The past Christmas holidays will live long in the memory, but not for the right reasons. While some stayed in their permanent residence, others used the opportunity to visit relatives, only to find themselves forced to remain there beyond their planned duration, due to Covid-19 restrictions.
As an employer, that might not seem like a big issue, sure most people can work these days remotely, even if they’re in a different country. But you’re potentially opening your organisation to the risk of Permanent Establishment, payroll, tax and immigration issues, amongst other things.
One of the most significant transformations for the workplace from Covid-19 has been the forced adaptation of remote working, and it’s difficult to see how the world could return to the working practices of 2019. Countries like Ireland are legislating to provide employees with the right to request to work remotely. Companies like Dropbox have announced a remote-first policy after realising the benefits from staff working away from the office.
The past year has opened people’s eyes to the freedom of remote working. It doesn’t necessarily have to be literally at one’s home. It can be anywhere! For example, Barbados’ beautiful island has created a special visa for remote workers who want to work and live in a tropical paradise.
However, having your employees based in one country and working in another, even temporarily, has significant potential pitfalls. You need to consider the following if some employees are currently remotely working overseas or requesting to do so in the future.
- Permanent Establishment
The Organisation for Economic Cooperation and Development (OECD) considers Permanent Establishment to be any fixed place of business through which the operations are wholly or partly carried out continuously. That includes a ‘home office’. Six months is the standard length of time, but it can vary across countries. So, an employee working from their parent’s home overseas or a holiday home for a prolonged period, could create a PE for your organisation. The profits attributable to that PE generally would be taxable in the remote jurisdiction.
If the activity is a sales activity, the profit would be generated through the sales concluded by the PE. In other situations, the taxable profit might be calculated based on a cost-plus service remuneration. The status can vary widely, if you have an employee in Singapore, working remotely, they are considered ‘engaged in business’, and you are required to set up a corporate presence.
An international remote board meeting could also create a PE. Covid-19 may have led to the displacement of board members in various countries around the world. If key decision-making processes occur in locations other than the place of incorporation, it could result in tax consequences. For example, suppose a majority of directors made a decisive vote, resident in a country that is not the country of incorporation? In that case, tax authorities of that country could argue that effective management is effectively located there, subsequently establishing a PE.
Each country has its own thresholds for determining when someone will be tax resident in that jurisdiction for payroll purposes. However, payroll obligations are separate to residency rules – for example, Irish payroll obligations could apply if a foreign employee spent 30 workdays in Ireland.
If your employee stays beyond that country’s determined period, you might have to register as an employer, obtain a Tax Reference Number and operate payroll in that foreign jurisdiction. From the employee’s perspective, there may be an increase in their personal tax bill and an obligation to file tax returns in multiple jurisdictions.
By reaching the status of resident in another country, your employee could also create VAT issues. The ‘permanent’ presence of human and technical resources can create a fixed establishment and make your organisation subject to VAT, with associated VAT registration requirements.
If an employee is remotely working in a country where they do not have the right to work, the company and the employee could encounter penalties, a fine or expulsion.
- Employment laws
Suppose the employee surpasses the allocated time period and is considered a resident? In that case, they could have the support of the local laws such as working time rules, overtime and leave entitlements, or termination rights. This could increase the expense significantly as employer costs and employee rights are much more pronounced in most EU Countries. For example, in France, there is a strict 35-hour workweek. There are 43 days paid holidays in Austria, Finland entitles fathers to 54 days paid paternity leave, and the Netherlands has the most robust protection against dismissal.
- Intellectual property
If an individual creates IP in another country, local IP assignment laws might apply, including compensation for the creation of that IP. Data privacy issues can also arise.
- Health Insurance
The danger to our health is obviously at greater risk during this pandemic. If your employees are covered by private health insurance, is that covered in the country they reside?
How to minimise the risks
Take an audit of all your employees to determine whether they are currently working from the country you are based in or working from elsewhere. Establish how long they intend to stay there. Then you’ll need to check the employment, tax and immigration regulations. If they are outside those regulations, then it’s a decision whether to bring the employee back to your country of residence or become compliant within the country they are temporarily living.
Tracking and monitoring
I would then recommend developing an international remote working policy to futureproof the business. Each country’s tax, laws and immigration can change at any time; there is risk around data security, GDPR and Intellectual Property Protection in other 3rd party countries. You need to ensure your employees and the appropriate internal departments are fully versed in the current regulations. Tracking and monitoring technology is an expensive but effective option.
Using CXC is a speedy solution for complete compliance.
As you can see, there are a myriad of considerations per country and then variations across different countries, even within the EU. CXC has local compliant payroll in every country in Europe, so we are entirely up to speed with legislation changes. By temporarily transferring your internationally remote working employees to CXC payroll, you can ensure your organisation is fully compliant and de-risked.