What tech founders working abroad need to know about expat tax
Read time: 8 minutes
For tech businesses with plans to expand internationally, tax liabilities can become an impediment to growth if handled incorrectly. Country requirements can vary dramatically according to the employees’ activities and how long they’re staying, making diligence vital to avoid undesirable outcomes.
Here, Karen talks you through potential issues you may encounter, and offers advice for navigating the tax issues arising when working across borders.
What is expat tax?
Business owners often ask what expat taxes they can expect, but actually the term “expat” is used quite liberally. I think some of the misunderstanding around tax requirements comes from that title. It’s actually better to refer to expats in these circumstances as “internationally mobile” individuals, as this encompasses the full range of those who might need to think about tax implications.
What’s commonly referred to as expat tax normally refers to the tax liabilities for inviduals who are working in a foreign country, but not necessarily living there full time. This is quite a common scenario for tech entrepreneurs or those working for tech businesses, as they often need to lead business growth opportunities abroad.
What other common misconceptions arise around expat tax?
One of the most common myths about internationally mobile employees is the ‘183 days’ tax-free period. It is a common misconception that if you’re in any country for less than 6 months, there will be no tax liability. This is not always the case; the position is far more involved than simply counting days.
"First of all you need to establish if your home country has a double tax treaty with the country you are visiting."
Where there is, you then need to confirm you meet all the conditions of the treaty to qualify for tax free treatment. Not all treaties are the same and not all countries interpret the treaties in the same way.
You also need to look wider than you or your employees’ personal income tax position. If, for example, you or one of your employees is in Germany undertaking detailed negotiations for a new client contract, there is a risk of creating a corporate tax presence in Germany.
Are there other tax liabilities to think about when working abroad?
Where a corporate tax presence is created in a new location, it’s likely this will also lead to an income tax liability for the internationally mobile employee. There could also be potential payroll requirements and - of course - we mustn't forget social security. Social security is quite often the forgotten tax; most countries, especially in Europe, have a social security system. In the UK, we have a national insurance system; France, Germany, Sweden, Switzerland, Spain, and Italy all have their equivalent versions.
Whenever someone travels for work, there can be a potential social security liability. This can be incredibly expensive if not addressed, as the contribution rates for employers and employees differ enormously between countries. For example, in France, the employer rate is 45%, whereas in the UK, it's less than two thirds of that. These kind of cost implications can be quite significant, and hit your profit margin, if you don't plan appropriately.
What can tech founders do in advance to anticipate expat tax issues?
The first consideration is not about tax at all. Understanding the immigration requirements and ensuring you and your employees have the right to work in a country is a must. If you get the immigration wrong, it can have serious ramifications not only for the individual but also for your business. Again, rules vary tremendously from country to country as can the time it takes to get the right paperwork. Planning upfront is key so you and your employees can deliver the work required in-country on time.
Generally, a short business trip to have initial conversations with various parties is alright. Exercise caution though, as an exploratory visit can easily evolve into an activity requiring a work permit and/or create tax issues. If you are visiting a country to discuss the finer details of a contract or to begin delivering work, this creates both immigration requirements and tax implications. It’s vital to understand the tax and immigration rules before agreeing to commence work, as these issues can impact your ability to deliver in the required timeframe.
What happens if a tech founder or employee is resident in more than one country?
It’s quite common to have a founder or employee to have their home based in one location, but to spend a significant amount of time working in another location. Even though they're still considered to be tax resident in their home country, the sheer amount of time that they're spending in the other location means that they may also be tax resident in the other country.
Where this happens and there is a tax treaty in place, it is the treaty that determines where and on what the individual will be taxed. An example might be that individuals should not, in most cases, be taxed twice on the same income. The treaty resolves where the individual will be considered tax resident; generally, it’s where they have their permanent home and where their family are based.
An individual’s tax position in the host country will come down to whether they can use one of the articles within the treaty to exempt them from tax. One such condition is the 183 day rule already mentioned, which is normally counted within a rolling 12 month period or a fiscal year. This is why it’s vital to track each employee’s time spent in different locations, as well as their purpose for being there.
What should tech companies know about national insurance/social security?
There are specific rules around social security within the EU. Currently, the UK is covered by EU social security regulations, where the general rule of thumb is that you pay social security where you work, and that you pay in only one location. Where you work in more than one EU State, generally you will remain covered by your home country system if you work at least 25% of your time there.
If you’re based in the UK but are required to work for a period in the US, Canada, Turky or Israel, there are reciprocal social security agreements. These generally exempt you and your employer from contributing to the host country system and allow you to remain with the UK’s NI system. Further afield, in the ‘rest of the world’ countries, you will likely be subject to UK social security for the first 12 months, and then be exempt, if you are working for a UK employer. If you plan on being employed locally, there’s no ongoing liability to UK NI.
What about social security for employees contracted out by a tech firm to another location?
This falls under the same agreements as before. For example, if you're a UK tech company and you need to deliver a project to a US company, and you plan to send UK employees to the US, these employees would fall under the reciprocal social security agreement. They would continue to pay into the UK system, and be exempt from the US system whilst they were working there.
What are the most common pitfalls you see businesses making?
Most businesses do very well when they've got an employee to send to a particular location for a set period of time, because most companies have fairly good processes around keeping track of all the tax requirements associated with the work involved.
Where it becomes more difficult is where you have employee roles that change over time due to the business’ evolution, and more uncertain opportunities abroad that you can’t predict upfront. This is why it’s recommended to have someone involved in the business who can make sure there’s a record of international movement of personnel and any business dealings abroad.
Is there any advice you would specifically give to tech companies or tech founders?
I’ve found when dealing with an entrepreneur, their focus is on potential business opportunities, and a lot of what I talk about in terms of tax and compliance is really quite dull to them! I think the most important thing for founders to do is to have somebody who can support them by managing the immigration and tax requirements. They can ensure the entrepreneur doesn't create tax or immigration problems that could be an issue for the business or themselves further down the line. Untangling an historic issue is always far more time consuming and expensive than dealing with it at the time.
For example, if they're thinking of expanding into a new market, or maybe changing location for a fabulous business opportunity, someone needs to be present to deal with compliance requirements, without hampering the entrepreneur’s business acumen and ability to be internationally mobile. That person needs to be really connected to the business, and understand how the business operates, because then they can predict where there may be issues.
Are there any useful tools or information sources that tech founders can use?
Although it’s best to get professional assistance for managing your tax, if you’re thinking about going abroad for business purposes, it’s worth looking at HMRC’s website and using technology tools to keep track of where your employees will be and for how long. BDO has a cutting edge online tool and app, called BDO Quick Trip, designed to manage the immigration, tax and social security challenges arising from a growing international business traveller community.
Still have questions about expat tax? Get in touch by emailing [email protected].