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The decision has been made. The director of sales is going to leave soon on a three-week business trip outside of the United States. The global mobility manager contacts you to confirm that a visa or work permit, formal assignment letter, secondment agreement, and other required elements of a typical, long-term assignment are not necessary. The manager says to you, “What’s the big deal? It’s just a business trip. Can’t we avoid all the paperwork and hassle since the director will be overseas only for three weeks?”
Don’t be tempted to agree.
Short-term business travel can create the same risks for your company as a long-term assignment. A short business trip could create a corporate tax liability in a foreign jurisdiction, and subject the traveler to double-income taxation, work permit scrutiny, local statutory employment laws, or require employment by the local affiliate. Taking time to understand that these risks are just as significant as in the case of a long-term assignment will allow you to help your company stay out of trouble.
Here are some examples from popular destinations for business travelers.
Even a short-term business traveler can create a permanent establishment issue for his or her employer but it depends on what activities the individual is doing in the jurisdiction. The employee should not negotiate or conclude contracts on behalf of the non-U.K. employer while in the United Kingdom. Such activities can subject a company to local corporate income tax, even if unintended.
In addition, the presence of a business traveler in a jurisdiction like the U.K., even for a short period of time, can create a local income tax obligation. However, there may be some relief available to the short-term business traveler in the U.K. under the income tax treaty between the United States and United Kingdom. Note, however, that although the short-term business traveler may be exempt from U.K. income taxes, it is not entirely clear whether he or she is subject to U.K. national insurance contributions while working there. Generally, the answer is no, under the relief provisions of the Totalization Agreement between the two countries. However, each case should be analyzed to confirm that this relief is indeed available.
Short-term business travelers working in the U.K. for no more than six months in any 12-month period may enter the country under the business visitor category. However, if the individual is a national of a designated “visa country” then he or she is required to obtain a visa before traveling to the U.K.
Individuals who enter the U.K. on a business visitor visa must be based outside of the U.K. and must not receive a salary from a U.K. source. Individuals on a business visitor visa must not intend to produce goods or provide services within the U.K. Notwithstanding, these individuals are permitted to conduct certain limited activities, including attending meetings and briefings, fact-finding, and negotiating or making contracts with local businesses to buy or sell goods or services.
Business travel may trigger a permanent establishment depending on the type of services an individual performs in Brazil and the level of authority that is granted under his or her particular visa. Similar to the U.K., the short-term business traveler should not negotiate and conclude contracts on behalf of his or her employer.
Although there is no income tax treaty between the United States and Brazil, under general Brazilian tax principles if the individual is in Brazil for more than 183 days, the individual becomes a tax resident in Brazil and is liable for tax on his or her worldwide income.
Short-term business travelers generally will not be subject to the National Institute for Social Security contributions or the Government Severance Fund for Employees. Brazilian legislation in principle requires that payroll taxes for these contributions be collected with respect to any amounts paid to an individual, including amounts paid abroad, even if the individual is present in Brazil for only a short period of time. Practically, however, companies do not collect payroll taxes for short-term business travelers as these individuals remain on the home country payroll.
A company will also need to determine the appropriate visa; determining which visa applies to the short-term business traveler will largely depend on why the employee is going to Brazil.
The choices are a business visa, a technical visa or a temporary visa. A business visa is for an individual who will be going back and forth to Brazil on short stays. The business visa is good for 90 days, with the ability to extend the visa for an additional 90 days. A technical visa is normally used when the parties are unrelated (e.g., technicians of an equipment manufacturer sent to train a Brazilian customer’s employees). In order to obtain a technical visa, there should be a formal agreement between the non-Brazilian company and the Brazilian entity showing that the services are being performed in Brazil to provide a transfer of technology, technical assistance, manpower, and so forth. A technical visa is good for a stay of up to 90 days, although there is one type of technical visa that allows for a stay for up to one year. The technical visa can, in theory, be extended for an additional period of time.
If the short-term business traveler does not qualify for either a business visa or a technical visa, he or she will need to obtain a temporary visa. However, in order to get a temporary visa, the employee must become employed by a Brazilian entity and enter into a Brazilian employment contract, which may not be ideal in this situation.
There is a risk of triggering a permanent establishment by sending an employee to China, even for a short-term business visitor. In the event there is no applicable tax treaty between China and the jurisdiction sending the short-term business traveler to China, the concept of “establishment or place” applies (this is the Chinese concept equivalent to permanent establishment). The concept of establishment or place is broader than permanent establishment, so any business activity in China on behalf of an offshore employer could potentially trigger an establishment or place during a visit to China, subjecting the non-Chinese employer to tax on its China-source income.
Alternatively, if there is an applicable income tax treaty, as is the case where a U.S. short-term business traveler is sent to China, the interpretations of permanent establishment issues and other administrative tax notices will apply. Under the protection of the tax treaty, if the short-term business traveler does not negotiate or conclude contracts on behalf of the non-Chinese employer and the individual stays in China for about 3-4 days, there should not be a permanent establishment issue for the offshore employer.
Separately, because the short-term business traveler will likely not be a foreign national employee of the local Chinese entity, he or she will likely not be subject to social security taxes on their Chinese-source income.
Generally, individuals entering China are required to obtain work permits only if they will be staying in China for more than three months in a calendar year. However, shorter term stays may require a work permit as well, depending on the particular province (e.g., Shanghai). Some cities in China require a local employment contract in order to obtain a work permit. Executing a local employment contract will subject the individual to local Chinese employment law, which is not desirable from the standpoint of the employer who sends the short-term business traveler into China since Chinese employment law is very pro-employee.
Notwithstanding these general rules, new guidance was issued for foreign nationals performing short-term work assignments in China, which is effective January 1, 2015.
The guidance provides details on what circumstances will be considered a short-term work assignment and which circumstances will not. If the circumstances of the business travel qualify as a short-term work assignment, and the stay in China is for no more than 90 days, the foreign national must obtain a Z work visa to enter China. Otherwise, an M or F visa will be required.
The permanent establishment risks associated with sending a short-term business traveler to India are complex. To the extent that the short-term business traveler does not have the authority to conclude contracts while working in India, then those facts will be helpful to mitigate any permanent establishment risk. However, to the extent that the short-term business traveler will perform services while in India, the principal corporate income tax exposure is that a permanent establishment exists in India if a short-term business traveler performs services in India for a related party (e.g., the Indian affiliate) for even one day. Generally, the only way for a short-term business traveler to not create a permanent establishment is to be seen as performing services for the nonresident enterprise and not for the local affiliate (subject to a few additional limited circumstances).
If the short-term business traveler is in India for purposes of providing services to third parties (e.g., contractors or customers), then the permanent establishment threshold is 90 days. That 90-day threshold is cumulative for all employees of the employer who are in India performing services for the third party during any 12-month period. Accordingly, the individual’s employer would need to monitor the time spent in country by non-Indian personnel for each contractor or customer.
The short-term business traveler may be exempt from income tax in India so long as his or her stay does not exceed 90 days, as prescribed by the Income Tax Act of 1961. If an individual is not exempt from tax under the Income Tax Act of 1961, then the short-term business traveler may be able to rely on the U.S.-India Income Tax Treaty. As long as the short-term business traveler does not create a permanent establishment in India, he or she will likely be exempt from Indian income tax.
Short-term business travelers will be required to apply for a visa prior to entering India. The type of visa required will depend on the purpose of the individual’s trip. If the individual will establish or explore the possibility of establishing an industrial or business venture, or if the individual wishes to purchase and/or sell products in India, then he or she will require a business visa. A business visa will be endorsed with either “each stay not to exceed 6 months and registration not required” or “registration required within 14 days.” For all other types of activities, an employment visa is required. An employment visa may be granted for an initial period of two years with the possibility to obtain a 12-month extension with an ability to stay in India up to five years. Furthermore, the employment visa will require the short-term business traveler to be employed by an Indian entity and enter into an Indian employment contract.
So what is the big deal? In the event of noncompliance, your company and your employee may be subject to additional taxation, and there is the possibility that your employee may be stopped at the border and prohibited from entering the country, resulting in a lost opportunity or lost business. In addition, your company may be subject to penalties, fines and other legal action from a foreign government. This may not only be a financially costly result but may also create bad publicity. The last thing you want is for a short-term business traveler to do something that would negatively impact your company’s reputation among not only your customers but also your suppliers and other business partners.
To reduce these risks for short-term business travelers, you should take the following steps:
Tulsi Patel is a global equity services associate at international law firm Baker & McKenzie.
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