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Global Mobility Programs in the Post-COVID Era: Watch Your Tax Risks

COVID-restrictions have been eased considerably since the beginning of the pandemic. Where possible, employees have been working from their home offices for the past 18 months. Hybrid working has risen in prominence  and is expected to stay.

Hybrid working leads to an increase in employee mobility, less travelling time and therefore in many instances more satisfied employees. It allows companies to consider hiring employees that are based further away from the workplace than before. Companies may even consider hiring foreign employees for jobs that can be done perfectly from a distance. This however comes with a number of tax implications and challenges. This article highlights some of the challenges companies considering hiring candidates from abroad should be aware of.

Model Tax Convention

While every tax treaty is unique, most of the treaties that the Netherlands has, are based on the OECD Model Tax Convention (“MTC”). Slight (though significant) differences exist per treaty, but the below is the general outline as included in the MTC.

Article 15 of the MTC (and in most cases of the treaties for avoidance of double taxation) states that salaries, wages and other similar remuneration derived by a resident of a State is only taxable in that State unless employment is exercised in the other State.

Regardless of the above, the resident State is still allowed to tax if the employment exercised in the other state if:

  1. The recipient is present in the other State for not more than 183 days in any twelve month period commencing or ending in the fiscal year concerned; and
  2. The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
  3. The remuneration is not borne by a permanent establishment which that employer has in the other State.

Cross-border workers

For an employer, employing a cross-border worker creates a risk of having to compile a foreign payroll and/or pay wage taxes. That is unless, in principle, the employee is present in the State of the employer for more than 183 days a year.

Prior to COVID-19, many cross-border workers commuted to the premises of the employer every working day. As such, for example, an employee living in Belgium and working in the Netherlands for his Dutch employer was often present in the Netherlands for more than 183 days. Therefore, not triggering foreign (in this case Belgian) wage tax obligations for the employer.

Employers that want to avoid foreign payroll and foreign wage tax obligations therefore have to safeguard that an employee is at least 184 days a year present in the State of the employer, despite a possible global mobility program or hybrid working policy.

It is important to realize that the OECD recommended to, and many countries in fact did, ease the 183-days rule during the COVID-19 pandemic due to the travelling restrictions or practical impossibilities. With Belgium and Germany special arrangements were agreed with respect to allocability and social security coverage. For other countries this meant that during the COVID-19 pandemic payroll taxes and wage taxes were less quickly attributed to the resident state if not meeting the 183-days was in fact caused by those restrictions. Generally, this meant that in principle the pre-Covid work schedule continued to be considered. However, now that many of the travelling restrictions have been lifted so will the exceptions.

In order to prove that payroll and wage taxes are paid in the correct country, the employer will have to convincingly demonstrate that the employee was in fact present in the employer’s country of residence for more than 183 days. As such, a detailed travel calendar administration can suffice. That must include non-working days.

Please note that determining social security coverage differs from the above and might still trigger payroll obligations for social security purposes in the other country. Click here for more information on social security coverage, and/or A1 Certificate or Certificate of Coverage.

Permanent establishment and working from home

The second risk of hybrid working policies and global mobility programs is the risk of a permanent establishment triggering. Under certain conditions, a home office may trigger a permanent establishment of the employer in the resident state of the employer. In addition, certain activities performed by employees in their resident state can also trigger the creation of a permanent establishment in the resident country of the cross border worker.

If that happens the taxing rights on the cross-border worker’s wages are attributed to the resident state of the cross-border worker. Thus, causing the employer to become liable for foreign payroll and wage taxes.

A permanent establishment will become liable for the payroll and/ or wage taxes, the corporate income tax and VAT, among other possible taxes. In addition, a permanent establishment causes transfer pricing issues. Assets, risks, capital, income and costs have to be attributed to the permanent establishment as if it were a separate enterprise. In addition, there may be dealings between employer and the permanent establishment: an intercompany transaction between permanent establishment and the enterprise itself.

A permanent establishment can be a commercially viable option for conducting business abroad. But an unexpectedly triggered permanent establishment is mostly a compliance burden. As such, it is important to be aware of those activities and conditions that trigger a permanent establishment and set your hybrid working policy accordingly.

Want to know more?

Would you like to discuss how you can set up a hybrid working policy without additional tax risks or have us review your policy for such risks. Contact one of our specialists.

Crowe Peak
Olympisch Stadion 24-28 1076 DE Amsterdam, The Netherlands
+3188 2055 000 contact@crowe-peak.nl