Legal Risks Arising from “Floating” Employee …

1 1 Legal Risks Arising from floating Employee Arrangementsin the Arab Middle EastbyDonald C. Dowling, Jr. and Howard L. StovallMultinational companies face various Legal obstacles and economic costswhen doing business in the Arab Middle East. As a result, an increasingnumber of multinationals are considering a different approach to operatingwithin the Arab Middle East: hiring one or more employees physically locatedin the relevant Arab jurisdiction, even though the multinational employeritself does not maintain a formal office in that country. In other words, anon-resident employer hires a resident Employee , an arrangement we mightdescribe as floating employment, because the in-country personnel( floating employees) are not anchored to any formal in-countryinfrastructure ( , branch office or subsidiary established by theemployer). These floating Employee arrangements raise a number of legalissues for an employer. Any short-list of the biggest boom towns on Earth right now wouldcertainly include such Arabian Gulf locales as Dubai, Abu Dhabi, andQatar.

2 Governments and businesses in the oil- and gas-exportingcountries of the Arab Middle East, awash in petro-dollars, havebecome increasingly attractive customers for multinational businessesseeking to sell a wide range of products and services. Of course, many major multinationals have been operating acrossthe Middle East for decades. In most cases, these multinationals havethe resources and inclination to enter new markets without taking anyshort cuts. Large multinationals will usually formally establish alocal branch or subsidiary, get it fully licensed, staff thelegally-compliant local operation, and otherwise meet all therequirements of local corporate, tax, employment, and immigration law. Indeed, entering a new local market in this way -- formallyestablishing a registered commercial presence -- is almost always thebest practice. But as many markets in the Arab Middle Eastern becomeincreasingly attractive to foreign businesses, smaller multinationals(sometimes new-to-market for the Arab Middle East) are taking theirfirst steps into the region.

3 These smaller multinationals may bereluctant to make the significant financial commitment required by aformal, registered, commercial presence -- at least until marketpotential actually results in some positive commercial to this mix, the economies of many business friendly countries in the Arab Middle East are over-heated, with sky-rocketinginflation, which further increases the cost of doing , many countries in the region are still accuratelydescribed as high risk, high reward markets, offering not onlyopportunities but also Legal restrictions, administrative complexitiesand commercial hurdles, at least in some instances. law, forexample, currently requires that locally-incorporated subsidiaries beat least 51% owned by locals. Multinationals might prefer toestablish a local branch in the region, but the procedural hurdles forsetting up such an office can also be daunting: In the , forexample, a foreign company must appoint (and compensate) a sponsor in order to establish a branch office.

4 In the face of obstacles and costs like these, some (particularlysmaller, new-to-market) multinationals may try to take smaller stepsinto the Arab Middle East, seeking to avoid the all-in model offormally registering a local presence. One such approach that seemsunder consideration with increasing frequency in recent years: placing employees physically in the target country, even though themultinational employer itself does not maintain a formal registeredin-country presence. In other words, a non-resident employer hires aresident Employee in a particular country in the Arab Middle East. Wemight call this arrangement floating employment, because thein-country personnel ( floating employees) are not anchored to anyformal local business presence established and maintained by floating Employee arrangements raise a number of legalissues and Risks for an employer. floating Employees Working for Foreign EmployersFrom a practical perspective, the marked upswing in floatingemployee arrangements should come as no surprise: Technology greatlyfacilitates this strategy.

5 In the old days (say, through the 1970sand 1980s), a multinational s in-country local manager neededdedicated office space, a secretary, and perhaps other support staff. Today s floating Employee , on the other hand, can work efficientlyfrom his/her home, relying on computer/e-mail/Internet, videoconference software, cell phone, and express courier deliveries. But while technology may facilitate floating employeearrangements, an employer should carefully consider the many legalissues that can arise through such an arrangement . Adopting afloating Employee arrangement in the Arab Middle East (employingsomeone there without a local in-country employer entity) is usuallynot a best practice. Indeed, a multinational company generally shouldnot hire an Employee to be resident and working inside a country inthe region unless the employing entity is (or shortly will be)registered to do business in that floating Employee arrangement raises a number of locallegal problems, particularly those involving: commercial registrationrequirements, corporate income tax requirements, labor/employment law3(including issues with would-be independent contractors) andimmigration law (including visa/work permit requirements).

6 We addresseach of these issues in the following RegistrationIf a multinational engages an Employee who makes only short,limited, intermittent business visits into an Arab country but withoutestablishing a local residence, without signing contracts and withoutdemonstrably generating revenue in-country, that employer probablydoes not step across the customary doing business threshold in thejurisdiction. Once it does cross this threshold, however, amultinational employer generally must register in the country s Commercial Registry (the local equivalent to a state ssecretary of state business registration office). In most countries in the Arab Middle East, the seemingly simplequestion -- when does a foreign company cross this threshold andbecome obligated to register itself in the local commercial registry?-- does not always have a simple answer. Qatar, for example, requiresevery natural or juristic person to register in the local commercialregistry before engaging in commerce.

7 However, Qatari commercialregistration law seems somewhat murky as to what engaging incommerce means; for example, some provisions of Qatari law seem tofix this threshold at the point when a foreign company has actuallyset up a local branch office. Like Qatar, many other countries in theregion offer no bright lines to distinguish what constitutes a levelof doing business sufficient to trigger local commercialregistration requirements. By comparison, Article 31(2) of SyrianLegislative Decree No. 151 (1952) sets out an illustrative list offactors that indicates when a foreign company might have established ade facto local branch office and therefore subject to localregistration requirements: hiring workers paid by the employer (our floating employeesituation) buying or renting local real estate in the employer s name opening a local bank account in the employer s name listing the employer in a local telephone directory subscribing to a post office box (or a telegraph address )in the employer s nameAs Syria s (expressly non-exhaustive) list suggests, the questionof whether a multinational must obtain a commercial registration doesnot depend solely/exclusively on whether a floating employeerelationship exists, but also on other activities that the employermight be conducting locally -- for example, leasing office space or4office equipment, publishing telephone listings or establishing bankaccounts on behalf of the non-resident company, or transactingbusiness locally with customers, thereby generating income locally.

8 Of course, a non-resident employer would have difficulty denying theexistence of a local business presence in a particular country if itsfloating Employee uses business cards and stationery showing anin-country business address for the multinational (even if thatbusiness address is actually the Employee s place of residence).Once an employer s in-country Employee triggers the localthreshold for commercial registration, the question becomes: what mustthe company file? In non-Arab jurisdictions around the world,registration requirements may include: registering the local business office as an unincorporatedlocal branch providing a local address naming a local-resident agent (and sometimes even naming anentire board of directors -- notwithstanding that the localbranch technically is not a separate entity) empowering a local authorized agent via an apostilled (andtranslated) power of attorney registering with (or filing disclosures with) local tax,social security, and other government authoritiesHowever, in countries in the Arab Middle East, the commercialregistration requirement will usually be tied to a requirement thatthe foreign company establish a formal local presence, such as a localsubsidiary or branch if an employer violates these commercial registration rules?

9 In many countries in the Arab Middle East, local commercial registryofficials have police power to investigate and charge a foreignbusiness that acts contrary to local registration laws. In addition,commercial registration laws allow for fines to be imposed onviolators. However, generally speaking, enforcement officials in theArab Middle East customarily are not aggressively searching out floating employees who conduct limited and discreet in-countryactivities. As a practical matter, officials who enforce these lawsmight initially warn an unregistered business and let the employerchoose either to regularize its business activities or shut down itslocal any case, a business non-compliance threatens financial coststhat can run higher than these statutory fines. For example, amultinational with an in-country floating Employee may be unable toperform certain business activities because those activities requireproof of commercial registration -- such as renting office space,opening a bank account, importing goods through customs, or making a5sale to a government entity.

10 In addition, a foreign company s lack ofa local commercial registration number can cascade into violations ofother local laws, in particular: corporate income tax obligations,employment rules, and immigration/work permit requirements. Each ofthese matters is discussed in turn, below. Corporate TaxBahrain and the are tax haven jurisdictions thatcurrently do not assess any general corporate income tax. But mostevery other country in the Arab Middle East imposes tax obligations onbusinesses that generate taxable income locally. Any multinationaloperating in the region through a local floating Employee exposesitself to liability under these local corporate tax question of local income tax liability is usually morestraightforward where the local country and the multinational sheadquarters country have executed a tax treaty for avoiding doubletaxation. In this regard, there is good news and bad news:fortunately, every country in the Arab Middle East has indeed ratifiedtax treaties with a number of other countries around the world;unfortunately, the Arab world s network of tax treaties is lessextensive than in many other regions -- and relatively few of theseArab countries have comprehensive tax treaties with the there is no applicable tax treaty, local income tax lawsapply (with their domestic definitions of taxable income andprinciples of tax liability), regardless of what corporate taxes themultinational company may pay back home.