Foreign Enterprises' Risks in Hiring Employees When Subsidiaries or Branches Are Not Set Up in Taiwan
When foreign enterprises seek to expand their business, the organizational structure they choose to operate in a specific market plays an important part in their business judgment. Although setting up a local subsidiary, branch, or office, is feasible, foreign enterprises' unfamiliarity with local market's labor law, labor conditions, employee benefits, tax law, and corporate governance norms, usually results in high compliance costs for setting up a legal entity in the target market. On the other hand, foreign enterprises usually have a need for effectiveness when expanding into emerging markets. Additional costs may also be incurred by foreign enterprises if they encounter delays in local administrative procedures when setting up legal entities. Henceforth, hiring local employees indirectly through a nominal employer of records or directly by foreign enterprises themselves, without setting up subsidiaries or branches, has become a popular option for foreign enterprises to expand their overseas presence.
Labor law risks for foreign enterprises using a nominal employer of records
The so-called nominal employer of records refers to an unrelated third-party company who enters into employment contracts with local employees for a foreign enterprise, and such third-party company assumes all legal responsibilities under labor law, tax law, and other regulations, for the foreign enterprise. A nominal employer of records is usually a local company that is familiar with local laws and regulations and often assists in providing services like cross-border payroll settlement, accounting, and human resources management. In this way, foreign enterprises may evade employer's responsibilities to pay labor insurance, labor pensions, and health insurance, for local employees under Taiwan's Labor Standards Act and other laws and regulations.
Foreign enterprises might use Taiwanese companies with which they have done business before as a nominal employer of records and hire employees to work for them in Taiwan in order to develop the Taiwanese market, when they attempt to expand their business in Taiwan. For example, such a labor contract may stipulate that the employee shall carry out a business project designated by the nominal employer of records, but the project is essentially the work assigned by the foreign enterprise. Under this structure, the foreign enterprise will pay an amount equivalent to the salary to the nominal employer of records, who will in turn pay the salary to the employee and be responsible for such an employee's labor insurance, labor pensions, and health insurance. The problem arises when a foreign enterprise wishes to fire the employee, though it appears to be doing so through the nominal employer of records, the employee may protest and file a lawsuit with court against the foreign enterprise claiming to keep providing services and being paid wages by the foreign enterprise based on a valid employment contract between the employee and the foreign enterprise. In other words, although the foreign enterprise does not seem to have an employment contract with the employee, the foreign enterprise may still be sued, and the court will still determine whether an employment contract exists between the foreign enterprise and the employee based on facts and evidence.
For example, when Bullitt Group, a bankrupt company engaged in electronic design and telecommunications in the UK, entered the Taiwan market, it utilized a Taiwanese company to hire Taiwanese employees. That is, the employment contracts were signed between the Taiwanese company and the employees, but in fact the employees were providing services to the Bullitt Group. At that time, even the head of Bullitt Group's office in Taiwan signed his employment contract with the seemingly unrelated Taiwanese company. When Bullitt Group's headquarters in the UK decided to remove the head from his position, the lawsuit in Taiwan ensued. The court held that the employee was actually subject to the management, command, and supervision of the Bullitt Group, therefore the employment contract existed between the employee and the Bullitt Group, rather than between the employee and the Taiwanese company, that is, the nominal employer of records. See 108 Taiwan Shilin Dist. Court Chungsu (重訴) 15 (2019).
Bullitt Group once argued that under the concept of labor dispatch under Taiwanese labor law, it is separable between the employment contract and the use of labor. That is, when employees may enter into employment contracts with staffing agencies and provide labor services to client companies with the employees' consent, Bullitt Group may use the employees without triggering any issues. The court, however, held that the Bullitt Group was actually evading the establishment of direct employment contracts with its employees, thereby evading all of its legal obligations as an employer. If a foreign enterprise already decided to hire a specific worker but hires the worker through a nominal employer of records and then signs an employment contract with the worker, this is an act of "personnel transfer" prohibited under the Labor Standards Act. Paragraph 1 of Article 17-1 of the Labor Standards Act provides that "[a] dispatch-requiring entity shall not interview the dispatched worker or undertake any other conduct of appointing a specific dispatched worker before dispatching entity and a dispatched worker sign a labor contract." For example, it is not allowed for the client company to issue recruitment notices and interview or test specific workers on its own and then let some staffing agency enter into an employment contract with the worker. Therefore, the court held that, even under the concept of labor dispatch, the employment contracts still existed between Bullitt Group and the employees, thus Bullitt Group should bear the legal obligations such as payments of salary, labor insurance premium, and so on. Id.
On the other hand, in the event of a violation of Paragraph 1 of Article 17-1 of the Taiwan's Labor Standards Act, the worker may, under certain conditions, choose to maintain the employment contract with the nominal employer of records or, within 90 days from the starting date of rendering labor services, request the foreign enterprise for entering into an employment contract with the worker, in writing. If the foreign enterprise fails to negotiate with the worker exceeding 10 days or the negotiation fails, the law will deem that the two parties have established an employment contract of the labor conditions of the worker during his/her employment in the foreign enterprise. See Paragraphs 2 and 3 of Article 17-1 of the Taiwan's Labor Standards Act. Obviously, the risks of using a nominal employer of records in labor law are quite high.
Tax risks arising from hiring employees directly by foreign enterprises
When a foreign enterprise directly hires Taiwanese employees without setting up a subsidiary or branch, the employees may be considered as a permanent establishment of the foreign enterprise as they frequently sign contracts on behalf of the foreign enterprise, which may trigger tax risks. Article 10 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income clearly provides: "[a] person who, pursuant to the provisions concerning permanent establishment under a double taxation avoidance treaty, is acting on behalf of an enterprise of the other contracting country and has, and regularly exercises, in the territory of [Taiwan], an authority and power to conclude contracts in the name of the enterprise, shall refer to an individual, entity, or other collective of persons, who is acting on behalf of the enterprise and has and regularly exercises an authority and power to conclude contracts in the name of the enterprise, sign documents binding on the enterprise, or negotiate all elements, terms, and conditions of a contract." If a specific employee is identified as a permanent establishment as above because he or she regularly signs contracts on behalf of a foreign enterprise, such an employee will be deemed as a profit-making enterprise regulated by the Income Tax Act, and then be required to bear the obligation to keep accounts (Article 41 of the Income Tax Act) and pay income tax as a profit-making enterprise. Of course, the criteria for determining a permanent establishment must be determined in conjunction with the tax treaties between Taiwan and the countries concerned. However, Article 10 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income certainly have already led to tax risks for such employees.
For example, if a company from Country K ("Company K") uses a worker in Taiwan to sell concert tickets for artists from Country K, the worker's sales revenue may be deemed as the surplus profit derived from incidental trading activities. See Article 12 of the Enforcement Rules of the Income Tax Act. When calculating the worker's consolidated income, the price of the concert ticket may be deducted as a cost. See Paragraph 1 of Article 24 of the Income Tax Act. However, if the worker frequently acts as an agent for Company K to conclude sales contracts and conduct transactions, such a worker may be identified as a permanent establishment of Company K. As a result, the Taiwan's Taxation Bureau may calculate the sales amount (turnover) using the revenue earned from concert tickets sold (directly divide the revenue by 1.05 to get sales amount), and then calculate the business tax, and perhaps further the profit-seeking enterprise income tax, both to be levied on the worker. See 110 Supreme Administrative Court Shan (上) 512 (2011). As far as the profit-seeking enterprise income tax is concerned, the worker may not even be able to deduct the price of the concert ticket as a cost and thus have to bear a high tax. Obviously, if a foreign enterprise does not set up a subsidiary or branch but directly hires employees to work in Taiwan, even the employees themselves have to pay attention to tax risks.
