tax. If you are truly self-employed (and not an employee of your client) tax filing and payment are your sole responsibility. Sometimes ex-pats on short stays are offered special flat tax regimes to simplify the calculation, or you can select the progressive rates.
Compliance Risk: When you earn income in a foreign country from local sources, you must pay tax. As an ex-pat self-employed you may believe that you are not on the radar for taxes, but many work permits require registering for a tax ID number. Also, your clients will be reporting their payments to you as a contractor. Failure to file and pay taxes will result in fines, penalties and back taxes if you want to restore your good standing.
Social Security: Managing Payments, Exceptions and Offsets
The other financial obligation is social security contributions. In some cases, if you are paying into your home country system you may be given an exception. This is fairly common in the EU for citizens. Otherwise, monthly payments must be made the same as residents. The upside is that you will receive benefits such as health care coverage or participation in pensions.
Compliance Risk: Social security payments can decrease your net earnings, and may seem like an unfair burden of double contributions. But you are still obligated to make the payments to keep your self-employment compliant. It is worth your time to research the payment amounts and available exceptions or offsets via tax treaties.
Tax Residency: Tax Status for Long-Term Contractors
One of the conundrums of international contracting is tax residency. Simply, if you stay and work for long periods in one country you become a tax resident. This is usually six months but could be one year (Japan) or five years (South Africa).
This doesn’t mean you have any residency privileges, just the obligation to pay taxes like a resident. This results in paying normal tax rates and often on global income. Some countries have exceptions to this rule, but it can surprise even the savviest contractor.
Compliance Risk: Unintended tax residency can affect how earnings from other countries are taxed, even if you already paid once in a tax year. There are tax treaties between countries that help mitigate double taxation, but if there isn’t one then you will have to include global income on your local tax return. If you think you can just avoid reporting it, you might have to explain that mysterious 4-6 month gap in income before your arrival.
Self-Employment Criteria: Avoiding Misclassification as an Employee
Clients like hiring contractors because they avoid all of the social contributions and tax administration for employees. In other words, it’s a cheaper way to hire the same talent. But governments are wise to this strategy and are increasing scrutiny for cases of misclassification. If your client treats you like an employee, you could lose your self-employment status.
Compliance Risk: The risk is higher for your client who will have to pay penalties and back contributions if you are reclassified. But you will lose your ability to deduct expenses from your income and any other self-employment benefits, tax rates or exceptions. You can help matters by conducting yourself as truly self-employed and independent.
Banking and Finance: Bank Accounts, Currencies, Reporting and Payments
In the longer term, clients are likely to pay you in local currency, and preferably a local account. This brings a need to set up a bank account or arrange payment to your home account. Expats are free to set up foreign bank accounts as long as they have the right visa and address requirements. US ex-pats can expect the bank to report their account to the US authorities under FATCA.
Compliance Risk: There is little risk in setting up a local account as long as you provide correct information and documents. There will be a record of all deposits, so best to pay all of your owed taxes. Although you are setting it up for legitimate business reasons, it is technically an ‘offshore account’. Some countries (like the US) might ask you to report average balances over a certain amount.
Working Through a Limited Company, or Starting One
If you have a limited company in your own country, it is possible to work through that entity for foreign clients. You are bringing a business across borders when you do this, and there are additional registration and capitalization requirements. You can also start a limited company in a foreign country, but that is only practical if you have a long-term commitment.
Compliance Risk: Using a registered business entity is different than just showing up as self-employed for your client. Corporate tax on net earnings will be owed in addition to income tax on the amount you pay yourself. If you are starting a company inside the country, legal and accounting expertise are recommended.
Your Essential Compliance Partners Abroad
You don’t have to go it alone when contracting abroad, and there are ways to mitigate compliance risk. Here are a few ideas that could help alongside this global compliance checklist:
An umbrella company is a legal entity inside the country that can act as a third party to your client relationship. Their experience with ex-pats will give you the advice you need on all the compliance areas mentioned, which is especially invaluable for new contractors.
Local Legal and Accounting Professionals
For tax, business and immigration advice don’t hesitate to invest in lawyers or accountants. You will receive accurate guidance and will have someone to turn to in case of compliance issues.
Some recruiters will specialize in a country or region and will have overseen many ex-pat transitions to a foreign country. If you use a recruiter, they will get paid a percentage of your earnings, so have an interest in seeing you stay compliant.
Don’t overlook your new client as a source of support. They have probably hired ex-pats before and will know how to avoid problems. Just like a recruiter, they will want to make sure that you have a smooth entry and work life. They will know the rules for employment vs. contracting and they don’t want compliance issues either.
How Contractor Taxation can help you with compliance when contracting
Contractor Taxation has a network of umbrella companies that are ready to help you with client payments, tax withholding and compliance. Because each country is different, the local umbrella company’s experts will know exactly how to meet local compliance standards, and what pitfalls to watch out for.
Other benefits of umbrella companies include:
- Manages all client payments, tax withholding and any social contributions
- Issues you a payslip each month, to a local or foreign account
- Sponsors work permits
- Helps set up the contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
If you have questions about this global compliance checklist or how an umbrella company can help you, please contact us at Contractor Taxation.