Do I have to run payroll in the country my employee lives in?
Generally yes, where the employee is actually performing their duties there. That country expects withholding on the employment income earned within it, and the employer is the one who has to operate it. The residence of the company, the currency of the salary and the location of the bank account do not move that. What most employers underestimate is that payroll is only one of the obligations the hire can create. Social security, a corporate filing presence and a taxable presence for the business itself are separate questions with separate answers, and they are not all resolved by registering for payroll.
Does the tax treaty cover social security for my overseas employee?
No, and this is a common mix-up. Tax treaties deal with income tax. Social security is governed by a separate instrument, the totalisation agreement between the two countries, and the document that keeps the employee in the home scheme is a certificate of coverage issued under it. If there is no agreement between the countries, or no certificate has been obtained, the default is contributions in the country where the work is done, potentially on top of contributions at home. Apply for the certificate before the assignment starts. Retroactive coverage is not something to plan around.
Can one employee abroad create a taxable presence for my company?
Yes, and of the obligations a foreign hire creates it is the expensive one. Payroll and social security cost administration. A taxable presence can bring the company itself into the other country's corporate tax system, with filings, a profit attribution exercise and transfer pricing work behind it. Whether it arises is a treaty test applied to what the employee actually does there, so a person who negotiates and concludes contracts is a different case from one doing back-office work. Settle this before the hire, because the job description and the authority you grant are the facts the test gets applied to.
What is a certificate of coverage and who applies for it?
It is the document issued under a totalisation agreement recording which country's social security scheme an employee remains in while working in the other. Normally the employer applies, in the home country, before the assignment begins, and the certificate is then produced to the host country's authorities as the reason no contributions are being made there. Without it, the host country applies its own rules and the employee can end up contributing in both places for the same work. Build the application into the assignment timetable. It is the step most often discovered late, when the employee is already at their desk abroad.
We hired someone abroad without setting anything up, what now?
Work through the obligations in order rather than all at once. Establish where the employee has actually been working and since when, because that fixes the payroll position. Then check whether a totalisation agreement covers the countries and whether a certificate of coverage can still be obtained or contributions are owed locally. Then look at the corporate filing position. Last, consider whether the activity has created a taxable presence for the business. Registering payroll late is usually manageable. Discovering a taxable presence long afterwards is not, because the profit attribution then has to be done for every open period at once.
Can I just pay my overseas employee as a contractor?
Relabelling an employee as a contractor rarely solves the problem and often adds one. The other country will look at how the work is actually directed, controlled and integrated into the business, not at the wording of the agreement. If it concludes there was employment, you face the payroll you avoided plus penalties, and the social security position reopens with it. Genuine contractor arrangements abroad exist and are perfectly workable when the substance matches the paperwork. Choose the structure because it reflects how the relationship really operates, not to sidestep a registration that would have taken a few weeks to put in place.
Branch or subsidiary — which should we use to expand?
A branch keeps one taxpayer: results consolidate at home, losses are usable sooner, and the exposure is that the branch is a permanent establishment whose profit the host country taxes, sometimes with a branch tax on repatriation. A subsidiary is a separate taxpayer with limited liability and local rates, at the cost of withholding on dividends home and transfer pricing on everything between them. The deciding facts are usually expected losses, liability and exit plans. See branch against subsidiary.
Do I need to report a foreign business I own?
Almost certainly, and on more than one form. Canada requires reporting of foreign affiliates on the T1134; the United States has a family of returns keyed to the entity type and your level of control, and several carry penalties that apply whether or not any tax is owed. These are information returns, so the obligation follows the ownership rather than the profit. See T1134.
