The attractions of remote working are obvious: saving office space and costs for the employer, and commuting costs and time for the employee. In the UK, figures published by the Office for National Statistics in April 2016 showed remote working at its highest levels ever, at 13.9% and 13.7% of the workforce reported as working from home for 2014 and 2015 respectively.
And remote working allows workers to be based almost anywhere, creating a wealth of new possibilities for business, such as establishing a foothold in another territory without the usual costs. For the employee, if they can work in a sunny climate for an employer based overseas, so much the better.
But employers can easily overlook the legal and tax implications of employing remote workers in another country. Even within the EU there is no consistent approach to the treatment of tax and social security for such cross-border arrangements: employers can easily get this wrong.
Case study: an overseas researcher
Consider the following example: a non-EEA resident company employs a home-working researcher in an EU country “X”. The company does not have a permanent establishment in country “X” for tax purposes, or other employees there.
If country “X” was France, the UK, Luxembourg or Poland, there would ordinarily be no obligation upon the employer to withhold income tax in those circumstances (although this will change in France from January 2018). However, the position in respect of social security contributions is different: there would be withholding obligations in France, Luxembourg and Poland on these facts although not in the UK, and the position in the Netherlands is more complex – see below.
Note 1: Netherlands: Assuming that the employee is resident in the Netherlands, works only in the Netherlands on on-shore activities, is not assigned or seconded to the Netherlands, is not working for or hired out to other parties.
Note 2: Czech Republic and Slovakia: In general if a foreign employer employs individuals in the territory of the Czech / Slovak Republic for longer than 183 days in any period of 12 consecutive months, it is required to register as a tax payer in the relevant country and fulfil withholding and reporting obligations.
Note 3: Denmark: The employer may opt for the so-called gross scheme, whereby the employee reports and pays income taxes. Under the gross scheme, the employer is still obliged to register with the tax authorities as a foreign employer, and the employer is obliged to report and pay employer-social contributions, whereas employee-social contributions are paid by the employee. Under the gross scheme, the employer is also still obligated to make other employer payments, such as holiday pay to the Danish Holiday Fund (FerieKonto), if applicable. The reporting and payment procedure for holiday pay is currently unsettled for foreign companies without a permanent establishment. The employer may also opt for the so-called net scheme, whereby the employer withholds and pays income taxes, and social contributions as other companies.
Note 4: France: the foreign company must register with the French social security authorities and have a French payroll in place for withholding and payment obligations.
Note 5: Netherlands: employer contributions will be due for Employee Insurance Schemes and the Health Care Act. As a result, the foreign employer must register with the Dutch tax authorities to make these contributions and have a Dutch payroll administration put in place.
Minor factor: big difference?
The position varies not only between countries but also based on a range of factual considerations:
- Permanent Establishment: The location of any permanent establishment for tax purposes, whether in the same country as the employee’s home, or within the EEA, can be relevant to whether or not tax and social security deductions are required in a particular country. Assuming the same facts as in the previous example, if the employer has a permanent establishment in the country where the remote worker lived and worked, this would trigger income tax withholding obligations if the country in question was the UK, Luxembourg or Poland. However, the existence of a permanent establishment in France should not change the position for a hypothetical remote worker there.
- Other traps for the unwary: Other factors that may appear minor can be relevant. In the Netherlands for example, using the employee’s home address as a point of contact for the company can trigger the tax authorities to question whether Dutch wage tax should be withheld. In the UK, including the employee’s home phone number on a company business card could be enough to create tax withholding obligations for the employer.
- Local distinctions between types of taxation: The position in the UK is further complicated by the distinction between income tax and national insurance contributions (“NICs”): a permanent establishment in the EEA would not trigger UK income tax withholding for a remote worker in the UK, but would trigger NICS withholding.
What does this mean for employers?
- Employers who employ staff who work remotely in other countries should seek local tax and legal advice to ensure they are compliant with their obligations.
- Employers should also monitor closely what their employees are authorised to do, and what they actually do, when working remotely in other countries. This is to ensure that the employee’s activities do not increase the risk of the employer creating a permanent establishment in the employee’s country of residence. This could lead to corporate tax liabilities for the employer in that country.
- There may also be overlooked employment and compliance risks, including a duty to provide a safe workplace, and under data protection law.
For further information please contact any member of the CELIA Alliance in relevant jurisdictions.
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