There is no doubt that remote working and home working arrangements were already a growing trend prior to the Covid-19 pandemic.
A recent study published by PwC in the US into attitudes towards home working shows that the unintentional mass experiment which forced most of us to work from home has largely been a success.
Although, it is fair to say that few companies are planning to abandon office space completely, according to an article published on FlexJobs, it is also estimated that 22% of the total American workforce will be working remotely by 2025.
To put this number into perspective, that would mean a pre-pandemic increase of nearly 90%!
For both employers and employees, there are clearly many win-win factors which contribute to this staggering increase and change of workplace attitude.
However, for international employers and employees alike, long term working from home arrangements also represent some challenges and risks which should not be over-looked.
Main considerations for both employer and employee when working remotely across borders
Employers who have put in place or are planning to put in place home working arrangements with their remote workers working from home (but with “home” meaning one or more overseas locations), should be mindful of a variety of potential tax implications and other key issues.
The arrangement could in fact have repercussions for both employer and employee in terms of immigration, social security, tax, payroll requirements, employment law and other important aspects.
Brexit has also thrown an additional spanner in the works and in this article we will discuss in more details why that’s the case and how to best deal with it.
Immigration implications of remote working temporarily abroad
Whilst little has changed with Brexit for countries already outside of the EU-EEA and Switzerland as the usual requirements of Visa sponsorship for employers and work permits for employees continue to apply, Brexit has changed the immigration landscape for Brits who wish to remote work in the EU-EEA and Switzerland or for EU-EEA and Swiss citizens who might like the idea of smart working in the UK.
The end of free movement of people between the UK and the EU-EEA and Switzerland, as reported on the UK Government website, has translated into a maximum period of 90 days in any 180-day period in which an individual can work remotely without the need to apply for a Visa.
This means that unless an EU-EEA and Swiss citizen can obtain settled status in the UK (which would enable them to continue to live and work in the UK as before Brexit) or a UK Visa, they would no longer be able to work remotely from the UK for their EU employer say for 4 consecutive months until their partner completes their UK master degree.
Similarly, let us look at the example of a UK national seeking an arrangement with their employer whereby they work remotely from home and who, because of their personal circumstances, decide Switzerland will be their home for a period exceeding 90 days in any 180-day period.
In this scenario, they will be subject to the standard stricter criteria contained in the Federal Act on Foreigners & Integration applicable to non-EU nationals in Switzerland.
Social security implications for cross-border remote workers
The good news here is that Brexit has not overhauled existing arrangements between EU countries and there therefore no real possibility of a remote worker being asked to pay social security contributions in two jurisdictions.
The social security arrangements from 1 January 2021 are regulated by the detached worker protocol.
As part of this new UK/EU protocol on social security coordination, each EU Member State had until 1 February to decide whether or not to adopt the rules for detached workers (which effectively replicate the previous posted workers rules).
It has now been confirmed that all EU Member States have decided to adopt the detached worker rules with the main significant difference being that the 24 month period cannot be extended the same way that it could before.
The only exceptions being:
- Norway (where employees can remain in their home country social security system for up to 3 years provided they apply within 4 months of the start of the posting)
- Liechtenstein (where there are no special provisions in place and therefore the remote working employees may genuinely find it that they have to pay social security contributions in both countries)
- Iceland (where employees can remain in their home country social security system for up to 1 year, if employed and non-UK / non-EEA national, with the possibility of extending for 1 more year provided they agree the extension before the end of the first year)
- Switzerland (where employees can remain in their home country social security system for up to 2 year)
What this effectively means is that whether post 31 December 2020 or not, a UK employee who during the Covid pandemic has been working remotely from home, would be able to choose their “home” to be an EU-EEA country or Switzerland for up 2 years without having to pay social security contribution in that country (by remaining on the social security system of their country of employment).
An A1 application (the form to be used may vary depending on whether there are only 2 countries involved or if the employee is considered a multi-state worker) would need to be submitted to the home country authorities (meaning the State where the employee has the employment contract with their employer and in which they are payrolled).
Once granted, the A1 certificate will exempt the remote worker from having to pay social security contributions in the country from which they decide to work remotely (provided that the duration of the arrangement doesn’t exceed 24 months and they are not replacing another detached worker).
Income tax and payroll issues when working remotely across borders
The starting point, in order to properly assess where income tax liabilities fall due for a remote worker across borders is their tax residency status in each country.
In many countries, tax residency is determined by both domestic rules and international tax treaties (the latter also commonly known as Double Tax Treaty (DTT)) o Double Tax Agreements (DTA)).
Let us look at how domestic and international rules would work in practice using the example of an Italian national, employed in the UK, who has arranged with his employer to work remotely from home during the pandemic and who is now considering to carry out his job from his home in Italy.
According to Italian domestic regulations, a person working remotely from home would be considered an Italian resident if, for the greater part of the fiscal year (i.e. for more than 183 days):
- they are registered in the Records of the Italian Resident Population (Anagrafe)
- they have a ‘residence’ in Italy (habitual abode), or
- they have a ‘domicile’ in Italy (principal centre of business, economic and social interests, e.g. their family).
If one of the above conditions is met a remote worker would qualify as tax resident for Italian tax purposes.
However, that remote worker may also, according to the domestic rules of the UK, be considered UK tax resident (at least during the first year of “transfer”).
So in which of the two countries would the remote worker be considered tax resident and therefore what is the country in which he would be considered non-tax resident?
As the UK and Italy have signed a DTA and the Organisation for Economic Co-operation and Development (OECD) model tax convention is followed by both countries, the remote worker tax residency would be determined by looking at the conditions set out in the DTA which would override any applicable domestic rules.
3 reasons why is this important for a remote worker across borders AND their employer?
First of all, if the remote worker was to become an Italian tax resident as a result of working from home in Italy, moving his family there with him, over a prolonged period of time, Italy will likely acquire taxation rights over his worldwide income.
This would mean that any income (from employment, rental, capital gains, etc.) sourced in the UK or elsewhere, would be taxable in Italy too and the individual would then need to claim a credit for taxes already paid outside of Italy on that same income.
This would be at best, a cashflow issue until the credit from foreign taxes washes through and, in the worst case scenario, a real additional taxation increase for the remote worker on the delta between the usually lower UK taxes paid and the higher taxes due in Italy on the same income / gain sourced from outside of Italy.
Secondly, even if the remote worker did not become an Italian tax resident, upon exceeding an aggregate of 183 days of physical present in a fiscal year, per art. 15 (2) (a) of the Italy-UK DTA, they would be required to pay taxes in Italy on their Italian-sourced income.
Again, at best a cashflow issue for the remote worker until the credit for taxes paid in Italy washes through when filing their UK tax return.
In addition, up until they kept the remote working arrangement in place with their employer, it is quite possible that the employee may not even ever have had to file neither an Italian (because no income was previously sourced from Italy) nor a UK tax return (since all their taxes were already paid through the UK payroll).
However, now they have the additional complexities (and cost) of having to file a tax return in both the UK and Italy.
Thirdly, provided that the remote worker remains UK tax resident, the UK employer is required to continue to operate tax withholdings at source (PAYE) through the payroll despite the fact the employee is temporarily working abroad.
Not only that, but the UK employer may also be exposed to the risk of compliance requirements of operating payroll withholdings in the overseas location (in our example Italy), even though they have no physical business presence there and it was the employee who requested the remote working across borders arrangement for personal reasons.
Cross-border remote work Corporate Tax and Permanent Establishment considerations
As discussed at the beginning of this article, regardless of the recent pandemic, there was already a growing trend of arrangements being made between employers and employees for remote working.
The arrival of the pandemic has undoubtedly caused an increase of cases where often the individual has chosen to work remotely from their country of origin thus giving rise to the increased demand for the cross-border remote working trend.
As more and more employers announce they are going to support employees to Work From Anywhere and a wider range of remote working arrangements, many employees will no doubt be tempted to stay in their country of origin for many months to come, if not indefinitely.
However, employers are often not aware of the potential risks they might face as a result of these long-term remote working arrangements from overseas locations through which they try to accommodate and reward their employees.
Top of the list of these risks is the potential for a de facto creation of a Permanent Establishment (PE) in the country of origin of their remote working employees even though the employer does not have any business presence there.
The risks would be heightened in situations where the cross-border work from home arrangements cease to be temporary and business activities are carried out on a continuous basis.
Permanent Establishments triggers tend to vary from country to country with some having a lower thresholds than others.
However, generally speaking two of the most relevant triggers to look out for are:
- Place of effective management
- Employees activities
“Place of effective management” essentially means where a company’s management holds their meetings to manage and control the business.
Hence, if members of the board were holding meetings online now from their overseas remote working location, it could potentially be argued that the place of effective management is no longer the country in which their company is incorporated but the country from which they are working remotely instead.
On the other hand, typical “employees activities” which could lead to a de facto PE are the ability of the remote worker to enter into contractual agreements (with suppliers and clients for instance) on behalf of their employer.
There are also other country specific nuances to watch out for such as for example:
- using the employee’s home address as a point of contact for the foreign company in the Netherlands
- including the employee’s phone number on a business card in the UK
If an organization was to trigger a de facto Permanent Establishment this could potentially lead to unexpected double corporate taxes being due plus penalties and interest in the country where their employees has chosen to work remotely from.
How may GTS help with your remote working across borders issues
We have been providing international advisory services to clients and to a number of member firms for about 15 years and are therefore well positioned to assist with:
- Reviewing your current remote-work arrangements and provide advice on whether employers and their working from home from overseas locations employees should take any actions.
- Evaluating new cross-border working arrangements requests and advise on best-practices when working remotely in other countries including advice on compliance obligations and what to do next.
- Helping employers monitor closely what their employees should / should not be doing vs what they are actually doing and assist with global mobility and relocation compliance matters such as applying for A1 / Certificate of Coverage certificates or shadow payroll administration.
- Supporting clients in reducing risks and avoiding misunderstandings between employers and their cross-border remote working employees acting as a reliable, trusted third party for both in reconciling any misalignments on their mutual expectations in dealing with unexpected tax compliance consequences.
Contact us should you require further clarifications on the 30% Dutch ruling and/or have a look at some of the other insights we have published.