Overseas Employees: Tax Implications for U.S. Partnerships and Corporations

As consumer product companies expand globally and embrace remote work, managing employees overseas introduces unique tax and compliance challenges. Whether relocating U.S.-based talent or hiring internationally, these decisions can impact operational costs, brand agility, and investor confidence. Understanding the tax implications is critical for corporations and partnerships to maintain compliance and protect profitability in today’s competitive marketplace.

Key topics businesses with employees overseas should be mindful of include:

Employee Relocation Abroad: When a current U.S.-based employee moves overseas but continues working remotely, companies must consider:

• Local Tax Exposure: The host country may treat the employee as locally employed, regardless of payment origin, triggering payroll registration, labor law compliance, and potential social security obligations.

• Permanent Establishment (PE): From an international tax perspective, a Permanent Establishment is a treaty concept. PE is a fixed place of business through which the business of an enterprise wholly or partly carries on. Even without client-facing activities, remote work may be deemed to create a taxable presence if it contributes to the core business.

• Social Security: Without proper coordination under a Totalization Agreement, both the company and employee may face dual social contributions.

Hiring an Overseas Employee: Companies looking to hire directly or through an Employer of Record (EOR) can simplify local compliance by leveraging EOR Benefits. In this situation, the EOR typically handles payroll, tax withholding, and labor law obligations in the host country. However, risks still remain for the U.S. based organization. If the company retains control over the employee’s work, the host country may still treat the individual as a direct employee, potentially triggering PE and tax exposure.

Establishing a Local Entity: By creating a foreign subsidiary (also known as a “blocker” entity), companies can mitigate PE risk due to the following:

• Corporate Taxation: The local entity becomes the taxpayer, simplifying compliance but potentially increasing effective tax rates due to corporate and dividend taxes.

• Transfer Pricing: A cost-plus structure can help manage taxable profits if applicable.
• U.S. Reporting: A “check-the-box” election may allow partners or shareholders to claim foreign tax credits and mitigate double taxation.

U.S. Tax Consequences 

The U.S. tax impact of overseas employees is not uniform; it depends heavily on whether the business is structured as a partnership or a corporation. The following outlines the major U.S. tax issues each entity type should evaluate.

For U.S. Partnerships: Key U.S. tax considerations for partnerships include:

• Foreign Tax Credits: Partners may claim credits for foreign taxes paid, but must navigate complex reporting.

• PE Exposure: If the host country asserts PE, the partnership may need to file a foreign corporate tax return, even though it is not a corporation.

• Partner-Level Impact: Non-resident partners generally avoid filing obligations in the foreign country unless they have other foreign-source income from that country.

For U.S. C Corporations: Evaluating the following U.S. tax consequences is necessary.

• Corporate-Level Taxation: The corporation bears the foreign tax burden directly. Foreign taxes may be creditable against U.S. corporate income tax.

• Dividend Withholding: If profits are repatriated, foreign withholding taxes apply, typically 15% under treaties.

• Shareholder Impact: U.S. shareholders may face double taxation unless foreign tax credits or planning strategies are used.

For U.S. companies looking to retain, relocate, or hire employees overseas, assessing the legal, tax, and compliance implications in both jurisdictions is crucial. Partnerships face more complex partner-level reporting, while corporations may encounter higher effective tax rates.

For consumer product businesses, global mobility offers opportunities to access talent and strengthen international presence, but it also brings complex tax and regulatory considerations. From permanent establishment risks to foreign tax credits and reporting obligations, proactive planning is essential. Engaging experienced tax advisors and local counsel early can help mitigate exposure and align your workforce strategy with your business goals.

For guidance tailored to your business, contact Brent Lessey, Partner and Tax Leader of Anchin’s Consumer Products Group, or your Anchin Relationship Partner.