Working from home was more the exception than the rule before the COVID-19 pandemic. As a result of the pandemic, the massive switch to the digital remote workplace is a fact. Working from home is therefore also a keeper. Companies still have to realize that if their employees are allowed to work from abroad, this also has tax consequences. In this article we discuss in which situations a foreign employer encounters tax obligations in the country where the employee lives and works.
A Dutch cooperative of fruit growers receives a request from one of its employees, a trade marketer and brand manager, to temporarily perform his work from Italy. The employee makes the request because his partner has been posted to Italy by her Dutch employer for a period of 2 years and he wants to accompany her. The employer, while not required from a business point of view, is not unsympathetic to his employee’s request. The employer and the employee sit down and gradually come to a point where they see an opportunity to get more out of the work from/in Italy. In recent years, the employee has contributed significantly to the growth of the company in the Netherlands through his marketing activities. So they decide to use his knowledge and skills to further grow in the Italian fruit market. Until now, the employer’s employees have only gone to Italy on short business trips to speak to existing business relations.
It is agreed that the employee will continue his employment in Italy from home. For this, the employee will be reimbursed the costs for necessary (home) office facilities. In addition to the regular marketing activities that the employee continues to perform for his employer, the precise role of the employee in Italy has not yet been made concrete. Check wejustgotback.com for more information. As a starting point, they have the following work in mind: building the brand in Italy; maintaining relationships with current Italian customers; developing new business in Italy; developing and deploying (strategic) partnerships in Italy.
The CFO has also expressed a clear desire to limit the employee’s role in such a way that the authority to negotiate contracts is limited to the head office. The authority to conclude the contracts is reserved exclusively for the CFO. The employee will also occasionally be in the Netherlands for business meetings.
1.2. Teleworking/hybrid working methods
In the case above, taken from practice, it concerns a form of teleworking, more specifically temporary remote working. Other forms we often encounter are self-employed with foreign clients, working (partly) from home, working holidays, digital nomads and working in hubs / shared spaces.
Each of these working methods has consequences in many areas, see a non-exhaustive diagram below. At the moment, essentially only the social security position within Europe has been harmonized in the sense that only one legislation applies exclusively (this applies to both the levying of contributions and the right to which an individual can claim his social security rights). Outside the EU, the degree of harmonization will partly depend on whether a social security treaty has been concluded with the country concerned and which tasks of the social security system fall under the treaty.
As a result of the Covid-19 pandemic (COVID) and the resulting restrictions on free travel that countries have adopted for health reasons, international tax and social security obligations may change – temporarily or otherwise – through no fault of taxpayers. As such a change is not desired, in the field of social security at EU level, recommendations have been made to Member States to continue an employee’s social security situation as it was before COVID. For taxes, the OECD has also made a package of recommendations for a number of situations to – in short – leave the allocation rules that applied before COVID as intact as possible. Because the taxing rights are generally divided between two countries and therefore harmonization is less far-reaching than with social security rights, the package of recommendations focuses on various elements that influence the allocation of the taxing rights. Moreover, these can differ per bilateral relationship. It is therefore important to always check the relevant treaties and agreements.
We will analyze the above consequences and, where necessary, refer to our case. With regard to taxes, this contribution will mainly look at the consequences for income tax. The consequences for wage and income tax and social security eid have already been described in detail in the previous article OdG 2021-0034 ‘Working from anywhere? Customization required!’. We will therefore not go into further detail on these consequences in this contribution.
2.1. profit tax
COVID has shown the world how mobile a business can be. It is not uncommon these days for employees to increasingly work in a country other than that in which the company concerned is located. In our case, the employee will continue his current work for his employer abroad. And that’s not all. His relocation is being used to help create new business activities in Italy. As a rule, our experience is that within a company there is some ‘awareness’ that the relocation can have consequences for the personal taxes and social insurances of the employee and possibly also for the employer in the field of payroll tax and social security. Often there is also some form of policy when an employee is posted, for example in a temporary employment policy in which these matters are addressed.
What is generally overlooked is that a relocation can give rise to the foreign authorities to also levy profit tax because the presence and activities of the employee(s) in the country concerned lead to a permanent establishment for tax purposes. . In a temporary employment policy this will usually not be addressed because in principle it does not matter and it does not affect the employee. After all, a classic secondment often concerns the situation in which an employee is seconded by his employer to another affiliated employer to work under his management and supervision. But under the influence of COVID, we see that a daily walk to the workplace is now absolutely no longer a requirement. Employers are increasingly receiving requests from employees to work (partly) from home for personal reasons. This entails another dimension, especially from the point of view of the taxing interest for profit tax.
What we also see is that the employer does feel that the relocation may have consequences for profit tax, but makes a risk assessment. The trade-off is then what the chance is that the authorities will ask questions when working from home. After all, there is no office.
A little later in this article we will see that the above is essentially no longer a sustainable strategy in the long term. It is important that employers think carefully about their policy with regard to working from home and all kinds of forms in between. They will have to make an active policy on this.
2.2. Permanent establishment
Even without the presence of, for example, an office or another form of legal presence of the employer abroad, the relocation of an employee can lead to profit tax obligations. Namely through the concept of a permanent establishment. The permanent establishment concept in general creates taxing rights based on the economic activities of a foreign company. When does such a permanent establishment exist? And if there is a permanent establishment, what are the consequences?
In general, we can say that such a permanent establishment is present if 1) the company in the country concerned has a durable physical construction (for example a factory, office or home workplace) from which (partial) business activities are carried out and 2 ) if the company has a permanent representative in the country concerned.
2.2.1. home workplace
The question that arises is when the home workplace is a permanent establishment for the foreign employer. As a rule, a home workplace will meet the requirements that it is a sustainable physical construction. The answer rather lies in the question of whether the home workplace is available to the foreign employer from which (partial) business activities are carried out.
Paragraph 18 of the OECD commentary on Article 5, OECD Model Convention (Permanent Establishment Definition) states that business activities that can be (partly) performed by the employee from his home workplace do not immediately lead to the conclusion that the home workplace is available to the foreign employer. The activities performed by the employee will be of such a nature that they are not incidental, but are performed continuously from the home workplace. It must also be deduced from the facts and circumstances that the foreign employer obliges the employee to perform the business activities (partly) from his home workplace. This will be the case if the employer does not provide an office, while the nature of the work requires that it be performed from an office. The question is for which activities an office is still needed is required? COVID has just shown that office jobs can be done from home. A strict interpretation of this criterion could argue that office jobs fall outside the permanent establishment definition of a home workplace.
It can also be deduced from paragraph 19 of the OECD commentary on Article 5, OECD Model Convention, that as long as the employer makes an office available to the employee somewhere, the home workplace will not easily be regarded as a permanent establishment. After all, in that case the foreign employer does not oblige the employee to work from home. It furthermore follows from this section 19 that if the activities that the employee performs from home are only of an auxiliary nature, the home workplace cannot be a permanent establishment of the foreign employer. In fact, this means that the employee has no other choice to perform the work from home. In that case, it is considered that the home workplace is at the disposal of the employer.
For the employee in our case, it will depend on whether the nature of his work entails that it is performed from the office. Before the broadcast, it was agreed that his employer’s office would be his formal place of employment. Furthermore, there were no agreements regarding working from home. Because before his relocation the employee generally performed his work from the office and the work is not only of a supporting nature, in our view the employee’s home workplace in Italy will become a permanent establishment of the Dutch employer. This may be different if the Dutch employer makes an office available somewhere. This is no different when it comes to the office in the Netherlands. Now that the employee de facto does not use the office, the question is whether this should be looked through. In a situation in which the home workplace does not quickly become a permanent establishment of the foreign employer, one can think of sales functions in which it is not generally required that these are performed from home.
This means that the home workplace is a permanent establishment of the foreign employer and that (in any case) profit tax obligations arise. The employer will have to register for profit tax purposes and some profit will have to be attributed to the permanent establishment. There is also the possibility that an obligation arises with regard to other tax resources or social security.
2.2.2. Permanent representative
In the past, it was often assumed that there could only be a permanent representative if he or she had the authority and also normally exercised the authority to bind the company to contractual arrangements vis-à-vis third parties. Under the influence of case law and the OECD (OECD), we see a change in which a more economic approach is taken as the starting point for the question of whether a permanent representative can create a permanent establishment. A permanent representative can already create a permanent establishment if he carries out a certain degree of business activities for his employer in the relevant country.
Now that the activities that the employee from our case study for his employer in Italy are not only limited to marketing activities, but also consist of further developing or building the brand, maintaining relationships with current Italian customers, developing and developing and deploying new business. of (strategic) partnerships, in our opinion the foreign employer can already be sufficiently involved in the economic traffic in Italy. Limiting its powers only to further negotiate and conclude contracts with third parties is not expected to be sufficient in the current zeitgeist to exclude the risk of a permanent establishment.
In an increasingly digitized economy, the need to run business from a physical office has diminished and post-COVID home working is becoming a norm. This raises the question of when a home workplace is a permanent establishment of the foreign employer.
Employers should therefore check whether remote working in cross-border situations can be a reason for the foreign authorities to levy profit tax. An important fact is that the tax authorities have more and more insight into where companies and their employees are developing activities and will act accordingly. We therefore expect that the authorities will intensify their efforts further. In our view, this cannot be separated from the desire to increase tax revenues now that large expenditures have been made by COVID to prop up the economies. We therefore expect that the focus of legislators and tax authorities on home offices from which business activities activities of a company is expected to increase. In our view, this all fits in with the (growing) desire of legislators and authorities to focus on the economic nexus of business activities for attribution/types of taxation.
In particular, employers will have to assess whether the nature of the work of their remote employees is normally carried out from an office. If it is found that the nature of the work is generally carried out from an office and that this is also required, then the home office constitutes a permanent establishment. This, except in the situation that the activities do not belong to the ‘core business’ of the company or it concerns activities that are only of a supporting nature. In our view, the home office is an extension of the company.
For the presence of a permanent representative it is not necessary that the activities are carried out from an office or home workplace. Under the influence of the OECD and case law, a permanent representative can form a permanent establishment of the foreign employer if it carries out a certain degree of business activities for its employer in the country concerned. In particular, activities such as sales and business development as well as maintenance of client relationships can be seen as core business activities of the foreign company.
Therefore, internationally operating companies must continue to monitor their workforce to understand the likelihood of a permanent establishment (now or in the near future) existence. Especially now that the borders are slowly opening again and companies are being driven by new insights that a fixed workplace is no longer a requirement and because of the associated ‘war on talent’, they are increasingly implementing remote working policies in addition to the existing temporary employment policies.
Businesses should also consider how to practically and efficiently manage the existence of a permanent establishment to reduce uncertainty and risk.