During the Covid-19 pandemic many companies have had to confront the following question: what happens to the legal status of my employees if they choose to work abroad? We’ve identified some of the key legal and tax risks that you need to be aware of when your remote employees decide to work abroad.
Since the lockdown of numerous countries around the world, for many, the once distant prospect of working from home or abroad has now become the norm. While some of your employees might be working from their holiday homes others may have packed their bags to work more permanently from an exotic location further afield.
Although your corporate policies might be relaxed about this, it is important to be aware of the legal and tax issues that you and your staff may unwittingly be exposed to.
It’s worth noting that after a certain number of months spent abroad, which varies by country, as the employer, you are legally required to pay tax and social security contributions to your remote employees and to employ them in accordance with local employment law.
If you don’t employ them locally, or are unable to do so for logistical reasons, you could find that your company becomes subject to income and corporate taxation. And don’t be fooled if you aren’t immediately taxed, this can also occur retroactively. Beyond this, hefty fines and severe penalties are also a very real possibility.
So what are the pitfalls to watch out for? Here are some key ones:
- legal and tax status
- double taxation
- intellectual property rights.
In what follows we’ll give you the insights you need in order to effectively manage these risks.
So when should I be worried?
In short, you should be concerned as soon as your employees start working abroad. There are two things you must be aware of:
- local tax regulations
- employment law.
These will come into effect at different times, depending on the country your employee is more permanently working from. The number of days after which this kicks in varies from country to country. But a good rule of thumb is that typically if your employee is working from somewhere for more than around 4 months in a year, this will trigger local employment and tax regulations.
While 4 months may sound like oodles of time, don’t be deceived. Four months isn’t long if you need to make preparations to ensure all your staff are compliant.
Should I be concerned about Permanent Establishment Risk?
Permanent Establishment (PE) risk is a thorn in the side of most remote-friendly companies. PE is a permanent place of business where revenue-generating business activities are carried out. If a PE presence is found, local authorities will expect you to pay corporate taxes on the revenue you generate there.
As soon as your employee starts working in another country, your company may be exposed to PE risk. Whether or not PE is triggered largely depends on if your employee is engaging in revenue-generating activities.
Employing staff in supporting, but not revenue-generating, roles is unlikely to lead to a risk of PE. However, each local tax authority has their own regulations as to what constitutes revenue-generating activities. If a company is found to be evading corporate taxes tied to a PE, they can expect severe penalties.
In April 2020, the OECD clarified that immediate remote working as a result of Covid-19 should not change the tax status of employees or employers. They specifically mentioned that companies with remote staff during the pandemic would not be exposed to PE risk. However, the OECD statement is little more than a guidance, as it is not strictly binding, particularly not for non-member states.
So, although employing transparently does not erase your exposure to PE risk, it can significantly reduce it.
Remote Employee Income Tax & Contributions
In order to ensure your company has a compliant payroll process you need to be aware of where and how your employees have to pay their taxes and contributions.
After living and working “abroad” for a longer period of time, a remote employee will have to start paying income tax and social security contributions in the country that they are working in.
Take the Netherlands as an example. In the Netherlands employees registered as tax payers have a threshold of 183 days. Within this timeframe, they can live abroad and still pay their income tax in the Netherlands. Their social security contributions will also continue to be deducted from their salaries in the Netherlands. But, if they continue living abroad after this approximately 6 month threshold, their tax residency will change.
To ensure that an employee’s income isn’t taxed twice while working abroad, countries have Double Tax Agreements (DTA). If a DTA applies, tax filings must still be completed in both countries. In the lower tax rate country the employee is expected to pay 100% of the amount they would normally owe. In the higher tax rate country, they are also expected to pay the amount they would normally owe but the amount paid in the other country is deducted from this sum. The difference can be as little as zero, but this varies from country to country.
Where no DTA applies, full income tax will have to be paid in both countries. However, this is rare.
Paying Employer Contributions
Employer contributions for employees commonly include:
- unemployment insurance
- pension or superannuation funds.
Usually, these will be paid in the country where an employee is working from. DTAs do not apply to social security contributions. But thresholds might apply here too, depending on the country.
To continue on from the example above, a company based in the Netherlands will pay benefits in accordance with national regulations for their remote employees for 183 days. After this, benefits will be paid in the country where the employee is resident.
Additional regulations determine what contributions employers have to pay and which country’s rules apply. The European Union sets out clear rules for companies employing across borders between member states.
Generally, the consequences of not employing and paying compliantly can include:
- remedial fines - paying all benefits owed to employees
- punitive fines - additional hefty fines
While employing internationally may at first seem like a large undertaking, it is by far the safer option to be compliant and pay towards your employee’s taxes and contributions wherever they are working remotely from.
Unfortunately, remote working doesn’t mean an individual can work wherever they like for longer periods of time. As an employer, you will have to check that your employees have the right to work in the country they have relocated to. Not doing so doesn’t make the employment itself illegal, but it could lead to trouble with the local authorities. If your company is found to have acted irresponsibly, it might be landed with hefty fines, sanctions, or worse in extreme cases.
To ensure your company is fully compliant, you will need to check your remote employee’s status and the requirements of the country where they are working abroad from.
Intellectual Property Rights
Local jurisdictions define their own intellectual property laws. They tend to specify who retains the rights for intellectual property created during a period of work - the employer or the employee.
You will need to assess the intellectual property law in each country where your remote employees are resident, especially if you want to ensure your company retains those rights.
Some countries’ laws automatically ensure intellectual property rights for the employer. But this can depend on the kind of intellectual property. The safest option is to add additional contracts to the employment agreement, ensuring employer rights to intellectual property created with or using the resources of your company.