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Don’t Let “Digital Nomads” Expose Your Lab to Foreign Tax Liability

by | Nov 21, 2022 | News, Open Content

Where your remote employees actually work may have significant legal consequences for your lab.

You might have heard the term “digital nomad.” It refers to remote workers who move from place to place, often working in countries outside the borders of the companies that employ them. Chances are, some of your lab’s own employees are digital nomads. You may not think that’s any concern of yours. After all, if they’re productive, why should you care whether they work from Detroit, Denmark, or Dubai?

The risk is that the cross-border employment arrangement may inadvertently subject your lab to the tax laws of the host country. Explanation: National corporate and income tax laws apply to companies that have a “permanent establishment” (PE) in the country. Companies seeking to create a PE in a host country are typically required to:

  • Register the local branch or subsidiary to do business in the country;
  • Get a local-country taxpayer identification number; and
  • File annual corporate tax returns.

If the host country believes that employing a global nomad who lives in the country constitutes a PE, it may prosecute you for doing business without registering as a PE, seeking significant tax penalties that apply not just to your local, but worldwide income.

Compliance Strategy: The longer and more strategic your relationship with the global nomad living in the host nation, the greater the likelihood of being seen as a PE. Consider hiring a local lawyer to analyze the risks. If the assessment concludes that there is a risk, you may have to register a local corporate presence and migrate the telecommuter to a new in-country payroll, using the new in-country taxpayer identification number and a local payroll provider. The other option is to gamble that you won’t get caught or that the foreign government won’t have the will or resources necessary to bring a legal action against a company in the US for disobeying its local laws.

Use your control over the global nomad to manage liability risks. As the employer, you’re in the legal position to dictate the terms of any remote work or telecommuting arrangement, including the right to ban employees from telecommuting abroad. Keep global arrangements as short as possible—three months or under. Structure a short-term overseas work arrangement so the host country never becomes the employee’s (even temporary) place of employment. Other key provisions to include in your telecommuting policy or agreement:

  • A statement indicating that a late return from abroad constitutes resignation of employment (except where delay is due to consequences beyond the employee’s reasonable control, like a travel ban);
  • The employee’s affirmation that the US is his/her sole place of employment;
  • That the place of place of employment is a fundamental term of the agreement;
  • The employee’s duty to notify and get your express permission to relocate; and
  • The employee’s acknowledgement that moving to a different location without notification and permission is grounds for terminating telecommuting privileges.

For a more in-depth article on managing such risks of remote work, stay tuned for an upcoming issue of Lab Compliance Advisor.