Cross-Border Catch-Up: The Role of SOFAs in International Operations

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Patty Shapiro: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I am Patty Shapiro and I am here today with my colleague Shirin Aboujawde. We are cross-border attorneys here at Ogletree Deakins, and today we are going to discuss status of forces agreements, sometimes called SOFAs, but not the kind that you get to hang out on and what they are and when they apply. So Shirin, can you give us a high-level overview? What are these things, when do you apply them and how do you handle them?

Shirin Aboujawde: Sure, Patty. So a SOFA or a status of forces agreement is essentially a treaty that the US has between a foreign nation and it allows the US to send members of its armed forces and contractors that support those initiatives with the armed forces to the country with certain special exemptions. And those exemptions range from special immigration status, so they don’t need a visa like you and I do when we want to go travel. They’re exempt from tax laws in most cases so while they’re there and they’re working for the US government, they don’t have to pay income tax in that foreign country. They still get to pay US taxes. They get other special privileges. Sometimes they’ll be exempt from certain tax charges on goods and services, and they’ll also get beneficial treatment with regards to their presence in that country. The rules are really specific though. In most cases, the SOFA that the US has with a foreign country will be very limited. It’ll apply to US armed forces and it’ll apply to the contractor staff that are specifically there helping them. And so while dependents of US armed forces and dependents of contractors can come with them to the country and they will have immigration rights as well and the right to work there, they won’t always have the same tax benefits that their spouse will have being an employee or a contractor of the US government.

Patty Shapiro: I see. Okay. And how would a company know if a status of forces agreement will apply to their employees and what its terms are?

Shirin Aboujawde: That’s a great question. Now, most of the time you’re contracting directly with the US government. And so that’s how you’ll know, because in your agreement with the US government, it will specifically refer to SOFA status. And the US government is part of their contract with you, will help you in establishing SOFA status for your employees that are going abroad. And then once you get to that foreign location, there’ll be someone on the US government side that is responsible for SOFA relations. Right? So relations between you generally as the government contractor and the local authorities, right, to help things run smoothly. And they do everything from helping you get local driver’s licenses to sorting out your immigration paperwork to ensuring that you’re tax exempt, and it can be really helpful. Where it gets super tricky is in the gray area of dependents, and sometimes the SOFAs are very clear that the SOFA rules don’t apply to dependents and other cases it’s a lot more ambiguous.
And you layer upon that the fact that sometimes the Department of Defense or other US administrative bodies will issue guidance on what they think the SOFA means. Unfortunately, what we’ve seen is that then case law from a local foreign body comes into play and they don’t even take that guidance into account. So it can be really tricky. You have to read the SOFAs very carefully. Each country has its own unique SOFA with the US, and some of them date back 50, 60, 70 years and they’ve never been updated. I mean, the one, the US SOFA with Japan is well over 50 years old, and the ones that you see in Europe are just as old.

Patty Shapiro: Wow. So when a company is looking at the SOFA that applies to them and if any, and what it contains, is there anything in terms of just a general due diligence, best practices that they should be considering and looking out for?

Shirin Aboujawde: Yeah, so they should be looking out for the provisions that relate primarily to tax and employment law. Those are the two big… And immigration, those are the three big exemptions that you get with SOFA status. You get an exemption from immigration and an exemption from tax and an exemption from employment law. And that’s actually massive, right? So not only are you working for a US employer abroad, you’re paying US taxes, you’re not paying local taxes, but you’ve also, you’re still being treated as a US at-will employee. And that’s crucial because the employment laws of other jurisdictions, as we talked about in our many other podcasts in this series, are far worse than the US. They are strict, they have protections against termination. There are mandatory requirements with regards to vacation and leaves. There are additional payments that need to be made to employees like thirteen-month or fourteen-month bonuses.

And so it’s really important to be looking at the rules within the SOFA, looking at what employment laws are applicable based on what you do. Sometimes the SOFAs make it very clear if you are in… I use Japan as an example, Japan and Korea have two SOFAs that are widely used, and so I use them as examples, but there are a few in Europe that are also very common. The Japan SOFA will say, “You need to be in Japan working for the US armed forces in order to take the benefits of number one being tax-exempt, and number two being subject to US employment laws.” And if you are in Japan, for example, if you’re the spouse of someone working for the US Armed Forces, but you want to work remotely for a US employer, you think those exemptions apply to you and they don’t. The SOFA can sometimes be very convoluted in how it’s worded to people that aren’t familiar with them. And so that’s why I would say read the language of the SOFA very carefully to ensure whether a provision applies to you or not.

Patty Shapiro: Sure. And is there anything an employer has to do to claim the benefits of the SOFA or should they just be aware of them?

Shirin Aboujawde: So the only way to get the benefits of the SOFA is to contract with the US government and have those provisions as part of your contract with them. You can’t go into a country and claim SOFA status. It doesn’t exist. And you’ll know that you’ve got SOFA status because it’ll be in your immigration paperwork as you enter the country because you’ll be entering the country on SOFA status. So most times the US government contracts that you have with your employer or with your spouse’s employer, if you’re a dependent going on SOFA status, is what is going to clearly distinguish whether you do or you don’t have SOFA status. And then once you’ve determined that you’ve got SOFA status, then you’ve got to look at the SOFA and see which SOFA provisions apply to you. Right? Does the immigration apply to you? Yes. Most of the time it applies to everyone’s spouse, dependents, children, et cetera.

Do the tax apply to you? It depends. It depends on who you’re working for. Are you working for the US Armed Forces in that location? Then yes, they do. Are you working for another company in the US remotely? Sometimes it does, sometimes it doesn’t. Italy passed some new legislation attached to the Missoni visa, and there have been diplomatic letters back and forth that say that if you are the dependent of a member of the US Armed Forces or a contractor supporting the armed forces in Italy, you can in fact work in Italy and be tax-exempt while you’re on SOFA status. However, the nuance to that is that the diplomatic letters in Italy don’t say whether the employment laws apply to you or not. They talk a lot about health and safety and they talk a lot about social security tax, but they don’t talk about employment law. And so you’ve got to be really careful because sometimes the devil is in the details and if the diplomatic letters are silent, that means the judge could take it in his purview to attach employment laws in any dispute.

Patty Shapiro: Something I’ve heard a lot from employers is when they have an employee with a dependent that’s going to go with them, and that dependent has an employer in the US and you kind of touched on this briefly, they ask about whether the military base itself, they should think about it as basically US territory such that only US law applies to that individual. What are your thoughts on that perspective, and is that something employers should be thinking?

Shirin Aboujawde: Yeah, Patty, that is a great question. So the military base that the US is on abroad is not a US military base. It is a foreign military base that the US has rights to. And so even though they might be working and sometimes even living on the base, it should not be considered US soil. That is a complete urban myth when it comes to SOFA status. But I’m glad you raised it because it’s something that people often get wrong. Just because you are physically present on the base, just because you don’t leave the base, just because you live on the base, it doesn’t exempt you from the tax and the employment law implications if the SOFA doesn’t in black and white say you’re exempt.

Patty Shapiro: Is there anything else that employers should know or keep in mind when they’re in these situations?

Shirin Aboujawde: Yeah, I think the only other thing I would highlight as people consider employees that are on SOFA status, even those that had the special protections, the tax protections, the employment law protections, because they’re doing work for the US government abroad is it’s still very tenuous. The SOFAs can say in black and white, “You’re exempt from employment laws, you’re exempt from tax laws.” But every now and then we get really wonky judgments. There’s some German case law out there that actually tries to tax individuals that are on SOFA status and actually working for the US armed forces where they try and impose German taxes on them because they’ve been in Germany for so long. So what I say to employers who have employees that are properly on SOFA status is just still tread very carefully. Think about your actions before you take them. And my recommendation is always, if you’re going to take an adverse action, bring the employee back to the US before you do anything. I think if our listeners could take one thing away from this podcast, I would say if you’ve got SOFA status people bring them home before you do anything, and that way you’re out of any potential issues.

Patty Shapiro: Yeah, definitely a lot of due diligence and planning that needs to go on when you’ve got an employee with SOFA status. Definitely. Well, thank you for that comprehensive overview. I really appreciate it. And thank you all for joining us today for today’s Cross Border Catch-Up. Follow us to stay in the know about cutting edge employment issues worldwide.

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