Alder & Sound: Remote working at the Mediterranean Sea-view office – tax obligations to take under consideration
October 14, 2021
Do you dream of having the possibility to work remotely while having a view of the Mediterranean Sea or possibly while enjoying the mild climate of a central European city? If yes, remember also to check the potential foreign tax and legal obligations which may require actions from both the employer and the employee.
The change in work-life culture and the so-called new normal has offered many the opportunity to work remotely abroad. This is a great development and definitely something that employees appreciate. The parties, however, should also remember to check the potential foreign tax and legal obligations which may require actions from both the employer and the employee.
Is there a risk of local obligations for the employer as well?
From a Finnish tax perspective, remote work is typically done at a remote place that is not considered to be the employer’s office or any other place where the physical presence of the employee is required to carry out their duties. Therefore, many of the provisions regarding typical business travel do not apply to remote work.
In addition to the employees’ personal obligations that may arise, there are also several tax and legal obligations of which a Finnish employer could become liable, and which cost real money. Such obligations may be employer registration, withholding obligation, submitting monthly reports to local authorities, and even income tax liability if a so-called Permanent Establishment (see more below) is established. Many of the provisions are based on local legislation that is not open to one’s own interpretation or does not require any formal decisions of establishment.
Six-month rule and 183 days rule
When talking about international working it is often discussed of the so-called six-month rule and of the rule regarding the 183 days. These two separate concepts are often misunderstood, which is understandable, and many countries may even have similar domestic rules. In addition, the provisions of an applicable Double Tax Treaty should be considered.
As a starting point, Finnish Tax Resident’s temporary international remote work does not affect tax liability in Finland. A Finnish Tax Resident is liable to report all income to Finnish Tax Authorities and pay taxes to Finland on their worldwide income. The Finnish six-month rule regarding work abroad means that if certain conditions are met, the income earned while working abroad is tax exempt from Finnish Income tax. Remote working, as understood in taxation, will not fulfill the needed criteria (e.g. the move to another country is not because of the work).
Correspondingly, the 183 days rule of which often is discussed reverts to Double Tax Treaties. This rule typically states that the country in which the work is conducted has a right to tax one’s income if the employee spends more than 183 days in that country during a specific period of time. Additionally, many countries have similar thresholds for the determination of tax or non-tax residency.
As a very high-level rule of thumb, […] remote work which is done for less than 183 days in a Tax Treaty country should not impact to individual’s tax position in Finland and should not create tax liability to a foreign country.Alder & Sound
As a very high-level rule of thumb, it could thus be concluded that remote work which is done for less than 183 days in a Tax Treaty country should not impact to individual’s tax position in Finland and should not create tax liability to a foreign country (considering that neither party has any other presence in the said country).
Having a business unit abroad because of the remote work?
One key topic from an employer’s point of view is the risk of creating a so-called Permanent Establishment (PE) in another country. A PE may lead to creating corporate income tax liability. Typically this means an obligation to file a corporate income tax return and to enter into local tax registrations. The creation of a PE is interpreted by the local tax authorities, and it is subject to review of all circumstances at hand. Generally, a PE is described as a permanent or fixed place of business through which the business (of the entity in question) is carried on and that has sufficient geographical and timely permanence.
In practice, a PE does not has to be an office, shop, factory, or any other employer company’s location. Even an individual employee residing in a country and carrying out work from a home office could create a PE. This individual does not have to be in a top management position (which however would increase the risk) when carrying out the company’s core business activities, signing documents on the entity’s behalf, taking orders, etc. could be sufficient for the creation of a PE.
Does anyone really care?
Obviously, there are many cases where remote work does not lead to foreign tax and legal obligations. In addition, Double Tax Treaties include articles that limit contracting states’ right to tax certain income. Still, the risk of becoming locally tax liable is present, and carrying out the process of registrations and reports may lead to significant administrative costs – especially if all this needs to be done retroactively.
As said, the work-life culture has changed but also the regulation has changed, and each state is willing to collect its own. We deal with similar cases each day and it is no news to us that the authorities audit single individuals and that the countries share information with each other. Please note that the above-mentioned are just few topics to consider, as remote work also involves other aspects, such as employment law and social security issues.
Senior Associate, Tax & Legal Services
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Associate | Tax & Legal Services
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