Corporate Legal Affairs Case | Tax Compliance Strategy for Foreign Employee Assignments advisor

Unlike Korean tax law, which applies a 183 day standard categorically, U.S. residency for tax purposes is determined under the IRS Substantial Presence Test (SPT).

The corporate legal affairs team analyzed:

• Actual days present in the U.S. across a three year weighted calculation
• Whether days met the SPT threshold for each foreign employee
• Potential treaty exemptions depending on the employee’s home jurisdiction

Since the five foreign employees had extended their assignment from 6 months to approximately 12 months, they met residency criteria and were required to report worldwide income for the relevant tax year. This directly affected both federal and D.C. tax obligations.

The District of Columbia generally follows federal determinations on residency. 

Once classified as federal tax residents, the employees were treated as D.C. residents for tax purposes if they maintained domicile or a primary place of business in the District.

This meant the employer had obligations regarding:

• Proper D.C. withholding
• Reporting of taxable compensation
• Adjustments to payroll systems to ensure alignment with D.C. Office of Tax and Revenue requirements

The advisory team conducted a redesigned income classification based on U.S. tax law:

• Overseas base salary—taxable for U.S. residents even if paid abroad
• Assignment allowances paid by the D.C. subsidiary—treated as U.S. source wages
• Employer provided housing—generally included in taxable income unless qualified as an accountable plan reimbursement
• Utility reimbursements—typically treated as taxable fringe benefits

Each category was reassessed to determine federal taxability, D.C. taxability, employer withholding obligations, and possible treaty based exemptions.

The legal affairs team evaluated whether the employer’s contributions to housing and utilities could qualify under accountable plan rules, which allow certain reimbursements to be excluded from taxable wages if documentation requirements are satisfied. 

Failure to properly categorize these items could expose the company to:

• Back withholding assessments
• Accuracy related penalties
• Compliance findings in the upcoming tax review

A fully revised withholding system was implemented:

• Federal withholding calculations adjusted for resident aliens
• D.C. withholding obligations recalculated based on taxable benefits
• Fringe benefit valuation added to payroll reporting
• Updated documentation stored for IRS and D.C. audit readiness

The team also ensured that the company adopted correct forms (W-4, D-4) and revised its payroll software settings to reconcile U.S. and D.C. tax implications.

The corporate legal affairs advisory group redesigned the company’s global mobility policy to prevent similar issues in future assignments:

• Implementation of a day count tracking mechanism
• Standardized templates for housing and allowance documentation
• Mandatory tax briefings for incoming foreign employees
• Advance tax exposure modeling for extension requests

The final legal opinion included:

• Residency determination under the IRS SPT
• Reclassification of income under U.S. and D.C. tax law
• Revised withholding procedures
• Employer compliance obligations and risk mitigation steps

As a result of the redesigned corporate legal affairs strategy, the company successfully completed its tax compliance review without penalties and entered into a long term advisory agreement for continuous oversight of foreign employee assignments.