Your International Contractor Program Is a Hidden M&A Risk

If you run a software company and you've built delivery capacity in Latin America, you almost certainly have a contractor program. It probably started with two or three hires, worked well, and grew from there. What you may not have noticed is how the legal and tax landscape around that program has shifted — and how much exposure is now sitting quietly in your operating entity.

At GNS Law, we've spent over a decade advising software companies through exits and M&A transactions. International contractor programs come up in virtually every deal we work on. This post is a plain-language breakdown of what the risk actually looks like, what's changed recently in the regulatory environment, and what a sound structural approach looks like — whether you're exiting in 12 months or 5 years.

Why This Keeps Coming Up in Diligence

When a buyer acquires a software company, they're acquiring the operating entity — the one with the customer contracts, the revenue, and the goodwill. If that same entity is also directly contracting with 80 or 90 international workers, every labor claim, tax assessment, or reclassification finding those workers could generate sits in the same place as your customer relationships.

That's a structural problem. It doesn't mean the deal falls apart, but it gives buyers leverage: escrow holdbacks, price adjustments, rep and warranty exclusions, and extended indemnification tails — all of which reduce your net proceeds and complicate your close. The earlier you separate the risk, the cleaner the deal.

The Two Risks: Misclassification and Permanent Establishment

Most international contractors are classified correctly in the US. The problem is that the classification tests in the countries where those workers live are different — and in much of Latin America, they're stricter, more worker-protective, and more actively enforced than anything in the US.

Brazil is the clearest example. Brazil's labor courts apply four factors to determine whether a contractor should be reclassified as an employee: personal service, regularity, subordination, and compensation. If those factors are present, the relationship is employment — regardless of what the contract says. Penalties upon reclassification include retroactive benefits and can reach three to five times the original contract value with a five-year lookback. The same logic applies in Argentina, Colombia, Peru, and Costa Rica — each with its own framework, but with a common thread: courts default toward finding employment when there's any ambiguity.

Separate from misclassification, having a significant contractor presence in a foreign country can trigger "permanent establishment" — the concept that causes a country's tax authority to treat your US company as having a taxable corporate presence on their soil. If PE is established, profits attributable to that country's activity become subject to local corporate income tax, registration requirements, and filing obligations. PE is most likely triggered when contractors are engaged on long-term, full-time-equivalent arrangements, or when they interact with local clients or suppliers on your behalf.

A Note on Recent Developments

Recent developments in international labor and tax law are driving heightened review of international contractor programs across the board. In November 2025, the OECD issued its first major update to the Model Tax Convention since 2017, introducing a formal framework — including a 50% working-time threshold and a commercial-reason test — for when remote workers create a taxable presence for their employer. In Brazil, nearly 300,000 contractor reclassification lawsuits were filed in 2024 alone, prompting the Federal Supreme Court to suspend all pending cases in April 2025 in order to issue a single binding nationwide precedent. The volume of litigation is itself the signal. This is an area of law that is moving quickly, and the cost of being behind it is significant.

The Structural Fix: Two Paths

There are two primary structural approaches, and they are mutually exclusive.

Path 1: Move to a Compliant Platform (Recommended)

The most efficient solution is to route contractor engagements through a platform like Deel or a comparable Employer of Record provider. These platforms maintain country-specific compliant contracts, handle local invoicing and tax documentation, and assume a meaningful layer of compliance responsibility. Within that framework, each worker should be evaluated individually: those whose relationships are genuinely project-based remain as contractors; those who function more like employees — long-term, embedded, in high-risk jurisdictions — convert to EOR.

Path 2: Separate Legal Entity

For companies where platform migration isn't feasible for the full population, the alternative is a standalone entity — typically a Texas LLC — that serves as the contracting party for international workers. This entity can be a wholly-owned subsidiary or an affiliate of the operating company. You'll need an inter-company services agreement covering how work flows, how contractors are assigned, and critically, IP ownership and assignment. All work product must flow cleanly to the operating entity. The subsidiary also needs indemnification language protecting the operating company from any labor or tax claims that originate in the contractor population, and it must be properly capitalized and maintain basic corporate formalities.

How Contractors Must Be Treated to Stay Contractors

Structural changes are necessary but not sufficient. Courts across Latin America look past the contract and evaluate how the relationship actually operates. These are the standards that must hold:

• Every engagement must be tied to a specific Statement of Work with defined deliverables, timeline, and fee. No open-ended retainers.
• Engagements need fixed end dates. If a project continues, execute a new SOW. No single contractor should work exclusively for the same company for more than 12 consecutive months without a break or rotation.
• Contractors must have the genuine ability to accept or reject any given assignment. This must be stated in the agreement and honored in practice.
• Assign deliverables, not hours. Do not require attendance at daily standups, set schedules, or hour logs as conditions of engagement.
• Non-exclusivity must be real, not just contractual. A contractor whose entire income comes from one company over an extended period is economically dependent — a heavily weighted factor in Brazil, Peru, and Colombia.
• Contractors provide their own tools. No company-provisioned laptops, software licenses, or equipment.
• Contractors should not have authority to sign contracts, make commitments, or hold themselves out as representatives of your company. This matters for PE as well as classification.
• In Brazil and Colombia especially, engage through the contractor's own locally registered entity rather than with an individual. A business-to-business contract is substantially more defensible.

The M&A Lens: Why You Should Care Now

Even if you're not going to market for two or three years, the time to address this is before you begin a sale process — not during one. The structural moves described above take time to implement properly. An inter-company agreement, entity formation, contractor migrations, and operational retraining don't happen in 30 days. And if a buyer's diligence team surfaces these issues, you're negotiating from a weaker position on every one of them.

Done properly, a clean international workforce structure is not just risk mitigation — it's a valuation story. It tells a buyer that the company is well-run, compliance-aware, and exit-ready. That's worth real money at closing.

GNS Law is a Texas-based M&A and exit strategy law firm that has worked exclusively with software founders for over 12 years. This post is for informational purposes only and does not constitute legal advice or create an attorney-client relationship.