Impact of working from anywhere in the world on tax residency status

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Impact of working from anywhere in the world on tax residency status

With coronavirus restrictions beginning to ease in many countries, several high-profile employers have seen advantages in cost and time savings, allowing employees to continue working from home or even from ‘anywhere', said Jackie Hall, partner at international tax consultancy RSM, in a briefing note on 20 April.

She highlighted where ‘home' or ‘anywhere' are not in the same country as the normal workplace this can have different tax and legal consequences for both the employer and employee.

"Working from another country can impact on the tax residency status of an individual. In most cases, where this is restricted to short periods abroad, tax residency will remain in the individual's home country.

"Guidance issued by the Organisation for Economic Co-operation and Development (OECD) in January 2021 confirms that an individual who becomes stranded in another country, for example due to coronavirus travel restrictions, may become tax resident under that country's domestic rules, but the individual is unlikely to be resident in the other country under the tie-breaker provisions of a double tax treaty.

When employees ask to be able to work from overseas, employers will have to balance their commercial needs and objectives with the tax risks."

"However, working overseas for longer periods can result in the employee becoming resident in another country, meaning that generally they will become taxable in that country on their worldwide income, subject to any reliefs available under a double tax treaty."

Residency rules vary in different countries, she added, so it's important to understand the rules applicable to the country in question and the tax impact that will arise if an individual becomes resident in that country.

"In the case of temporary residence due to coronavirus restrictions, it is also necessary to understand how the other country intends to apply the OECD guidance. While the UK has been fairly relaxed in its view the same attitude cannot be guaranteed in other countries.

"Where employees are working overseas, even for relatively short periods of time, this may create payroll reporting obligations on the employer in that country, and even a requirement for the individual to file tax returns. This can have a significant impact on tax liabilities of both individuals and their employers, not to mention the extra costs of having to deal with these additional reporting requirements."

Hall further said in some cases, the residency of the employing business can also be affected: "For example, particular attention needs to be paid to the tax residency of directors, as this may affect the tax residency of a company. A company incorporated in the UK is generally UK-resident for tax purposes. However, a company may be regarded as tax resident in more than one country under tax treaty arrangements, if for example it is managed and controlled in another country by the majority of its directors. This may lead to significant tax liabilities overseas."

Another potential risk relates to the creation of a permanent establishment (PE) for local tax purposes, she said.

"This could mean that some of the employer's profits are taxed in the country where an employee is working, as well as in the UK, depending on the employee's activities.

"Most countries adopt the approach that a PE may be created in a country where the employer has a fixed place of business, through which the business of the employer is wholly or partly carried on, or where an agent acting on behalf of the employer has authority to do business on their behalf. An agent can include an employee for this purpose, and an employee's home or base overseas may be considered a fixed place of business."

Hall concluded: "So, when employees ask to be able to work from overseas, employers will have to balance their commercial needs and objectives with the tax risks of creating a PE. Local advice needs to be sought if there is any concern that any employees' activities may give rise to a PE. Employers should also be mindful of wider obligations which may be affected by employees working overseas, such as local employment law issues and health and safety requirements."

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