New COVID working patterns – working abroad
With many employees now working from home, many have become accustomed to working more flexibly and remotely including, in some cases, working abroad. This may be a deliberate choice by the employee, or simply a result of being stranded there. However it occurs, employers need to be aware of the potential tax issues it may cause.
Corporate tax issues
An employee who spends some or all of their time working in a location outside their country of employment may constitute a permanent establishment (PE) of their employer in that jurisdiction. Whether they constitute a PE will depend on a number of factors including the terms of the relevant double tax treaty and the nature of the employee’s role.
If a PE is created, it can potentially lead to difficult and unexpected tax and compliance issues. For example, the company would need to register for taxes and file a corporate tax return in the overseas country (with penalties if this is not done on time). Depending on the factors involved, tax may also be payable there.
Employment tax and social security
An employee working in a location outside their country of employment may be subject to both income tax and social security in their work location.
Different rules apply to income tax and social security. The rules about when these obligations may be triggered vary significantly, but keeping accurate records of working time and residence is critical in understanding what the exposure will be.
Where an employee triggers a liability to income tax and social security, the liability is likely to fall on the employer. It is worth noting that in general social security costs tend to be considerably higher in the EU. As with corporate tax the employer may be exposed to interest and penalties. Going forward the employer may need to discuss with the employee where these costs should fall, as well as any ongoing compliance issues.
For planned assignments abroad it is possible to set up arrangements in advance to manage the process and ensure no unexpected tax or other consequences are triggered. However, in the current situation there may not be time to put suitable arrangements in place, particularly where the employer is unaware of the employee’s position.
For many employers this will come as an unwelcome distraction in what is already a difficult and extended period. As well as the tax issues noted above, there are likely to be other issues to consider including immigration, work permit, employment law, pensions and benefits issues. Whilst some employers have simply banned their employees from working abroad, this will not always be possible. In such situations, employers need to understand the potential impact of employees working abroad and be prepared to manage the consequences.
For more information on the potential tax issues of employees working abroad, please contact our Corporate team.