Rethinking how and where staff work
COVID-19 is making many companies change the way they work, but for companies with employees working cross-border, these changes may have implications in relation to tax and social security obligations.
Increased efficiency and a better work-life balance for people working from home are two of the few positives to come from the COVID-19 crisis. And several major global companies have already announced major changes to their working environments.
Last month, Siemens announced it will allow its 140,000 employees worldwide to “work from anywhere” permanently where they are most productive, including at home or from a co-working space – some for a few days a week; others as a general rule. Likewise, Twitter has announced a permanent shift in its approach to working from home.
While increased employee convenience and reduced office costs seem obvious benefits of such a move, aside from the working environment and management issues, there are tax aspects that companies should consider before fully embracing the flexible workplace in the post COVID-19 world.
“With many businesses preparing to return to the office, the lessons learned – and the positive spin-offs of lockdowns – should not be lost.”Read our Great Conversation: Lessons of COVID-19 and the future of work
Creation of a permanent establishment (PE)
During the pandemic, many cross-border employees have been unable to physically perform their duties in their country of employment. Because of these exceptional circumstances, they have had to stay at home and work remotely instead – often as a result of government directives.
This has caused some concern as to whether the work from home during this time would create a PE for the employers in the employee home country.
In general, a PE must have a degree of permanency and be at the disposal of the employer for the place in question to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. So although part of the business of an employer may be carried on at the employee’s home office, this should not automatically imply that this location is at the disposal of the employer simply because the location is used by the employee.
According to the OECD: “for a home office to be a PE for an enterprise, it must be used on a continuous basis for carrying on business of an enterprise and the enterprise generally has to require the individual to use that location to carry on the enterprise’s business.”
Therefore, the OECD has stated that an exceptional and temporary change of location where employees work because of the COVID-19 crisis, including working or concluding contracts from home, should not create new PEs for the employer; this is force majeure and not an employer’s requirement.
In line with this, various countries have introduced special rules mitigating the internal tax and residence issues created due to the involuntary stays in the countries in question due to the force majeure circumstances.
PE after COVID-19
However, as some societies now attempt to return to business as usual, the lenient force majeure approach is unlikely to be upheld. On the contrary. If work from home is “the new normal”, the activity is likely to have a sufficient degree of permanency or continuity, and the enterprise could then be seen as directly or tacitly having access to or control over the home office.
Consequently, some countries apply the interpretation of both domestic rules and double taxation treaties to the effect that employees working from home constitute a PE if the work performed from the home office is one of the conditions for the employment (and the work is not just of a preparatory/auxiliary nature). This applies although the employer does not pay rent for the office, is not registered at the home address, and does not outwardly display any presence at the place. It is also worth bearing in mind that only a few workdays at home may be sufficient as long as this is a recurring event and subject to prior agreement.
In any case, the risk of permanently creating a PE will depend to a great extent on domestic tax law and the risk will have to be assessed on a case-by-case basis, including whether a PE may be ruled out due to the possible preparatory/auxiliary nature of the work performed.
Employer PE effects
Depending on national legislation and the applicable double taxation treaty, a PE might entail:
- Corporate tax liabilities in the host country, including tax filing obligations
- Transfer pricing obligations in respect of the PE and the parent in connection with which transfer pricing principles and cost/income splits should be carefully prepared
- Employer tax compliance obligations similar to the obligations applicable to domestic companies in the host country eg salary reporting, tax withholding and/or withholding tax liabilities. Here, the employer may face some challenges in terms of salary reporting and withholding tax, especially if the legislation has not foreseen the possibility of not all salaries being subject to withholding tax in one or the other country. Accordingly, the employer should be prepared to document their employees’ work patterns and split of taxation rights on an ongoing basis.
Such side effects may or may not entail additional taxes to be paid. However, from a compliance point of view, this could create quite a lot of additional administrative work.
Employee tax effects
Independent of the PE issue, employees now partly or fully working from home have other aspects to consider.
Usually, a double taxation treaty implies that the salary earned while working in the employer country is taxable there, whereas salary earned outside the employer country is solely taxable in the home country of the employee. A change in the work pattern could therefore have a significant impact on the taxation as well.
In some situations, it may only a have little effect on the net salary after taxes. However, in situations where the home country tax rate differs significantly from the employer country tax rate, or if the double taxation treaty applies the exemption method, the change could imply noticeable changes in the net salary. This could also be the case if the employee is subject to special cross-border tax regimes.
Therefore, before starting to work permanently from the employee’s home, the employer and the employee should clarify the tax consequences for the employee or at least agree on who bears the tax risk associated with such a change in work pattern.
Social security effects
The change of work pattern may also have a significant impact on social security contributions.
Under EU regulation 883/2004, employees working cross-border in the EU area are generally subject to social security coverage in the country of the employer. However, if a “significant” part of the working hours (>25%) is spent in the home country, the home country social security will be applicable instead.
So, if the work pattern changes from being occasional or from no workdays at home to frequent and recurring workdays at home, the employee is likely to become subject to the home country social security scheme.
In addition, a recent decision by the European Court of Justice (C 610/18) introduced the economic employer approach to the interpretation of Regulation 883/2004 which could imply that the creation of a PE would give rise to the question of whether the place of the employer by default is to considered located in the host country. In both cases, social security coverage could shift from the employer country to the employee country.
Considering the significant difference in social security contribution rates (in 2020, the EU average rate is approx. 21%, from almost nothing in Denmark up to 45% in France) this could result in some unpleasant increases in costs as well as changes in social pension savings and other social benefits.
Employment law, rules on working environment
In addition to the tax and social security considerations, please note that substantial work performed from a home office could trigger obligations in respect of domestic employment law, working environment and other rules applicable to individuals employed in the home country.
Therefore, depending on domestic law, the employer should clarify in each case whether he complies with the applicable labour rules.
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This article first appeared on www.linkedin.com and has been republished with the authors’ permission.