Since the pandemic, many more employees are working remotely. But are you aware of the legal and financial risks if they are in other countries?
There has been a huge increase in the number of people who are working remotely both from the UK and overseas either in permanent roles or just because of the pandemic. As the travel restrictions lift, we have seen a large number of employees continuing to work remotely either on a part-time or a full-time basis.
Effect of the pandemic
There are two distinct periods to consider for cross-border implications:
Start of COVID restrictions and throughout the lockdown periods (special rules may apply).
End of COVID restrictions and how we operate going forward (no special rules).
Many people found themselves stuck for a length of time working from countries they would not normally work in, while others returned home to be with their families. Certain countries have COVID relief available in relation to residence and income tax but there are also strict rules, and each country is different.
Risks associated with remote workers
1. Permanent establishment (PE)
Just one single person working in a country can trigger a PE status for the corporate in that country, and all the reporting that goes with it.
PE risk relates to the concept of an employee creating a presence for the corporate in the overseas territory. This is particularly important if the individual is senior management and has signing authority on behalf of the company. A person with this type of authority, or someone who concludes contracts, can inadvertently trigger a PE. The consequences for the company include corporate tax reporting obligations, local compliance and reporting obligations.
2. Regulatory requirements
Particularly for regulated industries, it may be a requirement that some roles are performed only in the country of residence of the corporate. Many financial institutions are tightly regulated in this area.
3. Post-Brexit immigration
Employers should make sure that local immigration regulations are met. Until 1 January 2021, it was relatively easy to travel and work across Europe from the UK whether for business or pleasure. Brexit means there are new immigration procedures. Visas are now required for people coming from the EEA to work in the UK and vice versa. In order to apply for a visa for a worker from overseas, the UK company must hold a sponsorship license.
4. Employment law advice
Employment law is complex, so you should always consult someone with international law experience. Where you have employees in various countries, asking to remain there and work remotely – or if you are planning to expand your international workforce, these are some of the key areas to consider:
different employment regulations
different rules for holiday entitlement, bank holidays
legislation on maximum working hours
minimum wage rules
health and safety regulations
It is important that employers understand the different working environments and both the employer / employee implications before agreeing to cross-border remote working.
5. Tax compliance and payroll reporting
Every country has its own set of tax and social security rules. With those come different requirements for reporting and payment. Many countries have a double taxation agreement/treaty with the UK but some don’t. Social security is dealt with by a separate network of agreements and Brexit has meant these rules are being revisited. Always check the latest status.
Treaties are generally designed to stop double taxation of the same income. However they have other functions too. For example, the existence of a treaty can simplify tax reporting for short term overseas business visits, so long as certain conditions are met. Please see our article Why business travellers must be tracked for more detailed information.
Where individuals remain taxable in the country of employment (home) and exempt from tax in the overseas or host country, reporting may still be required even where the treaty exemption conditions are met. The UK has an arrangement known as the Short Term Business Visitors Agreement, which is mandatory if a UK company has visits from overseas employees from the same group. Without this agreement, companies must operate UK payroll, even if only for a one-day visit.
An understanding of the international employment rules allows for efficient planning but because of the complexities, we recommend engaging a professional international tax services provider to avoid local country tax difficulties down the line.
Longer stays or visits to non-treaty countries can be reviewed and structured as appropriate. Employers may wish to restrict the amount of time spent in a country and only allow remote working from a list of pre-determined countries.
Where tax relief is not available, employers will need to identify the tax liability and comply with local withholding rules. Social security rules should also be reviewed. Failure to do so may lead to costly penalties.
6. Personal tax considerations
Employees may have more complex personal tax affairs as a result of working internationally – such as incurring higher rates of taxation and combined foreign and resident country taxes. Local tax advisors may be needed to help with returns, making sure everything is reported correctly and that any available tax relief is claimed.
Although a company may not have responsibility for an individual’s tax position, many may offer tax support as an additional benefit.
7. The importance of social security
Social security costs can be very expensive and complex. It is often a forgotten ‘tax’ and employers should be aware of the system that they are paying into. For employees temporarily away from their home location (typically up to five years), it may be possible to obtain social security certificates in order to continue paying home country social security if there is an agreement between the two countries. In other cases, host country social contributions may be due.
Social security contributions are important, as they provide for a state pension and, in some countries, for healthcare too.
What can you do?
Know where your employees are working from. This may not be as obvious as it first appears. We have experience of employers thinking their employees were in one country, when they were actually elsewhere and had not informed their employer. This would have implications for the employer.
Employers may need to create a supervisory process for an individual to oversee people working remotely/internationally.
Seek advice. It will cost far more to sort out a mistake.
Create a robust internal mobility policy covering short-term and long-term business travel and secondments that is bespoke to the organisation and what it is trying to achieve.