Posting Employees to the USA on B Visas

When you send employees to the USA to carry out work there, a number of issues need to be addressed, particularly in the areas of tax and immigration. A very common scenario is sending staff to the USA to carry out work, sometimes combined with supplying technology, i.e. together with the delivery of physical goods or products. The range of possible scenarios is so wide that it is impossible to cover every aspect of the potential consequences of specific cases. Tax authorities and immigration officers may therefore reach conclusions different from those outlined below.

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Tax issues when sending employees to the USA

We will start with the tax issues, but if you are interested only in immigration, feel free to skip this section and go straight to the immigration questions below. Business income in the USA is subject to several income taxes, sales tax and, on imports, customs duty. By setting up the corporate and contractual structures correctly, you can direct the taxation of this income either to the USA or to Slovakia, while also maximising the tax-deductible expenses you can claim. The key to achieving both goals is to determine in which situations a Slovak company supplying services creates a permanent establishment in the USA. To understand the advantages and disadvantages of the various contractual and corporate arrangements for supplying services, we first briefly outline the rates of the individual taxes, then the alternative contractual and corporate arrangements, and finally the conditions under which a Slovak company creates a permanent establishment and why this is the least advantageous arrangement. Closely connected to this is the immigration status of the staff sent to the USA. Finally, by a process of elimination, we explain which visa type is suitable for sending staff to supply services in the USA, and what the limits of this regime are.

Options for supplying goods and services in the USA

1. You supply services and goods to a US customer as a Slovak company,
2. you supply services to a US customer as a Slovak company, but your presence in the USA is so substantial that you create a permanent establishment there,
3. you set up a company in the USA and supply goods and services there as a US company, or you supply the goods as a Slovak company and the services as a US company. Part of the US income is re-invoiced from the US company to the Slovak company, reducing taxable profit in the USA; where the companies are related parties, you will need to comply with transfer pricing limits.

Re option 2 – permanent establishment.

We begin with this option because it is the least favourable. In doing so, we explain what you must comply with in order to follow option one, or alternatively choose option two to be on the safe side. What is a permanent establishment? Ordinarily, when services are supplied across borders, the economic activity is taxed in both countries. This is currently the case when services are received in the USA from tax havens. Fortunately, there is a solution that keeps a Slovak company out of this unfavourable regime: the double taxation treaty between the USA and Slovakia. This is best explained by quoting Article 7(1), which applies to this situation: “The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.” The treaty also covers the avoidance of double taxation on employment income, interest, dividends, royalties, rents and other types of income, but these are not relevant to our situation.

Why is a permanent establishment disadvantageous? Its main drawback is the administrative burden. Whether a Slovak company has created a permanent establishment in the USA depends on how substantial its US presence is – specifically, whether it has warehouses or offices in the USA, or whether its employees or directors spend time there. If a Slovak company has a strong presence in the USA, it must register for income tax there and pay income tax on the portion of income earned through its US activities, keep accounts of both income and expenses, and meet many other administrative obligations just like US companies. At the same time, it must account for this income and these expenses again in Slovakia and determine whether the profit already taxed in the USA will also be subject to income tax in Slovakia (i.e. whether the exemption or credit method for avoiding double taxation applies to that income). This is an administrative nightmare and the most expensive of all the options.

How can you avoid creating a permanent establishment? To prevent a permanent establishment arising in the USA, no office or warehouse should be used when supplying the services, and the Slovak company’s employees, contractors and directors should not be present in the USA while services or goods are being supplied. One example where no permanent establishment arises is the delivery of a project prepared in Slovakia and sent to the USA by email. The opposite would be, for instance, renting or subletting offices and warehouses, or sending employees and contractors who will prepare the project wholly or partly in the USA and then implement it there, in whole or in part.

Where a Slovak company can avoid using an office or warehouse when supplying services in the USA, but cannot avoid sending contractors or employees there, other Slovak companies mitigate this risk by obtaining an invitation letter from their US customers for a named person and a specific period. We look at this practice more closely in the section on immigration issues, where we also cover in more detail the restrictions on the scope and types of activity that Slovak staff may carry out in the USA.

As an aside, how do US authorities actually come to examine whether a Slovak firm has a permanent establishment in the USA? It usually happens because, when Slovak staff arrive in the USA, less privileged local US citizens invariably notice that foreigners are working there and report this to the US immigration authorities, which then carry out checks to ensure that all immigration and tax matters comply with the law.

Re option 1 – Slovak company.

This is the simplest and cheapest solution. The Slovak company invoices the US customer, who requests confirmation on the forms prescribed by the IRS and pays for the services. The Slovak company pays tax on the income in Slovakia. We have highlighted the risks and limits relating to a permanent establishment above, and we outline the immigration risks below.

It is worth adding that, even under this option, where Slovak employees or contractors work in the USA, it is important for immigration purposes to use invitation letters from the US suppliers and to adhere strictly to the limits on the scope and type of work permitted in the USA.

Re option 3 – US company.

This option involves setting up a company in the USA. The US company invoices clients in the USA. Its income is then re-invoiced to Slovakia, where it is taxed. The US company files a tax return in the USA but pays tax only on the profit made up of income that has not been re-invoiced to Slovakia. Where the companies are related, the extent of re-invoicing is limited by transfer pricing rules. To determine an appropriate level of profit on transactions between related parties, the cost-plus method, for example, is used.

The US company acts as a tax blocker against the risk of a permanent establishment arising in the USA. This option is more expensive than option 1, as a company must be set up in the USA and a tax return filed every year. On the other hand, it eliminates the risk of a permanent establishment.

It is worth adding that, even under this option, where Slovak employees or contractors work in the USA, it is important for immigration purposes to use invitation letters from the US suppliers and to adhere strictly to the limits on the scope and type of work permitted in the USA.

We should also add that, where services and goods are supplied together, the US company can supply the services and the Slovak company the goods.

As mentioned above, the US company can re-invoice its income to Slovakia; for completeness, however, we set out the US tax rates below.

Taxation of services supplied in the USA

• Federal income tax – a flat 21% for a C-Corp; otherwise, a progressive tax ranging from the tax-free allowance up to 39% – if you are interested, we can send you a separate, detailed answer on the bands,
• For example, state income tax in Georgia is 5.75%,
• In addition, in some states the supply of certain types of services may also be subject to sales tax. In the USA, sales taxes apply primarily to goods only; this is also the case in Georgia, for instance. Georgia has a statewide sales tax of 4% plus local sales taxes averaging around 4%, i.e. around 8% in total. To give a definitive answer on whether your services will be subject to sales tax, we need to know what type of service is involved and to whom it will be supplied, and the answer should always be checked with a local tax adviser. In Georgia, for example, most services are exempt from sales tax; this exemption does not, however, extend to accommodation, passenger transport, amusement parks, or delivery services for goods sold online.

Taxation of goods imported into the USA

• Goods supplied from Slovakia to the USA are not subject to federal or state income tax or to withholding tax in the USA, provided the relevant official IRS forms are completed for the customer. The IRS is the US federal tax authority. The customer will request these forms from the supplier before making payment; obtaining them is the customer’s responsibility, so the supplier need not deal with this itself.
• Goods supplied to the USA are subject to customs duty, the amount of which depends on the type of goods. To estimate the likely customs burden, you need to provide the expected range of goods.
• In addition, in some states the supply of certain types of goods may also be subject to sales tax (similar to VAT). For example, Georgia has a statewide sales tax of 4% plus local sales taxes averaging around 4%

Immigration issues when sending employees to the USA

If you, your employees or your contractors need to carry out work in the USA, you can choose from the following options:

• H1B work visa
• L1B / L1A managerial visa
• E2 investor visa
• B tourist visa
• ESTA – travel to the USA under the Visa Waiver Programme

Obtaining an H1B visa comes with several restrictions. Firstly, US work visas are issued to only a limited number of applicants, and this quota is oversubscribed more than tenfold every year, so a lottery is held. Secondly, the employee must pay tax and contributions on a salary at least as high as that of a US citizen in a comparable position, which makes the whole visa considerably more expensive. Thirdly, the entire visa process takes a year or longer. Fourthly, a foreign national can be employed only by a pre-approved US company that vouches for the prospective employee. Fifthly, this type of visa is relatively expensive to obtain.

Obtaining an L1B / L1A visa also involves several restrictions. Firstly, these visas are intended either for Nobel Prize winners or holders of similar awards, or for managers of more than 1,000 employees in the USA. Secondly, the employee must pay tax and contributions on a salary at least as high as that of a US citizen in a comparable position, which makes the visa considerably more expensive. Thirdly, this type of visa requires a company to be set up in the USA. Furthermore, it is relatively expensive to obtain.

Obtaining an E2 visa requires proof of funds ready for investment of USD 100,000 or more. Secondly, this visa type requires a company to be established in the USA. Furthermore, besides the other requirements, this type of visa is relatively expensive to obtain.

By a process of elimination, this leaves the B visa and ESTA – travel to the USA under the Visa Waiver Programme. ESTA is an authorisation allowing you to travel to the USA for 3 months without a visa. In practice, most clients sending employees or contractors do not use ESTA, because US immigration officers at the border may not accept that the work the employee is going to do in the USA is permitted under ESTA. Most clients therefore do not want to risk the unpleasant situation of their employees or contractors being refused entry and sent home, and prefer the B visa route instead. This option is also better in case of a report or a random inspection at the US workplace by the labour authorities or immigration police.

The B1 visa is a business visa that allows entry to the USA for 6 months. You can usually obtain a B1 only if you show that you need to travel to the USA for longer than 3 months, as ESTA would otherwise suffice. B visas are obtained at the embassy by submitting an application, the supporting documents and an invitation letter from your US customer for a named person and a specified period of work, which must be no more than 6 months and no less than 3 months. If your US customer does not provide such a letter, ESTA is your only remaining option. This, however, then has a bearing on the permanent establishment question discussed above.

Unlike H1B work visas or investor visas, B visas permit only a very narrowly defined range of work that holders may carry out in the USA.

Activities permitted on a B visa

What activities may you carry out on a B1 visa? If you are interested, we can send you the full list, but activities permitted under the B1 (business) visa include, among others:

• Installing, testing, inspecting, servicing or repairing commercial or industrial equipment or machinery sold by a company outside the USA to a US buyer, where the purchase contract expressly requires this; construction work is not permitted
• Taking part in a training programme not designed primarily to provide employment
  • Observing or inspecting how an enterprise or business operates, or how professional activities are carried out
  • Seeking investments in the USA without performing productive work or actively participating in the management of a business
  • Researching potential business locations (offices, warehouses, land)
  • Appearing as a lecturer or speaker
  • Working for a foreign exhibitor in connection with exhibits at international trade fairs or exhibitions, provided the visitor’s employment duties are outside the USA.
  • Arranging and attending business negotiations
  • Performing statutory duties as a member of the board of directors of a US corporation
  • Purchasing supplies or goods
  • Selecting and recruiting employees
  • Negotiating contracts, signing contracts or taking orders for products manufactured outside the United States
  • Attending conventions, meetings, trade shows or business events for scientific, educational, professional or business purposes
  • Settling an estate or property matters
  • Conducting independent research (i.e. research for which you receive no remuneration from US sources).
• Many other activities are also permitted in addition to those listed, e.g. a musician performing at a concert without being paid from US sources. What these activities have in common is that they are not remunerated – paid for – from US sources and that they are one-off or short-term.

For each of these activities, a more detailed description can be given of what it covers, based on the interpretation and case law of USCIS (the US immigration authority). To prepare an interpretation of what you may do in the USA on a B1 visa, we need a specific description of the intended work.

Installing and repairing machinery on a B1 visa

Most visa applicants are chiefly interested in the extent to which they may install, test and repair machinery and equipment. A more detailed explanation is given in the internal guidance on foreign affairs (The Foreign Affairs Manual, 9 FAM 402.2-5 (E) (1)). This provision allows a business visitor (B1 visa) with a higher level of qualification (meaning primarily persons with a university degree or otherwise specialised knowledge or experience) to carry out certain types of work in the United States in connection with commercial or industrial equipment or machinery purchased from a company outside the USA. The business visitor may either install, test or repair the equipment or machinery, or train US workers to perform these services. The purchase contract must expressly require the seller to provide such services. Note: building or construction work is not permitted, even if the purchase contract requires the seller to provide those services.

Here is the original US wording verbatim: “The Foreign Affairs Manual, at 9 FAM 402.2-5(E)(1), permits an otherwise-qualified business visitor to perform certain types of labor in the United States in connection with commercial or industrial equipment or machinery purchased from a company outside the US.. The business visitor may either install, service or repair the equipment or machinery, or train US workers to perform those services. The contract of sale must specifically require the seller to provide such services. Note: The performance of building or construction work is not permitted, even if the contract of sale purports to require the seller to provide those services.”

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