Managing Global Mobility and Compliance Challenges for Stealth Expats

Particularly since the COVID-19 pandemic, remote work has surged in popularity, offering unprecedented flexibility to get work done from anywhere and popularizing the "digital nomad" concept. Plugging in is so easy, in fact, that employees might not even inform their employer of the move—or they might inform their manager, who doesn’t escalate the issue and grants permission to reliable employees.

Legally, though, it’s not quite as simple as a laptop and an internet connection. Anytime a person’s physical location differs from their payroll, it may implicate a range of regulatory frameworks from immigration to tax to employment law. The law(s) that apply will depend on the locations involved and whether a treaty applies. Below, I detail a few such issues and how they often arise in what we sometimes refer to as the “stealth expat” situation (someone working remotely overseas without a work-related tie to their physical location, often under the radar of the authorities and even their employer). Individual risks will turn on individual facts; these guidelines are general in nature.

1. Cataloging the Issues

First, let’s review some terminology and key legal frameworks that might—or might not—cause problems in a stealth-expat arrangement.

• “Home country” and “host country” frame of reference: We often use the term “home country” to describe the employee’s location of origin and “host country” to refer to the location where the employee is performing work. Remember that localities (state, province, municipality) may have additional requirements.
• Immigration: In most countries, noncitizens need both permission to be physically present in the country and permission to work there. In principle, this remains so even when the work is for a foreign employer located elsewhere, though most immigration laws weren’t designed with that situation in mind
• Individual Tax Obligations: Individuals physically present in a jurisdiction must generally report income and pay taxes locally. Generally, a person owes local taxes when they spend more than six months out of a year (often “183 days”) in a jurisdiction. The United States and a handful of other countries tax their citizens on worldwide income, meaning that the same income might be taxed twice. To avoid this result, some countries have entered into bilateral tax treaties that govern taxation of one treaty country’s citizens in the other treaty country. But the laws and their application can be quite complex, and where income is properly “sourced” is not always clear.
• Income Tax Withholding Requirements: Many countries obligate employers to withhold and remit local taxes, so an employer could be penalized for failing to withhold or even held liable in connection with their employee’s failure to properly submit taxes.
• Social Security / Payroll Taxes: Some laws require, again depending on length of stay and other factors, that employees and employers contribute to local social-insurance programs like national healthcare and pension, again often through withholdings. Bilateral "totalization agreements" between two countries offer a compliance solution where they exist: operating similarly to the double-taxation-avoidance treaty, they allow citizens of one of the treaty countries to remain on their home country’s social-insurance system when temporarily present in the other treaty country (usually five years or less), by applying for a “certificate of coverage” from the home country’s social-insurance authority (in the U.S., the Social Security Administration). Employers should ensure that employees apply for this certificate when they anticipate being abroad for under five years to avoid unexpected local social security liabilities.
  
• Employer’s Taxable Presence/“Permanent Establishment” (PE): Pay attention to this one, as it’s a big risk driver across the board. When an employee acts on behalf of their employer in a different country, it poses a risk that these activities will be deemed the employer’s “taxable presence” in the foreign country, which means any employer revenue attributable to the employee’s activities is taxable in that country.
  
• Employment Laws: Employees working in a location are generally entitled to the protections of local laws in that location. Unlike in the U.S., many countries have statutory labor codes limiting circumstances for termination, and the employment relationship is governed by contract rather than "at will" (the latter generally being a U.S. phenomenon).
  
• Privacy and Cybersecurity: Remote work is largely technology-driven, which implicates privacy and cybersecurity laws, as well as the ability of the employer’s IT to guard against breaches. If an employer has not properly accounted for these prospects, cross-border remote work could violate cross-border data transfer rules or other protections local law affords to data subjects.
  
• More: Depending on the country, cross-border remote work might implicate foreign-exchange controls, currency regulations, data localization mandates, export control laws, safety hazards, and more.
  

2. Honing in on Risk Drivers

Because remote work exists in such a gray area of law, identifying the applicable laws is only the first step. To calculate the risks and costs accurately, employers must identify the proper risk drivers in the particular situation.  The two most important questions are:

• How long will the employee work remotely?: In general anything between 0-6 months is minimal risk; 6 months to 2 years is usually low risk; above 5 years is high risk. For terms of between two and five years, the risk level will turn more on specifics of the arrangement.
• Where is the remote work to be performed? The risks of remote work vary quite a bit based on the two countries involved, so identifying the host country goes a long way in determining the proper risk drivers.

After pinning down the location and timeframe, employers can proceed to identify and weigh compliance risks:

• Employer’s business in host country: If an employer has an existing business presence, whether through a corporate affiliate, a local distributor, individual consultants, or ongoing market-testing, this affects both the nature and extent of various risks. If the answer is “none” to all, for example, the risk of a single employee’s remote work giving rise to employer compliance issues of any sort tends to be low. The risk of tax issues rises whenever a business arguably generates revenue in a country–the remote worker is then added to that business and may tip the scale as to whether revenue is taxable locally, or whether the employer should register locally.
• Local country employment law: Employment-laws are frequently underestimated in a cross-border risk assessment, particularly for US-based employers. As a general rule, contracting into a second country’s employment laws should be avoided where possible. But in practice, employment disputes are far more likely to manifest than tax audits. Employees who feel mistreated or wrongfully terminated have a strong incentive to demand compensation from their employer, leveraging any rights or protections they may be able to argue apply to them. If they have any local-country connection, it is difficult to dispute a claim to local country entitlements. All this said, some countries’ employment laws pose a greater risk than others: look at the local country’s labor code, including cost to terminate and limitations on an employer’s right to terminate.
• Employee’s job duties: The employee’s job duties also factor into the risk assessment. If the employee holds a sales function or otherwise generates revenue for the company, working remotely may pose a greater PE risk. This risk is particularly high in countries like India and China, whose tax laws allow even the provision of nonrevenue generating services to a company to be deemed that company’s taxable presence. Likewise, employees that will create company IP from abroad may pose increased risks if local IP protections are inadequate.
• Bilateral tax treaties and totalization agreements: Where a bilateral tax treaty or totalization agreement exists between home and host countries, the employer has a greater degree of clarity on when and how local tax laws will kick in–though note that there is still a fair amount of ambiguity on “remote work” situations and where revenue is properly sourced.
• Status of forces agreements: If the remote work will occur while accompanying a spouse on a military deployment (or certain other situations such as private defense contractors), a “status of forces” (SOFA) agreement may provide for work authorization or offer other protections. Again, these provisions are rarely tailored to a “stealth expat” situation, in which the dependent spouse continues employment for an existing home country employer.

3. Choosing the Right Structure

After getting the lay of the land, an employer must choose the proper employment and payrolling structure, then document it. The options can be broken into three categories:

• Localized Employment: Best for 5+ years or indefinite

One solution to compliance challenges is to fully "localize" the employee by putting them on an in-country payroll. If an employee is in Japan, they should have a Japanese employment contract, pay Japanese taxes, and obtain a Japanese work permit. With global employer-of-record solutions now widely available, this option is more accessible than ever. But it is often more risky and costly than it is worth for arrangements lasting less than five years–in which the employee may prefer to stay on home payroll and social insurance anyway. This big of an investment to accommodate an employee also may give rise to precedent that will be hard to deny to others.

• Maintain Status Quo Structure (and Document Expectations): Best for lower-risk arrangements

At the other end of the spectrum, maintaining the status quo is often the proper path for lower-risk remote work arrangements. While failing to make payroll withholdings might (or might not depending on the country) result in a technical violation, it may be remote; the employer further may have a good-faith defense (e.g., that the income was not sourced locally and the withholdings requirement does not apply); and even if penalties apply, the penalties are often lower than the alternative to avoid them such as an employer of record solution.

• Ad-hoc options: shadow payroll; contractor agreements

For situations where neither of the above works, employers can consider alternatives such as finding a shadow payroll provider to make withholdings in the local country (but continue home country payroll as usual). Severing the employee’s employment relationship and engaging in a contractor relationship may in some cases offer an on-balance less risky alternative than an EOR solution in appropriate situations, particularly where the home country employer has no business presence or interest in the host country.  And if risks do not warrant accommodating the

4. Compliance & Risk Mitigation

To optimize risk mitigation strategies, employers can consider the following:

• Review and update key policies: Some employers may wish to have formalized remote-work policies, which can include a provision flagging any restrictions or escalations required if an employee wants to work from a different country. Employers with a highly-mobile workforce may have mobility policies that need adjustment to make clear that personal international assignments do not qualify for assignment benefits and similar. Employers may wish to consult other policies as well, such as data-privacy and cybersecurity policies, to ensure remote employees follow secure practices and comply with data transfer rules.
• Train Employees and Managers: Make sure employees are aware of the requirement to disclose and update their work location, and implement proactive measures to ensure compliance. Educate managers on remote work risks, including immigration, tax, and employment law considerations, to ensure they do not inadvertently authorize noncompliant remote work. For US-based managers, this can be particularly important as they may not be aware that at-will employment is rare outside the US.
• Document Remote Work Arrangements through letters to clarify expectations, and maintain the documentation in the employee’s personnel record. Include key provisions like employee tax compliance representations, reaffirming the home country employment relationship (for US employees, at-will status), and pinning the arrangement to a fixed term and subjecting it to appropriate conditions such as working on home country time zones and maintaining reliable and secure connectivity.  If a more complex arrangement is involved such as shadow payrolling, employer-of-record, or secondment to a local affiliate, an intercompany agreement is also recommended.

The rise of remote, tech-facilitated work highlights the tension between workforce flexibility and legal compliance. Employers must navigate a complex web of immigration, tax, and employment laws while assessing risk factors like revenue generation, host-country regulations, and compliance costs. Solutions range from localizing employment to temporary shadow payroll, each with distinct advantages and trade-offs. Ultimately, clear documentation and proactive risk assessment are key to managing the legal challenges of cross-border remote work.