For many military spouses, pursuing your own home-based or small business can offer the perfect blend of freedom and job flexibility to fit the demands of a military lifestyle.
Stepping onto the entrepreneurial path overseas (OCONUS) however, can be a bit tricky. That’s not to say that it can’t be done, (this spouse in Kadena, Japan shares her story), but in addition to learning and complying with military home-based business (HBB) regulations and OCONUS privileges, you now have the added challenges of:
1: (homesteading) on worldwide income.
Challenges and obstacles are just that – limitations, only if you let them.
So, before you order that pack of products as an independent sales consultant, become a boutique exporter of cuckoo clocks in Germany, a gourmet baker in Italy, or an in-home master chef in Japan, ensure that you take the time to learn the business basics.
At a Glance, Home-Based Business Basics
- Permissions – If you’ll be living on a military installation – to legally operate a HBB, you’ll need at a minimum, two permissions – 1) the installation’s Housing Office and 2) the Installation Commander. Depending on the nature of your business, particularly if it is childcare related, you may also need additional certs (think safety, first-aid and CPR, environmental and/or health inspections.) Some home-based businesses (operating on a military installation) may be denied by nature, such as animal breeding, in-home hair or nail salons, or selling any food or beverages that were made in your home (i.e. catering, or custom-baking) – and not in a health-inspected commercial grade kitchen.
- AAFES Compliance – Not living on post? Not a problem, but if you intend to sell or market items on a military installation, your home business still cannot “compete” with AAFES – as the exchanges are afforded the “first right of refusal” for several business categories. (Home enterprises on Army installations are governed by AR 210–7, Air Force installations are governed by AFI 32–6001). Additionally, you cannot “use or buy, exchange merchandise or services to produce income,” as this violates the “Notice of Intent to Resell” clause of the installation’s AAFES government contract. No buying in bulk at the exchange or commissary for your business supplies, or ingredients (and thus avoiding foreign country sales and VAT taxes). You’ll need to buy your supplies on the local economy.
- Don’t co-mingle military privileges – You cannot mingle personal base access privileges with your own business, to include: using a military vehicle for business-related driving, using Space-A (flight travel, or lodging) for a business trip, or using a military-issued APO mailbox for business.
- Of all of the base privileges, misuse of an overseas APO post office box to conduct business is the most common (but very serious) business misstep. The rules are very simple – you cannot send or receive mail, to include business/product shipments, through an APO. This is particularly important to note for home-based businesses operating in direct-sales, (i.e. Scentsy, Essential Oils, Younique, ZYIA/loungewear) – you cannot use your APO to order products, and take delivery. You must use a local, in-country postal service to stay in compliance with military base privileges, and SOFA regulations.
In addition to the HBB basics – as an OCONUS business, your business plan must address the following key areas, if you are to be successful – and perhaps even more importantly, legal.
Compliance with the “SOFA Agreement”
In your quest to operate a foreign home-based business, researching the host nation’s SOFA regulations and restrictions should be at the top of the list. Every foreign country, where there is a major military or embassy presence, has an established Statute of Forces Agreement (SOFA) in place.
And this is precisely where operating a home-based business OCONUS can get tricky, because no two SOFA agreements are the same.
What Germany allows, will not be what Italy allows, nor match what the U.K does, or align with Japan or Korea.
- What does SOFA govern? What’s the big deal about complying with it, if I’m not the one in the military?
- In simple terms, the SOFA agreement offers both protections and privileges (namely taxation, length of stay in host nation, shopping, and legal prosecutions) to you, as a sponsored dependent.
- If you have been listed on military PCS orders, to accompany your spouse to a foreign assignment, you will be bound by your new host country’s SOFA, as you are a US-sponsored guest in a foreign country.
Where operating an HBB and SOFA collide, are usually in the areas of taxation and employment. A notable example, is the Italy/US SOFA agreement, where to be employed in Italy (by someone other than the US Armed Forces, or US government), or to operate a business, you’ll need a separate Italian work visa and permit.
Under Italian residency law, you cannot hold an Italian work-residency visa and a SOFA agreement simultaneously – you must choose one or the other. So that means, (in Italy), to legally run a business, the Italian government will treat you as a taxable ordinary resident – open to additional expenses that ordinary residents incur, such as Italian income taxes and contributions to the Italian social security system, church and television taxes, and more.
A good first step is to locate your gaining OCONUS installation’s JAG and legal offices, or contact US Foreign Service Officers in the applicable host country US embassy. Many OCONUS installations also offer classes in business start-up through MWR, USO or Family Readiness Offices.
Local, Host Country Business Regulations
In addition to adhering to SOFA, researching local, host country regulations is crucial. This sounds daunting, but it is similar to researching a US city and state’s requirements to run a business.
Does the state (or province) require a business license? If the state doesn’t, will the city require a license? Will you need business insurance, and if so – in what amount, and where can you buy it? Is it necessary to make a public announcement – such as an advertisement in a local newspaper, that you will be opening a business? Will you need to obtain and maintain, a non-APO local mailing address for official business correspondence?
It is important to realize, maintaining a home-based business, on a military base does not mean you are “operating on US soil” and therefore excluded from following local, host country business regulations.
In an OCONUS situation, you may also need to find a local business-minded spouse to help with language translation barriers – or befriend a local shop owner to gain a business mentor to help you navigate any language or cultural barriers.
Foreign Business Taxes and the Challenge of US Worldwide Income Taxation
All governments demand taxes, and OCONUS ones are no different. The challenge for US citizens, is partly that the United States taxes worldwide income – no matter where you earn it. Being outside of the US also does not alleviate you from paying US federal and state income taxes.
- Furthermore, if you are not careful, this can create a “triple taxation” scenario, where 1.) your OCONUS host country, 2.) the US Federal Government and 3.) your own US state residency that collects state income taxes, demand their cut on your OCONUS business income.
- The US (and many state governments – California is a prime example) tax code is vicious in this regard, as there is no concern “where” your income was earned; only that you have earned income that must be taxed.
And while there is some IRS tax relief (Foreign Earned Income Exclusion up to $107,600 as of this writing), the burden of proof to properly file for this exclusion is upon you. The exclusion may relieve some of your US federal income tax obligations – but a foreign government doesn’t care what the IRS expects from you, as a business owner.
To run an OCONUS business, you will likely need a host nation tax expert to guide you on host nation tax filing requirements in addition to a US CPA well-versed in your own state’s income tax requirements.
Don’t forget – you may also need to file a foreign income tax return, as an OCONUS business owner, to properly declare (and pay) the correct foreign taxes.
Mitigating Host-Country Residency Taxation (Homesteading)
Perhaps the largest risk – and most important mitigation for running an OCONUS business – is to ensure that you are not signaling to a foreign government that you or your business meet, or intend to meet, the qualifications of foreign residency, or homesteading.
The US/host country’s SOFA agreement is the “magic bullet” that largely prevents a country from taxing your US-earned income, or your servicemembers’ US income. However, as of this writing – particularly in Germany, foreign tax officials are aggressively pursuing US families that have appeared to create “special ties” to the country, signaling (to German tax authorities) that they either have qualified to be taxed as ordinary, German citizens, or intend to homestead in country.
It will be imperative as an OCONUS business owner to find and follow competent legal and tax counsel. Failure to do so could inadvertently create a situation where you, your residency status and your full, worldwide income are pitted against foreign tax authorities.
So … What Would Happen if I just ‘set up shop’? Without following the red tape?
It is outside the scope of this article (or author) to provide you with fiduciary tax, legal, or business advice. Perhaps the biggest benefit of legally setting up a business anywhere, is the peace of mind in knowing you’re operating within legal bounds.
Stateside – if you run an illegal business (illegal simply meaning, in this scenario – you have not followed appropriate business law to correctly establish your HBB), your business will either be fined by tax authorities, or ordered to close (and likely also fined, with back taxes calculated). On base, (stateside) this means you could also be kicked out of base housing, if you were operating an unlicensed HBB, particularly if it was childcare, food, or health-service related.
An unlicensed, non-permitted OCONUS homebased business, however, can yield big problems. Violations could cross into SOFA territory, in that case – if you are kicked off base for operating an unlicensed HBB, and no longer permitted to hold SOFA privileges – you may be booted from the country (at your own expense). As with stateside unlicensed businesses – you would also run the risk of being targeted for back taxes and fines, (and depending on the severity of the violation, jail) however, in this scenario it would be a foreign government (operating under foreign law and tax codes — not US) pursuing you.
No one likes the bureaucratic red tape associated with running a business.
But, any business, whether that’s OCONUS or back in the states, will come with a bit of red tape. Your task as a potential business owner, will be to find out where that red tape is, and how to cut it.
