Independent contractors have choices when it comes to selecting a form of business structure. One of those is operating as a ‘limited company’ when working for clients. Depending on the laws of the contractor’s home country, a limited company can have advantages. However, there may be issues that arise when the contractor is engaged abroad.
Some of these come up because the contractor is an employee of their own company. In this case, they will need to take a broader view of their legal, and tax residency status.
If you are using a limited company at home and are contemplating working on an overseas project, you should be informed. Here are some of the risks for contractors that you should be aware of;
- Permanent Establishment
- Tax Residency (183-day rule)
- Company status while abroad
- Labor Leasing Restrictions
- IR35
Permanent Establishment
If you work in a foreign country as a limited company you could be exposing yourself to what is known as ‘permanent establishment’. Any foreign entity with sufficient “business activity” that creates revenue can be subject to local corporate tax. This depends on the nature of the work and the amount of time spent in the host country.
If your work triggers permanent establishment for your company, then you could be liable for p to taxes and fines for failing to file a tax return. There are both work activity and time-based limits to imposing permanent establishment. Thus, it pays to research the rules in the destination country before departure.
Personal Tax Residency
A related issue is the personal tax residency of the contractor as an employee of their limited company if enough time is spent in the host country. Most jurisdictions use a 183-day rule, which means if the employee is in the country more than 183 days cumulatively in a calendar year they will be considered a tax resident.
If you become a tax resident of a foreign country, you could be liable for personal income tax both at home and abroad. Then, you would have to hope there is a tax treaty to give you some relief from double taxation.
Company Status
A contractor who works long-term in another country may risk losing their limited company registered status at home. If the home country considers the limited company as no longer valid, then either the recruitment agency or client could be viewed as the actual legal employer of the contractor.
This would bring unexpected employment duties and costs to the client, and diminish the advantage of hiring a contractor. If you are working overseas, you should take steps to ensure that your limited company continues to be a viable and legal entity at home to avoid losing corporate status.
Labor Leasing Restrictions
Another effect of a long-term engagement is running afoul of labour leasing laws in the host country. As an employee of your limited company, you may be viewed as being ‘leased out’ to the client. This is a practice that requires a leasing license in the host country. This is a time-consuming and expensive process, often requiring a substantial deposit.
IR35 (UK)
If you are a UK contractor, working abroad does not exempt you from IR35, which applies to all UK personal service companies. IR35 imposes employee-like tax status on some contractors who may be using their limited company to avoid tax payments. The law applies whether the contractor is working in the UK or another country.
Any one of these issues could interfere with a long-term engagement with a client overseas and can bring unexpected costs, penalties and legal troubles. If you have questions about contracting in foreign countries please contact ContractorTaxation to assist you.
