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As far as I know, the only way to avoid creating a tax nexus in each country where you have "employees" (or contractors) is to make sure the contractors invoice
by relix 8y ago
As far as I know, the only way to avoid creating a tax nexus in each country where you have "employees" (or contractors) is to make sure the contractors invoice you. The way this usually works is indeed the contractors have a sole proprietorship or legal entity from which they invoice you.
If you just pay them without an invoice but as payroll then congratulations you're now on the hook for all taxes and social security payments in the country your now-employee works in, no matter what's in the contract. In fact you might have committed a crime against local labour law by putting in the contract that you're explicitly not liable for social security payments, benefits or business-side taxes. By not registering a mailbox firm in that country you're probably also committing some crime because this means you couldn't meet any of the local labour law obligations.
This may work while everything is peachy while you pay them a higher amount which they can use to pay their social security themselves, but if your now-employee ever gets a grudge against you, they can easily file a lawsuit against you, and it'll be hard for you to defend. Your now-ex-employee will keep the inflated salary, having not paid the security benefits, and you'll be on the hook for back-paying all tax and social security payments with interest plus a fine.
Especially as a startup you don't want to deal with all these administrative overheads. Just request that each person sets up a business from which they can invoice you, and that they get an accountant to help them with whatever obligations that comes with. You can suggest to pay for the accountant. It's not actually that big of a deal and will allow each person to meet the local obligations, which they (or the local accountant) will know better than you. Note that they themselves then become liable for taxes and social security payments, as someone always is.
- slgeorge 8y agoThis works if you have a person(s) for a period of time. But, the longer they work for you 100% of the time, and the more team members you have in a jurisdiction the more likely the team members are to be considered employees and that you have established a business in the jurisdiction. At least in the UK the separate company and 'invoice' rule is important, but there are a number of other questions used to determine if someone is an employee. As you note, the other big problem is that it places you in a very uncertain situation with labour law / labour relations.
- em-bee 8y agohow can a remote country force me to open a local business entity? i am not there, so they can't get me. they can only get my contractors which would hurt them, not me. (the worst is i could loose them, and they'd be out of work) the remote country would have to have an agreement with my country to be able to force me to change anything. (the european union counts as one country here, so i am asking about the case where at least one party is outside) greetings, eMBee.
- slgeorge 8y agoWell it depends on whether doing things the legally correct way is important or not to you? For a small team it's unlikely as the cost of enforcement outweighs the benefit. But as you grow the amounts become more significant and there are plenty of impacts of not doing things properly. Here are way this could impact a business: * The business won't be able to legally carry out business (e.g. sales) in the jurisdiction because there'll be an outstanding court judgement or tax judgement against you. * The business' auditors or professional company directors may either (a) ask you to keep money on your balance sheet to account for the outstanding judgement, (b) or refuse to sign-off your accounts. If you refuse to tell them about the outstanding fines/judgement then you will be taken to have lied to them at which point you may be struck off as a company director. It's extremely difficult to find a professional finance professional to work for a business where ethical and reporting standards are not followed because they will risk being censured and losing their livelihood. * You won't be able to travel to the jurisdiction (if you are a director/owner of the business) as you'll risk being put in jail/civil fine. * The state in question can use international tax treatments and bring a court case or enforcement against the company within their main jurisdiction. Unlikely for a small company.
- Carpetsmoker 8y agoOne downside for employees is that stuff like getting a mortgage will often be a lot harder if you're a contractor.