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The Pros and Cons of Running a Remote Payroll

When a multinational company sends employees on foreign assignment, one of the options for paying expat salaries is to run a remote payroll.  A remote payroll is where a non-resident company makes tax and withholding payments to the host country authorities.  While this may appear to be a simple solution for foreign assignments, there are several inherent challenges that must be overcome.

There are significant issues that can arise with this approach if the company does not have a registered corporate entity in the host country.  The employment laws of many countries require some type of registered entity to run payroll and remit withholding and tax payments.  Failure to register as a local entity, where required, can bring penalties in some countries, and it may be difficult to properly administer the payroll without registration.

The Advantages and Disadvantages of Remote Payroll

Where it is permitted, running a remote payroll has both advantages and disadvantages, which should be assessed ahead of time.  The specific employment laws and withholding requirements can make a remote payroll challenging for companies without local resources or payroll providers.

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Depending on the nature of the assignment, a company may elect to use a remote shadow payroll solely for the purpose of complying with local regulations.  This can be accomplished using a DIY approach involving shadow payroll, or by using payroll administrators or a GEO solution.  A full discussion on shadow payroll can be found in this article.

Advantages of a Remote Payroll

No Need to Incorporate Locally

By using some form of a shadow payroll, it may be possible to run a remote payroll in the host country without incorporating locally. However, implementing a shadow payroll will depend on the laws of the host country.  If a company can use a payroll administrator, then they are able to handle the calculation, withholding and tax payment requirements and save the time and expense of setting up a local entity. A more complete solution would be the use of a global mobility service like Shield GEO to act as an employer of record.

The Company Can Continue to Pay Employee in the Home Country Currency

If the payroll is established simply for purposes of complying with local withholding and tax laws, and there is no host country requirement for the employee to be directly paid in the host country in local currency, then the employee may still be paid in their home country and their own currency.  Otherwise, there can be issues with exchange rates when converting to the currency of the host country, as well as the loss of home country benefits and seniority.

Remote Payroll Easier and More Efficient Than Running a Local Payroll

A remote payroll is much easier than running a fully compliant local payroll with a properly registered entity.  Setting up and administering a local payroll with a registered corporate entity can be costly and time-consuming and is usually only suitable where a company has a commitment to the host country. Depending on the country and assignment a remote payroll might not even require the employer to register locally.

Disadvantages of a Remote Payroll

Complexity of Payroll Withholding For Local Compliance

Even if a remote payroll is possible, there is almost always still the need to administer the required withholding in the host country.  Unless local experts are used, there will be a need for human resources to understand the laws and requirements to ensure compliance.  Another option is to use a local payroll administrator on behalf of the non-resident company.  However, the administrator only handles the calculation and remittance functions, and may not be relied on to know or fulfill all of the local requirements.

Research on Host Country Regulations

Whether a company attempts to run a remote payroll on their own, or use a payroll administrator, the company will still need to research the following host country regulations:

  • Social Security Withholding
  • Payroll or Employment Tax
  • Personal Income Tax
  • Other Statutory Contributions

Potential for Liability

Failure to research and comply with local laws could result in potential liability and penalties for the company.  The penalties for non-compliance will often exceed the potential savings from not incorporating locally or using a GEO solution.

May Be Prohibited by Local Statute

Some countries such as China, prohibit remote payrolls altogether, and so a company must either incorporate locally or use a GEO solution.  Even if remote payrolls are not prohibited, failure to have a properly registered entity can limit the scope of business activities, and could violate other host country regulations for registration and corporate tax compliance.

Payroll is only part of the picture

The employee may still be required to be on a local employment contract by law. The companies activities might be deemed to have created a permanent establishment. It is therefore, in the best interest for the company to create a local entity. The employee may require a work permit or visa which requires sponsorship from, and employment through, a registered local entity. The employee may also require local services like access to healthcare or the education system which are typically not accessible without proof of local employment.

Where is Remote Payroll Possible?

Unless strictly prohibited by law, a company can run a remote payroll in most countries as long as the local regulations are met.  There are only a few countries, such as Ghana, that permit a company to independently run a remote payroll and remit taxes and withholding to local authorities without local registration.  In most cases, some form of payroll support will be needed. These include a payroll administrator or GEO service, which help avoid non-compliance problems.

Bilateral Agreements Between Countries

Many countries have bilateral agreements with economic partners to simplify remote payrolls for foreign workers.  For example, a treaty might prevent double withholding or taxes for the employee, where they continue to have those amounts withheld in their own country.

However, this does not save the company from the separate obligation to meet the reporting or registration requirements for payroll and taxation of employees.  A few countries, such as the Netherlands, allow a company to register as a “non-resident employer”, but that still may not be enough to ensure compliance as some social security contributions cannot be made by non-resident companies.  Even where special laws or treaties exist, there are still host country requirements that must be met.

The Shield GEO Solution

One alternative for any company that is considering a remote payroll is the use of the Shield GEO service.  As local employer of record, Shield provides a registered local entity that can employ the worker under a fully compliant payroll, without the cost and time of setting up an incorporated entity. The employee will have a local employment contract and be issued with payslips in the host country. In addition if host country law permits, they can receive all or part of their remuneration in their home country and currency.  Furthermore, using a GEO solution eases the burden on HR departments to research and comply with local regulations, and may limit “permanent establishment’ concerns from business activity.

Get in touch to find out more about how an Employer of Record solution can help your company

The information in this article is subject to changes in local legislation.

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