The surge in remote work has catalyzed a new era in global employment. Current employees have relocated abroad while businesses have begun remote onboarding across international borders to seek out talent that was previously beyond reach.
This emerging dynamic has further entangled an already intricate web: work taxes.
Now, organizations must consider the tax implications of cross-border work arrangements carefully. Whether you’re hiring employees overseas or allowing current staff to work abroad, understanding tax laws is essential to avoid potential complications and legal pitfalls.
Put simply, if you want to know how to streamline your onboarding process, mastering remote worker taxes is a critical step. Maintaining compliance in this rapidly changing world is essential for successful global expansion.
The Risk of Permanent Establishment
Whenever a nonresident employee is working remotely, companies must consider the risk of Permanent Establishment (PE). This status designates the location as a permanent place of business where revenue-generating business activities are carried out.
If an employee’s work-related activities trigger a PE status in a foreign country, there could be serious consequences for failing to abide by international tax law.
Should PE status occur, companies may be required to:
- Register the company as a taxpayer
- Remit taxes
- File local country returns
- Pay corporate income taxes
Naturally, most companies want to avoid triggering PE. To that end, there are four key areas of concern:
- Sales activities or revenue creation – If remote workers engage in sales activities, like signing contracts or closing deals, this could trigger PE.
- Control over workers – The degree of control a company exercises over its remote workers and the ways in which they classify contractors and employees can influence the risk of PE.
- Dependent agent role – An agent located in another jurisdiction can trigger PE based if they are not seen as “independent”, which might include having the authority to sign contracts for the company.
- Fixed place of business – Traditionally, a "fixed place of business" meant a tangible location such as an office, branch, factory, or workshop. But the age of remote work has blurred this definition—now, even a home office or a regular workspace for remote employees may qualify as a fixed place of business.
Mitigating permanent establishment risk for remote workers is a multifaceted task, but it's manageable with the right approach. Businesses can effectively handle the risk by seeking independent tax advice to understand the rules of each country, collaborating with an employer of record, avoiding revenue-generating activities, limiting control for remote workers, and steering clear of establishing a fixed place of business without setting up a local entity.
Account for Potential Occupational Distinctions
Understanding whether your company has employees, contractors, or consultants is vital as it's a major factor in determining a taxable presence in a foreign location. In some jurisdictions, an independent contractor might be treated as an employee, unintentionally triggering a tax liability for your organization.
Seeing as this can vary from one country to another, you should take steps to manage the risks and complexities in international taxation and obligations, such as:
- Building a framework for employee compensation and benefits
- Recognizing variations in job definitions across countries
- Conducting due diligence with local laws
- Considering outsourced administration
Being proactive and well-informed in these areas not only minimizes potential legal and financial risks but also fosters a compliant and flexible global workforce.
Remote Employee Tax Obligations and Contributions
Global payroll compliance requires that you know how and where your remote employees must pay their taxes and contributions.
For example, working remotely in a foreign country within the EU for an extended period means employees must eventually pay personal income tax and social security contributions in that country. Employees living in the EU typically have a threshold of 183 days to live in the country before they are liable for income tax. However, if they continue living abroad beyond this 183-day mark, their tax residency alters. They may still be liable for tax in their “home” country.
Double Tax Agreements (DTA) are designed to prevent double taxation for employees who are liable to pay tax in both jurisdictions party to the DTA. Under a DTA, tax filings are still required in both countries. The method of double taxation ‘relief’ will depend on the individual’s exact circumstances, the nature of the income and the specific wording of the treaty between the countries involved.