One employee working in another country raises four separate questions with four different answers: where the employment income is taxable, where payroll withholding is owed, which country's social security applies, and whether the employer now has a taxable presence there.
Who this guide is for
- Employers with a first hire in another country, or an employee who has moved without asking.
- Finance and people teams operating a remote-first policy across borders.
- Employees who have been told their pay arrangement is "fine" and want to understand the exposure.
Four questions, and why they diverge
Where the income is taxable is generally decided by where the work is physically performed, modified by the applicable treaty's employment article, which can exempt short assignments on defined conditions. Where payroll withholding is owed is a domestic administrative question and often has a lower threshold than the taxability question, which is why an employer can be required to withhold on income that turns out not to be taxable.
Social security is coordinated separately by totalization or social security agreements, which are not part of the tax treaty and can point at a different country entirely. And the employer presence question is a corporate one: staff performing work in a country can create a permanent establishment for the employer, which changes the employer's own tax position.
Because the four are decided by different instruments, the answers routinely differ. Assuming one answer covers all four is the single most common structural error in cross-border employment.
Withholding and registration for the employer
An employer with an employee working in another country generally has to register there for payroll purposes, withhold under local rules and remit on the local cycle, and file the local returns and year-end statements. That is true even where the employer has no other presence and no local entity.
Where the treaty is expected to exempt the employee from tax in the work country, several systems allow the employer to apply for a waiver or reduction of the withholding rather than withhold and let the employee reclaim. Canada has an application for a waiver in respect of non-resident employees working temporarily in Canada, and a separate route for reducing withholding at source where the eventual liability will be lower. Both are advance applications. Our page on the employee withholding waiver covers the Canadian one.
Social security and the certificate that avoids paying twice
Without coordination, an employee sent to work in another country can be liable to contribute to both countries' systems on the same earnings. Social security agreements solve this by assigning coverage to one country and providing a certificate of coverage that evidences it, which the employer keeps and produces on request.
The certificate has to be applied for, generally before or at the start of the assignment, and it is specific to the person, the assignment and the period. Retroactive applications are sometimes possible and are always harder. Where no agreement exists between the two countries — which is common for the Gulf corridors — double contribution may simply be the outcome and needs to be priced into the assignment. Our page on social security and totalization certificates covers the mechanics.
The two shortcuts, and what each one costs
The first shortcut is paying the person as a contractor. Whether someone is an employee or a contractor is decided on the substance of the relationship in each country, and the two countries can reach different answers on identical facts. Getting it wrong exposes the employer to back withholding, contributions, penalties and interest, and in some systems to a punitive characterisation of the contractor's own company. Our page on employee versus contractor in both countries sets out the tests.
The second shortcut is an employer of record. It solves the registration and payroll problem genuinely, and it does not solve the permanent establishment problem: the question of whether the employer has a taxable presence turns on what the person does, not on who runs the payroll. A senior person concluding contracts through an employer of record can still create a presence for the real employer. Our page on employer of record tax risk covers the limits.
A remote work policy is a tax document
Once employees can work from anywhere, someone will. Each country an employee works from can create withholding, registration, social security and presence questions, and the employer usually finds out at year end or not at all. The realistic control is a policy: which countries are permitted, for how many days, with what approval, and what the employee must report.
The other half is day tracking. Almost every relief and threshold in this area is measured in days, and an assertion about days without records is not a position. A simple, employee-maintained calendar with employer oversight is worth more than any amount of retrospective reconstruction.
Setting up a cross-border employment properly
Answer all four questions before the first payment, because unwinding a payroll is harder than setting one up.
- Establish where the work is physically performedBy day and by country, including planned travel. This is the input to every other answer.
- Test taxability under the treatyApply the employment article, including any short-assignment exemption and its conditions. Note that satisfying it does not remove the withholding question.
- Determine the withholding and registration dutyIn the work country, on its own thresholds, and apply for a waiver in advance where the treaty is expected to exempt the income.
- Settle social securityIdentify the applicable agreement, apply for a certificate of coverage before the assignment begins, and where no agreement exists, price the double contribution into the cost.
- Test the employer's own presenceWhat the person actually does — contract authority, customer-facing sales, premises — and whether it creates a taxable presence for the employer.
- Document and trackAn assignment letter or contract that matches reality, a day-tracking method, and a calendar for the payroll filings and the certificate renewals.
What to gather
What a cross-border payroll review needs:
- Employment contract or assignment letter, and any secondment agreement.
- Where the employee will physically work, by country, with expected days.
- The employee's residence and citizenship, and their family's location.
- Compensation details including equity, bonuses, allowances and benefits in kind.
- The employer's existing registrations and presence in the work country.
- Any employer of record or agency arrangement, with its contract.
- A description of the employee's duties, especially any contract authority.
- Existing certificates of coverage or waiver applications, with dates.
Where this goes wrong
Treating one answer as four
Treaty exemption from tax does not remove the duty to withhold, and neither addresses social security or the employer's own presence. Each question needs its own answer and its own paperwork.
Reclassifying an employee as a contractor to avoid payroll
The characterisation follows the substance, the two countries can disagree, and the exposure sits with the employer plus penalties and interest. It also tends to surface when the relationship ends badly.
Relying on an employer of record for the presence question
It solves payroll and registration. It does not answer whether the employer has a taxable presence, which depends on what the person does rather than on who processes the pay.
What to do next
For a first hire, the useful deliverable is a four-question memo for that specific person and country, with the registrations and applications it implies. For an existing arrangement, the same memo run backwards tells you what is already exposed.
We set up cross-border payroll, run the waiver and certificate applications and handle the ongoing filings at a fixed fee agreed before work starts. See payroll for a foreign employee in Canada and the payroll setup fee page.
Checked and signed off for the 2025 and 2026 filing seasons by Udit Gupta, Cross-Border Tax Expert, Legal Quotient Consultants. General information, not advice for your circumstances — call our 24-hour helpline to discuss your own position.
This guide states mechanisms and names forms rather than quoting rates, thresholds or day counts, because those change annually and the guide does not. The current figure for your own tax year is confirmed against the authority that publishes it before anything is filed.
