Planning is vital before sending an exec to the U.S.
Last time, we looked at what happens from an income tax perspective when someone goes to work in the United States from Poland. This week we look at additional aspects of the assignment, including social taxes and non-employment income, courtesy of my good friends Abigail Greef and Alex Knight from our U.S. tax group in Brussels.
U.S. social security taxes are assessed on an employee performing services in the U.S., as well as on his employer. Poland does not currently have a social security agreement with the U.S., and so a Polish executive assigned to the U.S. may be subject to double social security taxation if he continues to contribute to the Polish social security system while on assignment. The type of visa one holds may also have an impact because certain visa types are exempt from social security taxation.
Even if the employee is paying U.S. social security, coverage will more than likely not fund all medical costs incurred in the U.S. The executive will need to participate in a company-sponsored healthcare plan or take out private health insurance for the duration of the assignment to cover the potential costs of hospitalization in the U.S., or the difference in medical expenses not reimbursed under U.S. rules.
Another practical point to consider when moving executives to the U.S. is the responsibility to withhold federal, state, and social security taxes. In general, both U.S. and foreign employers who pay compensation for services performed in the U.S. are obliged to withhold and remit federal, state, and social security taxes on behalf of the employee. Even though a foreign executive may be considered an employee of a Polish company and be paid via a Polish payroll, the Polish employer is required to withhold and remit the appropriate taxes to the U.S. government. Obviously, this rule only applies if the individual is actually taxable in the U.S. based on the above rules. Failure to comply with U.S. withholding requirements may result in significant penalties for the company, and fines equal to the total amount of tax not collected and paid may be levied.
If the Polish company is the payer of the income, it is deemed to be a "withholding agent" for U.S. purposes and would need to obtain a U.S. taxpayer identification number to facilitate the withholding process. This could present many problems for a Polish employer, and so the easiest way to remedy the issue is to appoint an "authorized agent" to handle the withholding and remitting process on behalf of the Polish employer. This could logically be done through a U.S. payroll agency or through a related U.S. company (i.e. U.S. parent or subsidiary). The authorized agent could then administer the withholding for the employee and charge back the expense to the Polish payroll.
Polish executives working in the U.S. need to obtain an identity number to file a U.S. tax return. If an individual is required to obtain a U.S. social security number, then this number will serve as his identifying number. If the expatriate is not eligible for a social security number (based on his visa type), then an Individual Taxpayer Identification Number (ITIN) will be required. The application may take a few months to process; it should therefore be made as far in advance of the U.S. tax-filing deadline as possible.
As far as personal tax matters are concerned, assignees to the U.S. should be particularly alerted to U.S. estate and gift tax laws, and to rules on ownership of foreign corporations.
U.S. estate and gift taxes are imposed on the transfer of property worldwide, either during lifetime or at death, for all U.S. citizens and residents. A resident for this purpose is an individual who holds a green card and/or is domiciled in the U.S. Domicile, as mentioned last time, is a question of intent, and would therefore not be a consideration unless the assignee intended to remain in the U.S. indefinitely. Non-resident aliens are subject to estate tax on U.S. situs assets; an assignee who buys a house to live in while in the U.S. and keeps that property may be liable to estate tax on the value at death.
The U.S. has a host of rules concerning the ownership of foreign corporations by U.S. citizens or residents. These rules are designed to prevent U.S taxpayers from sheltering income from tax. There are stringent reporting requirements associated with the rules, and heavy penalties for non-compliance. Foreign executives who have significant investments in non-U.S. corporations should consider reviewing these investments with a U.S. tax adviser before becoming a U.S tax resident.
Again, people often ask what business it is of the Internal Revenue Service if a Polish person owns a company in Poland, but once someone has U.S. tax residency, they become entitled to investigate virtually everything that may affect the taxpayer's status or tax liability. The penalties for failing to meet the reporting requirements even if there is no ultimate tax liability mean that these requirements need to be taken seriously.
Overall, it is clear that pre-assignment tax planning is essential in structuring a cost-effective assignment to the U.S. Careful planning of issues such as residency may not only decrease the U.S. tax due but also reduce the risk of unpleasant surprises or administrative headaches connected with the U.S. assignment.
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen. Alex Knight and Abigail Greef are managers in the U.S. tax group in Arthur Andersen's Brussels office, specializing in U.S. taxes for U.S. and non-U.S. individuals working in Poland and Central Europe.
