When hiring US employees, UK companies can choose to hire them directly as employees of their UK company or indirectly as employees of a US subsidiary (or other affiliated company). There are four reasons why a UK company interested in hiring US employees should consider creating a US company for this purpose.
Taxation. Under the US-UK Tax Treaty, a UK company is generally not subject to US tax on its US business activities unless it has a “permanent establishment” in the US. The mere act of hiring a US employee will create a “permanent establishment” for the UK company, thus triggering an obligation to file US tax returns. However, whether you hire your employee directly or through a subsidiary can have tax consequences. First, when an employee is hired directly by the UK company, the UK company must file the US tax return. In so doing, the UK company must apportion its worldwide income and expenses to the US market, thereby subjecting the UK company to a potential audit of its books globally. When you operate through a US subsidiary, the subsidiary (not the parent) files the US tax return, thus better insulating the UK company from US tax audits and exposure. Second, hiring an employee through a US subsidiary could offer tax advantages arising out of: (1) differences in how corporations are taxed in each country; (2) timing differences in the reporting of inter-company payments; and (3) the availability of additional mechanisms for repatriating US profits to the UK (e.g., royalties and dividends). Finally, US states are not bound by the US-UK Tax Treaty. If you hire an employee to work directly for your UK company, then the corporate income arising out of your employee’s activities could be subject to state withholding tax. If you instead hire them through a US subsidiary, no withholding tax is generally required.
Legal Exposure. Hiring a US employee results, inevitably, in additional legal exposure. Employees drive cars for work, resulting in collisions. Employees make representations about products or services which, intentionally or unintentionally, turn out to be false. In rare instances, employees engage in conduct that is unfair or deceptive to the clients or customers you serve. In each instance, it is ultimately the employer which will be liable for the conduct of the employee. By hiring these employees through a US subsidiary, you potentially insulate the UK parent from liability in US courts for their conduct. As your US activities grow in their size and scope, keeping your UK parent out of US litigation will become increasingly important.
Employment Law. US based employees of a UK company can potentially claim statutory employment protections available to UK employees. Many of these protections do not exist for US employees. Most US employees, for example, serve at-will and can be terminated with or without cause and with no notice. Indeed, UK concepts such as “unfair dismissal” and “redundancy” have no analogues in the US. Whether an overseas employee can benefit from UK statutory employment protections is a complicated issue that ultimately hinges on the degree of connection between the overseas employee and the UK company. By hiring your US employee through a US subsidiary, you render this connection more tenuous, thus increasing the likelihood that the more flexible employment laws of the US will govern your employee relations.
Facilitating Employment Related Payments. Your US employee will want to be paid in US dollars. In most cases, the activities of your US employee will generate revenues denominated in dollars. It logically follows, therefore, that a business structure that allows you to transact fully in dollars will best allow you to operate seamlessly and efficiently. As the employer of a US employee, you will need to make regular electronic payroll tax and withholding deposits. You will also want to make electronic deposits of employee wages. US banks are very reluctant to open accounts owned directly by foreign corporations. Although it is possible for the UK parent to setup dollar denominated accounts in the UK, these accounts usually result in additional fees that are not charged to the accounts of domestic US corporations. By operating through a US subsidiary, you can easily receive and make electronic payments through a US bank account, thereby incurring fewer fees.
As a result, if you plan to hire a US employee, it is often advantageous to do so through a US subsidiary. Many UK companies are reluctant to hire US employees through a subsidiary because they wrongly believe that the creation and operation of a subsidiary is time consuming and expensive. Bouwen can typically establish a fully operational US subsidiary within two weeks. We advise on all the legal and tax issues – from employment agreements to employee benefits to workers’ compensation insurance – that the new company requires. We will even manage your accounts, pay your employees, file all required tax returns, and make all required payroll tax deposits. Best of all, we do it all for a low predictable monthly fee. (Learn more about our services here.)
Hiring a US employee doesn’t get any easier or smarter. Contact us today.
For more information about hiring US employees, click here to read about the questions UK companies typically ask us about hiring employees in the US.