Expatriate Structures: Selecting the Best

Donald Dowling

Expatriate Structures_Four diverse employees holding a teal globe symbol

This is the third of four in an article series entitled How to Structure Global Mobility Assignments, Expatriate Postings and Cross-Border Secondments.  It was written by international employment attorney Donald Dowling with Littler Mendelson P.C.

For Article 1 – Who Is and Is Not an Expatriate – Click here.

For Article 2 – 4 Expatriate Structures – Click here.

The question:  how to select which of the four expatriate structures is most appropriate for a given expat assignment. Answering this depends on nuances of the particular expat’s given situation, and on the employer’s strategic needs. Even within one multinational employer, different expats may get structured differently. Therefore, in drafting a given expat’s assignment package, avoid reflexively copying the last expat’s assignment package (unless the ideal structure for the current expat posting happens to coincide with what was the ideal structure last time). If, for example, the last expat was a secondee while this expat needs to be temporarily localized, then the secondee’s assignment package is the wrong model for documenting this assignment.

Want to know more about the pros and cons of hiring locals over expats?  Click here.

In selecting among the four expat structures in structuring any given expatriate assignment, think through practicalities of the particular posting, like whether the expat will serve a home or host country entity, and which employer affiliate will fund compensation. Then factor in three legal issues: immigration, payroll laws and permanent establishment. How these three issues play out for a given expat should point to the most appropriate of the four expat structures.

  1. Immigration. All countries impose immigration laws. An expat who does not happen to be a citizen or legal resident of the host country almost certainly needs a visa or work permit to work in-country. The visa and work permit process often requires an in-country employer visa sponsor. The foreign correspondent and secondee expat structures may not work because they do not include any host country employer to sponsor the visa. (In a secondment, the host country beneficial employer may be willing to sponsor the visa but because it does not actually employ the expat, in some cases it will be ineligible to sponsor.) Also think through expat family visa issues. For example, some countries will not issue a spouse visa for a samesex partner.
  2. Payroll laws. Most countries impose what we have been calling “payroll laws”—analogues to U.S. reporting/withholding/contribution mandates as to employee income tax (federal and state), social security, state workers’ compensation insurance, state unemployment insurance and federal unemployment tax. Even oil-rich countries like Qatar that did not used to impose payroll laws now do.

The compliance imperative. The headquarters team structuring a global mobility assignment that keeps an expat on home country payroll might be more focused on complying with home country payroll mandates than on host country payroll laws. But actually, host country payroll compliance may be more vital, because during the assignment the host country is the place of employment—the expat lives and works in the host country using its roads, sewers, garbage pick-up and other services, and is probably liable personally for host country income tax.

Imagine, for example, the employer of a foreign correspondent assigned from Rome to a temporary place of employment in Raleigh. The home-country Italian employer should comply with U.S. and North Carolina payroll laws, and so should not illegally payroll its expat on an offshore Italian payroll that fails to report income to the IRS and other U.S. federal and state agencies. An employer based in Raleigh will face reciprocal compliance challenges when assigning someone to work in Rome.

Violating host country payroll laws by illegally paying an expat offshore can be a crime—indeed, it can be a felony in the United States.1 This is usually true even where the employer gets a certificate of coverage under a social security totalization agreement, because those certificates do not address income tax withholding and reporting.2

In structuring expatriate payroll, consider vehicles like “split payroll” and “shadow payroll” that facilitate compliant payrolling. In many countries, structuring an expat as a foreign correspondent or secondee without a “shadow payroll” is effectively illegal because it violates host country payroll laws. But not always. Some countries’ payroll laws obligingly exempt foreign employers that do not transact business locally—Guatemala, Ivory Coast, U.K. and Thailand are examples. Still other countries—France and Estonia, for example—offer special expat payroll registration procedures that let foreign employers comply with local payroll laws without otherwise registering to do business locally.

  1. Permanent establishment. A third vital legal issue in structuring expatriate assignments is avoiding an unwanted host country corporate and tax presence for a home country employer entity. “Permanent establishment” (PE) is a corporate tax presence that host country law imposes on a foreign entity held to be “doing business” locally in the host country. The expat structure challenge is where host country law might deem a home country entity employing an expat working in the host country to be “doing business” in the host country, because of the work the expat performs. The expat’s in-country activities on behalf of the home country employer are said to trigger a PE. Even if the home country employer has a local sister entity registered to do business in the host country, an expat who is a foreign correspondent, secondee or co-/dual-/joint employee might trigger a separate PE for the home country employer affiliate.

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Imagine, for example, a Berlin-headquartered organization that directly employs a full-time highly-compensated expat in Chicago but otherwise does little or no business stateside. If the German expat telecommutes, contributing to German matters, in German, from an apartment on Lake Shore Drive—making phone calls, receiving mail, occasionally meeting with traveling colleagues—might the U.S. IRS and Illinois secretary of state take the position the German company now “does business” in Illinois and so must register with the Illinois secretary of state and file U.S. federal and state tax returns? If so, the German company would be said to have a U.S. PE. Its unlicensed U.S. operation might trigger fines and taxes. The reciprocal issue could arise in the outbound scenario—imagine, for example, a Chicago organization employing a full-time highly-compensated expat in Berlin.

After factoring in these three issues and selecting among the four expatriate structures, document the expat assignment to reflect the selected structure, and take other steps to shore up the position that the selected expat structure is legitimate. When an expat and an employer get in a dispute (disputes tend to arise in the context of expat dismissals), the expat structure question can get litigated in court. The court will look at the actual facts and circumstances without necessarily deferring to the employer’s characterization. In a 2014 case, as one example, the U.S. Second Circuit Court of Appeals rejected an employer’s argument that its expat was temporarily transferred/localized; the Second Circuit ruled that particular expat was a co-/dual-/joint-employee.3



  1. 26 U.S.C. § 7202.
  2. See U.S. Social Security Administration web page on “U.S. International Social Security [Totalization] Agreements,” here.
  3. Brown v. Daiken America, 756 F. 3d 219 (2nd Cir. 2014).


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