Working from home - a blessing or a curse?
von Peter Scheller
During this pandemic many companies are trying to keep their economic or professional activities going by sending people home and letting them work from there. This measure is not suitable for all businesses, but it is keeping many alive. Manufacturing companies or craft businesses will not be able to do this, but many of those in the service sector are taking this route right now.
Will this become a more common way of working in the future? We believe that it will, as there can be many efficiency and environmental benefits - providing that the core business interactions, that are needed to be undertaken at a personal level, can be agreed, managed, evaluated and updated as necessary.
So what are some of the pros and cons of working from home? Let’s look at one circumstance in particular. Working remotely in another country from one’s homeland.
I know of several northern Europeans who escape the miserable winter weather conditions to work in countries with 300 plus sunshine days per year. It sounds like a perfect idea. However, there are various implications with respect to immigration and labour law as well as taxation and social security.
Let’s look at taxation and social security here
If an employee works abroad in country x there will be tax implications for the employee and the employer alike. If the employee stays in country x for a long period he or she will become liable to income tax there. In general this will be the case if the employee stays in country x for more than 183 days within a calendar year or a twelve-month-period. In this situation the employer will not be able to withhold the foreign income tax if the company does not have a permanent establishment in country x. The employee must therefore file income tax returns in country x. At the same time the employer must in general not withhold income tax in the country of origin in order to avoid a double taxation situation.
In addition to that the employee is now a subject in a foreign tax environment and might find it difficult to understand the different tax system. One example would be if the employee comes from a country with a self-assessment system and country x has an assessment notice system. The employee may also be confronted with new tax regulations in respect of deductible job related and private expenses. Unpleasant surprises may also occur if the employee wants to continue paying into a pension plan and these payments are not tax deductible in country x.
The social security situation is likely also to be different to the tax situation. In general an employed person becomes part of the social security system in the country where this person works. If the employee stays for a longer period abroad he or she is likely to become liable to the social security contributions or taxes from the first day of working in country x. In several countries the 183-day rule for tax laws does not apply for the social security matters.
However, if the employer sends his employee on an assignment contract abroad the employee might remain in the social security system of his or her home country. The period of assignment must be limited. Assignments within the European Union, the states of the European Economic Area (Norway, Iceland, Liechtenstein) and Switzerland are limited to a maximum period of 24 months. In other cases there may be other social security agreements or domestic rules applicable. Employer and employee have to make sure, from the outset, that they are not liable to contributions in two jurisdictions. Equally, the possibility that the employee has no cover in either of the countries should be avoided - having no state health insurance at all is not advisable.
Another issue to consider is that the employee in country x could create a permanent establishment for his/her employer there. A permanent establishment is a fixed place of business or installation which serves a business. These are for examples branches, offices or workshops. An office can be determined as a permanent establishment under the following conditions:
- If an employee relocates to another country and continues to carry out work or activities for his employer and has an office where business-related services and office work is carried out. High standards on the type of premises or equipment are in general not required but if the premises is used for business purposes then a permanent establishment may have been created.
- A telephone and internet connection is available. However, in times of smart phones and tablets this is of decreasing importance.
- In some countries an office at the residential home can qualify as a permanent establishment.
If such an “unwanted permanent establishment” is created the employer will become liable to income or corporation tax in country x. What becomes taxable will be the part of the profit of the company which is attributable to the permanent establishment in country x. This assessment will result in additional administrative costs for documentation, filing accounts and tax returns and to fulfil other legal requirements. The same unwanted consequences occur if the employee is considered to be a permanent representative of his/her employer in country x. If this employee, on behalf of his/her employer, has an authority to conclude contracts in the name of the employer and can conclude such contracts then this will become an issue. This predominantly applies to sales staff.
Other relevant tax issues also have to be observed. For example the employee may have income from other sources such as rental income or income from capital investments. Many employees may be surprised to find out that dividends, interest or capital gains will be taxed in country x even if the funds are held in a bank of the home country. If the employee transfers his household and cars to another state he or she may also have to observe customs or VAT regulations. In specific cases there are also other tax consequences to be considered.
The above issues appear somewhat complex and perhaps the “fear of the unknown” may discourage long-distance or long-term distance working. However, it may be possible to generate significant new business in country x, making the exercise worthwhile. The key is to plan ahead, understand the implications of working abroad, and take the necessary steps to create a tax and social security environment that suits the business opportunity at hand. One option is to investigate how it works, on the ground in country x, for a short period, to see if there is the synergy needed to take matters further on a more permanent basis.
Nick Smith, Business Consultant, Urban Designer
Peter Scheller, Steuerberater, Master of International Taxation