20. September 2022 Not least due to the Covid-19 crisis, the topic of remote working has become more and more a focus in the last two years. Also, the ever-advancing technology and digitalization make working remotely possible without any problems.
- Foreign local hire
- Cross-border Homeoffice
- Virtual secondment
- Workation
In this regard the following issues must be examined in all types:
- Wage tax risk
- Permanent establishment risk
- Social security
In the following each model will be explained in more detail.
Foreign local hire
In this model, an employer in country X concludes a contract of employment with an employee in another country Y. The employee continues to work in the country of residence Y.
Example: An employer in Austria concludes an employment contract with an employee in Romania.
Tax and social security consequences:
- In these cases, 100% of the income tax is due in the country from which the employee performs 100% of his work. Income earned on individual working days in the employer’s country (Austria) is taxable in the employer’s country. The obligation to withhold income tax in Romania must be examined on a country-specific basis and is usually linked to the existence of a permanent establishment in the employee’s country of residence.
- The permanent establishment risk depends on whether a double taxation agreement (DTA) has been concluded between country X (Austria) and country Y (Romania). If so, it depends on how the permanent establishment is defined in the DTA (fixed place of business, agency permanent establishment or service permanent establishment) and from where the employee works (home office, office rented by the employer, office of a group company).
- Within the EU/EEA, according to the territoriality principle, the obligation to pay social security contributions exists in country Y (here Romania), the employer would therefore have to register in country Y (Romania) and pay social security contributions there, unless the employee assumes this obligation and concludes a corresponding agreement with the employer (agreement acc. to article 21 para. 2 Reg. (EC) 987/2004). In connection with third countries, the obligation to pay social security contributions in the residence country of the employee must be examined on a case-by-case basis.
Cross-Border Homeoffice
An employer in country X offers his employee to perform part or all of his work from his home office in country Y (corresponds to foreign local hire in case of 100% home office activity, see above).
Example: as above, but only partial activity in the country of residence (instead of 100%).
Tax and social security consequences:
- Wage tax liability in the employee’s country of residence (Romania); if a single day of work is performed in Austria (employer’s country), wage tax would be due there on a pro-rata basis.
- Permanent establishment risk needs again to be checked on a country-specific basis.
- Social security: If at least 25% of the activity is carried out in the employee’s residence country Romania, then Romania would be the responsible country for social security payments. If less than 25% of the activity is performed in the residence country of the employee, the employer country (Austria) is responsible for social insurance (contributions are in this case to be paid in Austria). The 25% limit is to be determined on the basis of a 12-month period. With regard to employees who are third-country nationals, the obligation to pay social security must be examined on a case-by-case basis.
Virtual secondment
Employee in country X with employer in country X takes over a temporary function for a group company in country Y. The employee will, however, continue to work physically in country X for the group company in country Y.
Example: Employee of an Austrian company, residing in Austria performs activities for the Romanian group company.
Tax and social security consequences:
- Wage tax is generally withheld in the country of the employer. If the country in which the group company is domiciled (Romania) follows the economic employer concept, the employee would be liable to pay tax there from the first working day that he/she spends there. Furthermore, a possible withholding tax obligation of 20% of the remuneration for the provision of services must be taken into account, in particular in cases of virtual secondment to Austria.
- In this case, the Romanian group company could, under certain circumstances, establish a permanent establishment in the country of residence and employment (in this case Austria) if that country follows the concept of an economic employer and the group company in Romania is to be regarded as the economic employer due to the transfer of personnel costs (the employee is therefore economically attributable to the Romanian company). The establishment of a permanent establishment by the employer in Romania is excluded due to the fact that the employee does not reside predominantly in Romania, or if the situation is to be regarded as assignment of employees (personnel leasing), no permanent establishment would be established, because according to the prevailing view, the establishment of a permanent establishment is excluded in such cases.
- Social security contributions are continuously to be paid by the employer in the country of employment (Austria).
Workation
Employee in country X has an employment contract with an employer in country X. The employee temporarily relocates to country Y and continues to work from there for the employer in country X. Country X is almost always a vacation destination.
Example: employee of an Austrian company, residing in Austria, performs work from a Greek island for 3 weeks.
Tax and social security consequences:
- Whether an income tax liability arises in the “vacation country” depends on whether the residence was maintained in country X (Austria) as well as whether a DTA exists between country X (Austria) and the vacation country (Greece) and how long the employee stays in the vacation country. If the employee gives up his residence in country X (Austria), no DTA would be applicable and the DTA protection against possible double taxation would cease to apply. That means, in the non-DTA case, double taxation of the employee’s income could occur. If a DTA is applied, a tax liability would arise in the vacation country if the employee stays there for more than 183 days in a calendar year or in a 12-month period.
- The establishment of a permanent establishment by the employer in the vacation country (in this case Greece) is rather unlikely in DTA cases. According to the prevailing view, a minimum period of 6 months would be necessary for this. In non-DTA cases, the establishment of a permanent establishment would be conceivable.
- From the perspective of social security law, the responsibility for social security would initially remain in the employer’s country (Austria) for up to 60 months; in relation to third countries, this could lead to double insurance. This means that in the latter case, both the employer country and the “vacation country” could potentially claim payment of social security contributions.
Shortages of skilled workers, global health crises and advancing digitalization and technologies are making it increasingly attractive to employ people abroad.
Various models are available for the employment of people abroad. In this context, however, tax and social security aspects must be taken into account. In order to keep compliance costs low abroad, comprehensive advice is required in advance. We will be happy to provide you with comprehensive support you from a tax, social security and labor law perspective.
We would be happy to advise you on this topic (info@artus.at).
PS: Please note, that we are no native speakers and that our blogposts were translated with the help of google translate.
