The real reason your work doesn’t let you remote-work from abroad, and how to fix it

We’re delighted to publish an article on the underreported subject of tax and remote working, by Leonard Wagenaar, an M&A tax and international tax professional[1] whose insightful analysis is usually posted on LinkedIn here. This is the first in an occasional series of articles by outside tax experts – we won’t necessarily agree with every word, but we will agree that the subject is important and not currently getting enough attention.

Since the pandemic, remote work has become common. Some countries now try to attract remote workers to settle in their country, so they can work remotely internationally. Of the 27 EU countries, 11 have implemented or are considering special ‘digital nomad visas’[2]. Two of them – Greece[3] and Spain[4] – also couple this with special tax breaks for remote workers, triggering fears of a race to the bottom on personal taxes.

Although most of us can’t imagine a working environment without remote work, international remote work is still rare. New visa rules are unlikely to change that. Within the EU, there were never any visa restrictions on remote work for EU citizens. A culture of international remote work could transform the labour market. But the biggest obstacles are tax systems, even those from supposedly supportive countries.

Right now, no sensible employment contract will leave the employee free to work from wherever they want, as a travelling employee could easily trigger tax for the employer wherever they travel. That’s because countries generally tax the foreign companies as soon as they have a ‘permanent establishment’ (or “PE” for short). Generally, a PE will be triggered if someone does business for the employer through a ‘fixed place of business’. This is a concept that’s over a hundred years old and though it has developed over all those years, it clearly wasn’t designed with the digital age in mind. For instance, could a desk in your holiday home be a fixed place of business? Or the kitchen table of your friend’s uncle? How about the table in the local coffee shop? Or could the ‘fixed place’ even be within the work phone you carry around?[5] No one really knows.

There are plenty of guidance notes, published tax rulings and case law, but these are highly fact dependent and go in different directions. Being stranded abroad against your will in a global pandemic probably doesn’t trigger a PE, provided you at least tried to get back home[6]. If the company demands that you work remotely in another country, that’s likely a PE[7]. Having an office abroad and not using it is not a PE[8]. But the typical basic remote worker fact pattern? No one really knows. Countries can apply other tests to answer this question, such as “is the home office at the disposal of the employer?” or “does the employer have the ability to exclude people from the home office?”. But generally, these tests replace one obscure question with another.

The longer a fact pattern continues, the higher the risk of a “fixed place of business” PE. The threshold is usually set at three months. But there are exceptions to this too, especially if the activities abroad repeat themselves after interruptions. And if one remote worker leaves the country, but another enters around the same time, does that reset the clock? Does it matter whether the second employee visits the same place or does similar activities? Again, no one really knows.

Most of the time, having or not having a PE would not impact the tax due for the employer all that much. But a PE would require the employer to register locally, run a local payroll and run expensive transfer pricing analyses to figure out just how much profit should be allocated to the PE. Any position they take will displease either their home tax authority or the foreign tax authority, meaning they will live with a significant risk of challenge. So, usually, employers don’t bother and just require that they can control the employee work location, even if that’s outside the office. In the Netherlands, an employer can’t unreasonably deny a request for remote work, but they can deny such a request if someone wants to work remotely from another country.

So, in short, archaic tax rules are holding back a modern labour market. Political discussions are dominated by images of ‘digital nomads’ backpacking their way between work, the beach and travel. But the best opportunities are for people who now struggle to find suitable work due to their location. If employers could hire remote employees internationally with minimal disruption, the biggest opportunity is for areas that have been left behind economically. Remote work – including international remote work – is a tool for levelling up.

So far, countries have not felt empowered to solve this problem, but they have all the tools to do so. The definition for PE has been fixed in many double tax treaties. A multilateral solution would be most efficient, but will take a very, very long time, especially now that all international tax debate seems to be consumed by other topics[9]. In the meantime, there is plenty countries can do unilaterally. Tax treaties give countries the right, but not the obligation, to tax PEs. So, countries can apply higher thresholds than tax treaties. In other words, host countries can choose not to tax foreign companies with remote workers by issuing clear binding guidance that a home office does not trigger a PE and neither do workspaces in hotels, Airbnbs, coffee places or on smart devices, etc. [10] It would not bring the company’s overall tax burden down (not by much at least), but it would greatly reduce their compliance burden. And if it stops companies from trying to control where their employees are working from, I’m sure they won’t complain either.

This simple measure could very well be more effective in attracting international remote work than new visa categories or even personal income tax breaks. Countries can adopt this simple step without a potentially damaging tax competition that comes with offering lower personal income taxes. After all, they can still collect all personal income taxes from the remote workers. It is all possible. But is the political will there?

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Photo by Glenn Carstens-Peters on Unsplash.

[1] All views are in personal capacity and do not necessarily represent those of any employer, remote or local.

[2] https://www.euronews.com/travel/2022/10/23/want-to-move-to-europe-here-are-all-the-digital-nomads-visas-available-for-remote-workers

[3] https://visaguide.world/digital-nomad-visa/greece/#:~:text=Taxes.,a%2050%25%20reduction%20tax%20program.

[4] https://www.schengenvisainfo.com/news/spain-introduces-new-visa-for-foreign-start-ups-digital-nomads-reduces-taxes-for-them/#:~:text=Digital%20nomads%20will%20also%20be,for%20up%20to%2012%20months.

[5] To my knowledge, no one is actually claiming this, but the argument would have some technical merits. Your phone might be quite small, but there was never any size limit placed on a PE. The phone doesn’t stay in one place, but neither does a market stall nor a desk in a co-working space, both cases that are readily accepted as triggering a PE, because they are part of a ‘geographical whole’. And if the phone is generally used in the same locations (as is likely), a similar argument can be made here.

[6] https://globaltaxnews.ey.com/news/2022-5117-spains-tax-authority-issues-ruling-on-remote-workers-and-permanent-establishments-during-and-after-covid-19-restrictions

[7] https://skat.dk/data.aspx?oid=2350336

[8] https://www.lindedigital.at/plink/swi

[9] https://www.oecd.org/tax/beps/oecd-releases-pillar-two-model-rules-for-domestic-implementation-of-15-percent-global-minimum-tax.htm

[10] Guardrails could be introduced to prevent wholly remote businesses to pretend that they are foreign companies. For instance, the guidance could require a PE once remote work FTE / payroll costs exceed 25% or certain fixed numbers.