Tax Implications of Working Remotely from Another Country

Since the height of the Covid-19 pandemic, many companies have had to confront the following question: what happens to the legal status of my employees if they choose to work abroad?

While some of your employees might be working from their holiday homes, others may have packed their bags to work more permanently from an exotic location further afield. And, while your corporate policies might be relaxed about this, it is important to be aware of the tax implications of working remotely from another country, along with legal and other complications that you and your entire company may unwittingly be exposed to.

Below, we walk through some of these key risks and how to navigate them efficiently.

Tax implications for remote employees across different countries

After a certain number of months spent abroad, which varies by country, employers are legally obligated to pay tax and social security contributions to remote employees. They’re also usually required to employ said workers in accordance with local employment laws—see below.

With respect to taxation, many countries base tax obligations for revenue generated in-state on the residency of the individual in question and/or the establishment of a place of business in that location. Businesses with permanent offices, warehouses, and other revenue-generating facilities in a given country likely need to account for tax obligations in the countries in which they’re located. This includes income tax for individuals who work at or out of those locations.

Similarly, individuals with permanent residences in a country typically need to pay taxes on income earned therein to a tax authority in that country. Any portion of these individuals’ tax obligations that are covered by the company, likewise, likely need to be paid to that authority.

In short: employees working abroad may need to pay remote work taxes where they’re working and living, which includes payroll tax and other contributions typically covered by the employer.

So when should I be worried?

There are reasons to be at least a bit concerned as soon as your employees start working abroad. This is especially true if your company hasn’t yet planned to employ workers abroad.

There are two primary things you must be aware of:

Local tax regulations
Local employment law

These will come into effect at different times, depending on the country your employee is more permanently working from. A good rule of thumb is that employees working from somewhere for more than four months per year will likely trigger local employment and tax regulations.

Four months isn’t long if you need to make preparations to ensure all your staff are compliant.

Should I be concerned about permanent establishment risk?

Permanent Establishment (PE) risk is a thorn in the side of most remote-friendly companies. PE is a permanent place of business where revenue-generating activities are carried out. If a PE is found, local authorities will expect you to pay corporate taxes on revenue generated there.

As soon as your employee starts working in another country, your company may be exposed to PE risk. Triggering it depends on whether employees engage in revenue-generating activities.

There are also special conditions and complications to be aware of, however.

For example, in April 2020, the OECD clarified that immediate remote working as a result of Covid-19 should not change the tax status of employees or employers.¹ Companies with remote staff during the pandemic would not be exposed to PE risk. However, the OECD statement is little more than guidance, as it is not strictly binding, particularly not for non-member states.

Remote employee income tax & contributions

In order to ensure your company has a compliant payroll process, you need to be aware of where and how your employees must pay their taxes and contributions. After working abroad for a longer period of time, a remote employee will likely have to start paying income tax and social security contributions (or their equivalent) in the country in which they are working.

Take the Netherlands as an example. In the Netherlands, employees registered as taxpayers have a threshold of 183 days. Within this timeframe, they can live abroad and still pay their income tax in the Netherlands. Their home countries’ social security contributions will also continue to be deducted from their salaries in the Netherlands. But, if they continue living abroad after this approximately six-month threshold, their tax residency will change.

To ensure that an employee’s income isn’t taxed twice while working abroad, countries have Double Tax Agreements (DTA). If a DTA applies, tax filings must still be completed in both countries. In countries with lower tax rates, employees are expected to pay 100% of the amount they would normally owe. In the countries with higher tax rates, they are also expected to pay the amount they would normally owe, but the amount paid in other countries is deducted.

If no DTA applies, which is rare, full income tax will have to be paid in both countries.

Navigating double taxation and international tax treaties

Employees working abroad—and their employers—need to be careful about how, where, and to whom they report their income and pay taxes. In many cases, understanding the ins and outs of applicable DTAs and residency definitions is the key to avoiding costly double taxes.

For example, consider the DTA between Canada and the US.

The Department of Finance Canada lays out specific instances in which individuals are taxed by the Canada Revenue Agency (CRA) and/or the US’s Internal Revenue Service.² Residency ties are the strongest indicator of where an individual’s tax obligations lie. They include factors such as owning or renting a permanent home or a ‘habitual abode’ within Canadian territories.

In practice, US citizens working and living in Canada pay Canadian taxes on the income they earn in Canada, regardless of where the company they work for is located. In addition, foreign nationals who are considered Canadian residents for tax purposes pay Canadian taxes on worldwide income earned, irrespective of company location(s) or where it was earned.

Paying employer contributions

Employer contributions for employees commonly include healthcare, unemployment insurance, and some version of pension or superannuation funds. Usually, these will be paid in the country where an employee is working from. DTAs do not apply to social security contributions.

However, thresholds might apply here, too, depending on the country.

To return to the Netherlands example from above, a company based in the country will pay benefits in accordance with national regulations for their remote employees for 183 days. After this, employee benefits will be paid in the country where the employee is a resident.

Additional regulations determine what contributions employers have to pay and which country’s rules apply. The European Union sets out clear rules for companies employing across borders between member states.³ The consequences of not employing compliantly can include:

Remedial fines – Paying all benefits owed to employees
Punitive fines – Additional hefty fines

While employing internationally may at first seem like a large undertaking, it is by far the safer option to comply and pay towards your employee’s contributions—wherever they work from.

Employer contributions and legal tax compliance across borders

As detailed above, employees typically need to pay income tax in a given location if they reside there permanently, irrespective of where the company they work for is located. This extends to the portion of their social security and related contributions employers are required to make.

Regular and special rates can vary widely by country.

For example, consider Spain’s required social security contributions.⁴ The total contribution is 36.95% of an employee’s taxable income, on average, but employees themselves are only responsible for 6.47% of that. The remaining 30.48% is expected to be paid by the employer.

In contrast, German employers typically pay half the total burden of an employee’s required contributions.⁵ Employers with remote workers in Germany can expect to pay about 7.9% (half of 15.8%) of a worker’s taxable income for health insurance, 1.7% (half of 3.4%) for long-term care, 9.3% (half of 18.6%) for pension insurance, and 1.3% (half of 2.6%) for unemployment.

Work permits

Remote working doesn’t mean an individual can work wherever they like for extended periods of time. As an employer, you will have to check that your employees have the right to work in the country they have relocated to. Not doing so doesn’t make the employment itself illegal, but it could lead to trouble with the local authorities. If your company is found to have acted irresponsibly, it might have to deal with hefty fines, sanctions, or worse in extreme cases.

To ensure your company is fully compliant, you will need to check your remote employee’s status and the requirements of the foreign country where they are working abroad from.

Work permits and employment authorisation across borders

On the one hand, employees often need specific authorisation in the form of visas or work permits to operate remotely in a foreign country. While unofficially checking an email while on vacation is acceptable in some instances, strict permission is required for permanent setups.

On the other hand, some countries have specific laws and programs in place for ‘digital nomads’ that specifically make it easier for employees to work remotely from them.

For example, consider these digital nomad programs highlighted by legal experts⁶:

Ireland – Nationals of 87 countries can work remotely for 90 days without a visa.

Italy – Workers performing highly technical tasks can qualify for digital nomad visas.

Malaysia – Workers earning at least $24,000 USD annually can become digital nomads.

Many other countries offer similar programs, leveraging foreign workers’ earnings either directly through taxation or indirectly through the stimulation of local economies.

Intellectual property rights

Local jurisdictions define their own intellectual property laws. They tend to specify who retains the rights for intellectual property created during a period of work—the employer or employee.

You will need to assess the intellectual property law in each country where your remote employees are resident, especially if you want to ensure your company retains those rights.

Some countries’ laws automatically ensure intellectual property rights for the employer. However, this can depend on the kind of intellectual property. The safest option is to add additional contracts to the employment agreement, ensuring employer rights to intellectual property created with or using the resources of your company.

Protecting intellectual property rights internationally

When employees work remotely, there are inherent risks to IP that are not present in a traditional, on-premise work engagement. Lacking visibility and control over devices can lead to greater risks of IP theft or loss—which laws like copyright and trademark help protect against.

However, not all countries’ IP laws are created equal.

The US Chamber of Commerce ranks countries’ relative strengths and weaknesses with respect to IP protections.⁷ Nations with high scores (i.e., the UK at 94.12%) offer greater protection for companies and engender greater economy-wide innovation. Some countries that are ideal targets for remote work nonetheless have lower scores on this index (i.e., Australia at 80.75%, Poland at 70.74%, and the Philippines at 41.58%), indicating fewer or weaker IP protections.

This doesn’t mean that companies should avoid letting workers work remotely from these places. However, greater attention needs to be paid to IP policy at the company level.

A related concern has to do with general risks to IP security, irrespective of rights, across borders. Since IP protections are typically specific to a product designation within a domestic market, there is an increased risk of IP theft from competitors (or cybercriminals) in foreign markets where duplicates or derivatives could be harder to seek legal remedies for.