In the era of digitalisation and globalisation, the concept of work has undergone significant transformations. The advent of smart working has enabled employees to perform their tasks from any part of the world, but it has also introduced legal and tax complexities for companies employing such workers. In particular, managing employees residing in another country presents specific challenges related to taxation, residency, and labour legislation, which must be carefully managed to avoid fiscal and contributory risks. Understanding these complexities is crucial for successful international operations.
Foreign Employers: Everything You Need to Know
20 May 2024
What is a Foreign Employer?
A Foreign Employer is a non-resident entity that hires one or more employees in a target market without establishing a permanent presence in that market. The employee is hired directly by the Foreign Entity, meaning the employment agreement is between the resident employee and the non-resident employer. For example, a German company can hire an employee residing in Italy to perform their activities there, without establishing a subsidiary, a branch or a so called “Permanent Establishment” in Italy.
Why Become a Foreign Employer?
There are several reasons to choose this approach during the decision making process of the international hiring:
- Cost Efficiency: Establishing a full legal entity or branch abroad is more expensive than setting up as a Foreign Employer. Registering as a Foreign Employer allows companies to manage payroll and social contribution compliance in the country of performance of the work activity, without substantial financial investment;
- Speed of Implementation: Setting up a Foreign Employer is normally much quicker compared to establishing a subsidiary or branch. It involves only the registration with local tax and social security authorities, allowing businesses to start operations swiftly and efficiently;
- Operational Flexibility: This solution provides the flexibility to hire talent from around the world without being tied down to the legal and bureaucratic requirements of setting up a local entity. This can be particularly advantageous for short-term projects or market testing or smart work activities.
Limitations of the Foreign Employer
- Operational Limitations in the Target Market: the primary limitation of operating as a Foreign Employer is that the Employer should not be fully operational in the target market. Without establishing a subsidiary or branch, the employee(s) cannot conduct commercial activities, conclude or negotiate contracts, have representational authority for the Employer Foreign Company. The definition of Permanent Establishment normally involves all the business operations different from auxiliary or preparatory activities. OECD commentaries on article 5 of the model tax convention provides detailed information concerning the operational limitations;
- Permanent Establishment (PE) Risk: the Foreign Employer may face potential tax risks if the local Authorities challenge and assess the presence of a Permanent Establishment. The risk of Permanent Establishment may arise if the employee’s activities involve concluding contracts, negotiating agreements, or exercising representation powers on behalf of the company, in accordance with double taxation treaties. As far as Italian tax Law is concerned, Article 162 of the Italian Income Tax Code, rules that a significant and continuous economic presence of a foreign enterprise may qualify as an Italian PE, even without a physical office or plant.
How to Become a Foreign Employer?
The Foreign Company intending to hire employee(s) who will be located on Italian territory without establishing a Permanent Establishment in Italy, should start this process by appointing a Social Security Representative residing in Italy to act on its behalf before the Italian Tax and Social Security Authorities.
Then, appropriate employment agreement between the Foreign Company and the employee(s) should be drafted and negotiated considering the minimum requirements of the Italian labor law and will include the required social security contributions, as the Foreign Company will pay contributions for sickness, maternity and holidays to the Italian Social Security Institutions.
The empoyees will normally pay their own personnel income taxes in Italy according to the international treaties and considering their residence and presence in Italy.
The Foreign Employer should comply with mandatory Italian laws, such as the principle of proportionality and adequacy of remuneration as per Article 36 of the Italian Constitution.
ECOVIS STLex Services
ECOVIS STLex, with its multidisciplinary consulting services, can support Foreign Companies in becoming Foreign Employers and assist with ongoing payroll management. ECOVIS STLex would be your sole point of contact for:
- Registering the Foreign Company in Italy for contribution purposes and appointing the Social Contribution Representative;
- Providing labor assistance in drafting the employment agreement that meets the Foreign Company’s needs and complies with Italian local regulations;
- Calculating payslips (processing monthly payroll for employees and/or collaborators, including overtime, variable pay, and allowances; processing maternity and sick leave claims; managing increments and bonuses; and delivering payslips in a computer-readable format);
- Assisting the Foreign Company with the payment of Italian taxes and contributions for employees;
- Offering legal labor consultancy services focused on the employment relationships between the company and its employees in Italy;
- Providing tax consulting on the tax residence of individuals and legal entities, and analysis of permanent establishment risk.
Explore our dedicated services:
Contact our professionals at studio.torino@stlex.it for further information on Foreign Employers.
