International contracting can be exciting, but navigating another country’s tax and legal landscape can be complex. This guide outlines key considerations for using your limited company to work abroad. These points apply to any company you may be using abroad for contracting:
Tax Residency: Your residency status determines where you pay income tax. Double taxation treaties often exist to avoid paying twice, but understanding residency is crucial.
In many countries with double tax agreements (DTA) with your home country, the DTA sets out where you will pay your taxes. There are two main aspects of residency you have to bear in mind—in particular, income tax and corporation tax.
The income tax treatment will depend on whether you are a dependent or an independent worker or, more usually, employed or self-employed. In general (but not always) self-employed people pay local income tax from Day 1 of their stay abroad. Typically, employed people staying less than 182 days pay tax back home. However, if the stay is extended, local income tax is payable back to the start of the assignment.
The other crucial impact of residency is with work countries that have worldwide taxing rules, including the UK and Germany, but most advanced economies. Residence here establishes that your worldwide income is taxable, not just the income arising in the work country. In these cases, the DTA exists to avoid income tax being charged twice on the same income.
So, the points you must bear in mind are:
- Am I an independent or dependent worker under the DTA, and is my stay long enough to tax me as either?
- Is my stay long enough to bring my worldwide income into the tax net of the work country?
To find the answer, you must consult the double tax agreement between your home state and the state where you are temporarily working.
Regarding Corporation Tax treatment, we need to consider and look at Permanent Establishments.
What is a Permanent Establishment (PE)?
The relevant Double Tax Agreement will define permanent establishment. This is commonly a fixed place of business, which can be, for example, an office, a warehouse, or a regular location where business is carried out. The definition may also set out what is not a fixed place of business. That said, many jurisdictions look closely at where the seat of management and control resides.
Suppose your company has only one director and that director has shifted to the work country. In that case, it is easy to see how the tax authority may determine that the company’s management and control has moved from its ordinary seat of residence to the work country. Two primary outcomes flow from this event:
The Implications of a PE on Corporate Profit Tax
The first is that companies are typically taxed on their corporate incomes, i.e., for their corporation tax, based on where the central management is. If you shift the central management and control, your company can become liable to corporation tax on its profits generated in that other state while it is deemed to be resident there.
Corporation Tax rates can also vary – as of April 2024, corporation tax rates in the EU differ considerably:
Minimum: The EU introduced a minimum effective corporate tax rate of 15% in January 2024 – applicable to multinational companies, and this means that such companies operating in the EU must pay at least this rate, even if a specific country has a lower statutory rate.
Range: Statutory corporate income tax rates (combining central and sub-central taxes) still differ among member states. They range from 9% in Hungary to 35% in Malta, albeit a headline rate reduced according to specific criteria.
Average: The EU’s average corporate income tax rate currently sits around 21.3%.
You’ll likely pay home corporation tax on your limited company’s profits. Profits from overseas work have specific implications. For setoff, you must refer to the Double Taxation Agreement (DTA).
The implications of a PE for VAT purposes
The second is that the company may exceed the threshold for VAT registration in the work country and may have to register. Thresholds vary widely. In the UK, it is £90,000 in a 12-month period. Within the EU, for inter-EU B2B, the threshold can be as low as €10,000.
Social Security
Will you contribute to your home country, the work country, or potentially both? Depending on social security agreements, A1 certificates or Certificates of Coverage might be applicable.
Typically, you pay social costs (National Insurance Contributions in the UK) in the country where you work. Supposing you are working in more than one country, you could potentially pay social security costs in more than one country, and this leads to apparent complexity and confusion as to where you will draw social benefits. Like Double Tax Agreements, states have agreed on Social Security Treaties (or sometimes, Totalization Treaties) to solve this problem.
The EU has agreed to Europe-wide social security treaties (but not DTAs) that specify that it is possible to contribute in one state alone. Typically, the state where you are ordinarily resident will issue you on application with a Certificate of Coverage, known in the EU as an A1.
An A1 can exempt a worker for up to 24 months from having to pay social charges in the work country, provided you pay them back home. However, they are not free tickets to pay no social charges.
In the unusual case of working simultaneously in more than two EEA states, you may obtain an A1 from your employer’s location.
What is a Foreign Employer?
If your company employs you to work abroad, it is now a foreign employer (FE). Wherever it is possible to be an FE, you must register as such and operate a payroll subject to the rules that prevail in the work country. In some cases, it may be possible to pass these responsibilities to your employee or director, but then they must observe the regulations to ensure that they pay their correct taxes and social charges.
Seeking Professional Help
We highly recommend a tax advisor specialising in international business to navigate these complexities and ensure compliance in both countries. They can advise on:
- Tax Residency: Determining your residency status.
- Double Taxation Treaties: Understanding their impact on your tax obligations.
- Permanent Establishment: Assessing if your limited company creates a taxable presence in the work country.
- Transfer Pricing: Rules governing how you charge your limited company for services.
- Social Security: Determining your social security obligations.
- VAT Registration: Understanding thresholds and requirements.
Business Operations:
- Business Registrations & Licences: Check if your limited company needs legal registration in the work country. Depending on your industry, specific licenses or permits might be required.
- Employment & Visa Requirements: Work visas might be necessary. Explore visa options based on your situation.
- Employment Law Compliance: Ensure adherence to local employment laws regarding minimum wage, working hours, and employee benefits.
Financial Considerations:
- International Banking: Research banking options for your limited company in the work country, including currency exchange fees.
- Currency Fluctuations: Manage the potential impact of currency fluctuations on your income and expenses.
Accounting & Reporting:
- Separate Accounts: Depending on the regulations of your work country, you might need separate accounts for overseas income. If you don’t, you may have to share and explain all your income and expenditures to the local tax authorities.
- Tax Reporting: Understand tax filing requirements in your home and work countries. All tax authorities impose strict reporting requirements and timings, and failing to meet them can lead to penalties and fines.
Risk Management:
- Local Representation: Consider appointing a regional representative to handle administrative tasks or legal issues. Flying under the radar cannot be relied upon. If you are not familiar with local rules applying to directors and their foreign companies, our advice is to consider other options.
- Insurance: Explore relevant insurance options to protect your business from risks in the work country. Most jurisdictions require companies operating there to have mandatory insurance, which may include pension insurance, public liability insurance, and employment insurance. Establishing what you need and arranging cover is very important, or you could face potentially significant penalties.
Using a foreign or local limited company to work abroad is more complex. You should assess the pros and cons compared with a more straightforward employed or self-employed solution. However, suppose you are a professional contractor, and your contracting is a business rather than a series of short engagements. It has its rewards in that case, but you must know the implications.
Things can end badly if you do not accept responsibility for paying local taxes and other charges. We advise speaking with our accounting experts at Access Financial, who specialise in this area and have done so since 2003.