Multinational companies increasingly have internationally mobile employees (IMEs) who perform services in more than one country, other than their country of citizenship, during a single taxable year.

It can be quite challenging to manage legal compliance and tax risks with a globally mobile workforce using a typical secondment arrangement. Under this arrangement, an IME is employed by the home country (usually the place of citizenship) employer and is then assigned or seconded to work in a host country. This approach can result in several entities within a multinational company’s controlled group having multiple assignment letters for each IME, without having any common administration.

A global employment company, or GEC, is an entity established by a multinational company to employ its IMEs. In effect, the GEC serves as a leasing company that is responsible for the employment, compensation and benefits, immigration and income and social tax matters for IMEs. The GEC provides the assignment letter to the IME, pays—or arranges with a third party to pay—compensation and benefits, and handles all required administrative support for the assignment. The GEC in turn charges a service fee to each entity that uses the IME’s services.

Key Advantages of a GEC

GECs provide several potential advantages for multinational companies. Having a single human resources group supporting IMEs allows for continuous employment with one entity, while providing uniform global compensation and benefits for IMEs moving through numerous locations. This addresses the lack of consistency that tends to occur when several entities in different home countries assign employees to host countries.

GECs can also better protect the parent company from myriad local employment laws and suits, and can achieve employment taxes in the GEC home country that are more predictable—and sometimes lower—than those in many other locations. With respect to taxes, multinational companies are continuing to focus on improving control, reducing compliance risk and controlling cost. A GEC can serve to protect members of a controlled group from being subject to tax in a foreign jurisdiction if an IME’s activities were to create a corporate taxable presence or permanent establishment in the host country. GECs also facilitate coordination of payroll tax withholding and reporting from a single location, as opposed to relying on several groups in each host country to manage those activities.

Using a US and a Non-US GEC

It is not uncommon for there to be a separate GEC for those IMEs who are subject to US tax, such as US citizens, resident aliens and non-resident aliens providing services in the United States, and another GEC for all other IMEs.

US citizens who are IMEs often retire in the United States and usually prefer to remain on US retirement and other benefits for ease of administration and tax planning.

These individuals may also wish to remain on the US Social Security system to avoid a reduced benefit resulting from ineligible employment. US Social Security coverage is also a relatively inexpensive state system compared to other countries and is easier to provide through a US employer.

This structure can protect against significant tax liability under Section 409A of the Internal Revenue Code, which can apply to non-US citizens with respect to their non-US pension and deferred compensation plans. Coverage of a non-US citizen under a covered plan that does not comply with Section 409A can result in 20 per cent or higher penalty taxes in the United States on amounts earned that are attributable to US service.

Local Tax Considerations

Establishing a GEC requires careful planning to ensure the employment arrangement will be respected by local authorities. For example, an IME’s activities may create a permanent establishment in the host country. If that occurs, local tax authorities will typically seek to impose a tax on the entity employing the IME, which raises the question as to who is the employer.

Whether or not the local government will respect the GEC as the employer will depend upon whether the arrangements are determined to be bona fide, i.e., the GEC can show that it is more than a shell existing only on paper. Critical factors that will determine whether or not the GEC will be respected as the employer of IMEs include, but are not limited to

• Establishing a reasonable service fee for the IME’s services
• Having an individual(s) employed to operate the GEC
• Drafting appropriate legal documentation of the employment and assignment of the IME
• Operating the GEC in a manner consistent with the GEC’s legal documentation
• Having the GEC be responsible for core employment functions

Taxes that the GEC may be required to pay on profits earned in the host country due to the IME’s activities may be well worth the cost of protecting another entity within the controlled group from foreign income taxes.

Local Employment Laws

Another matter to carefully consider is whether or not adjustments to the GEC employment arrangement will be necessary in order to meet legal requirements for an IME in the host country.

A classic example is participation in the host country’s social security program, which may require the presence of a local employer in that country. This local employer requirement may also apply in order to comply with host country regulations regarding payment of salary and other payroll-related benefits. A solution that may be available to address the need for having a local employer is for the GEC to establish a “branch” within the host country.

It is reasonable to expect that IMEs will continue to increase in order to achieve growth of global business. Greater focus by foreign governments on collecting more revenue from individuals who provide services within their borders, and an increasingly complex and changing regulatory environment, magnify the need for careful planning and compliance.

A GEC may be an appropriate structure for a multinational company to address these challenges depending upon the costs to establish and operate the GEC, the number of IMEs, the countries where services will be provided, current assignment practices and the potential for risk mitigation.