Remote working – not entirely risk free

November 2022 | SPOTLIGHT | LABOUR & EMPLOYMENT

Financier Worldwide Magazine

November 2022 Issue

We have all seen it: the picture of the straw hatted beach dweller with a laptop living the dream of sitting by the sea and running a multimillion-pound business while sipping a pina colada.

Setting aside the danger of drinking on work time, we must ask the question: what is the tax position around this? What are the pitfalls for the thrusting young start-up guru who wants to live by the beach in Spain, or Italy, Morocco, South Africa or wherever, and work from all of those places whenever, however, he or she chooses? What warnings should a tax professional offer to executives?

The international tax system is designed to tax entities in ways set down before the invention of laptops. Those rules still apply and no matter how much people want their dream life, they must take note of them.

Corporate residence

Corporate residence always matters. Generally (with some notable exceptions, such as Hong Kong and Gibraltar) jurisdictions tax companies based on their worldwide income and gains if they are tax resident in that country. It is important to understand that place of tax residence and place of incorporation are not always the same thing, and that a company can be resident in more than one place (subject to double taxation treaties (DTT)). There are generally two types of tax residence test. The first is incorporation. For countries which have incorporation as a tax residence test, it is generally a backstop position. The UK, for example, treats all UK incorporated entities as resident in the UK unless a DTT otherwise says so. Many other countries have this rule. The second test is management. Though there are variations on the theme, most countries also have the rule that where a company is ‘managed’ in their territory it becomes tax resident there. For example, France speaks about companies ‘operated’ from France, while Germany speaks of ‘place of management’. Each of these rules is slightly different but in essence if a company is managed in a country, it is taxable on its worldwide income and gains in that country (unless there are country specific reasons why that is not the case).

The management-based test for corporate residence obviously poses a challenge for a young start-up chief executive officer (CEO) who wants to work from a Tuscan farmhouse, a Spanish villa or any other country with a relevant test. If the strategic management rests with him or her, then the company registered in a tax-friendly jurisdiction may well be tax resident in a less tax-friendly jurisdiction. At worst the company could be accused of evading tax, and at best he or she could be open to investigation.

Permanent establishment

It is not just about CEOs and top-level management, however. There is the concept of permanent establishment (PE). A PE is a sort of minimum connectedness that a company tax resident in Country A needs to have to Country B to be taxable in Country A. The concept itself comes from article 5 of the Organisation for Economic Co-operation and Development’s (OECD’s) Model Double Taxation Agreement and is embedded in the laws of most countries. There are two forms of PE in article 5, but here we will ignore the ‘bricks and mortar PE’ which requires a fixed place of business, as we are concerned with remote workers, not offices (though any enterprise with a fixed place of business in another country should take advice in the relevant jurisdictions).

Article 5 states that: “Where a person is acting in a Contracting State on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the leading role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are: (i) in the name of the enterprise; (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or (iii) for the provision of services by the enterprise that enterprise shall be deemed to have a permanent establishment in that state in respect of any activities which that person undertakes for that enterprise.”

With this in mind, let us imagine a French company with a sales director who works from his villa in a country which has made this concept part of their domestic law. He concludes contracts for sales of widgets with customers and notifies France what the order is. Under article 5 and its derived legislation, the profits of the contracts he concludes will be taxable not in France, but in the country where he lives – a tax return must be filed, and registrations must be undertaken. A company which closes its eyes to this will be viewed as non-compliant for tax.

Local employment and administrative law

We have spoken about very high-level tax concepts so far, but there are of course more mundane, everyday issues as well.

For example, in Gibraltar one cannot be an employer without registering as such with the Department of Employment. In nearly all countries, employers need to be registered with the local tax authorities for the purposes of the equivalent of PAYE (employment withholding). These are all relevant and necessary actions for compliance.

There are doubtless a number of employers taking a ‘don’t ask don’t tell’ approach to the location of their employees. Some less scrupulous companies write contracts that say “employment can be delivered in Country X” but turn a blind eye to the fact that the employee is in Country Y. There are very few countries which will tolerate such a position, and one must query what the position of such an individual employee will be when, in 30- or 40-years’ time, they come to retire. Where will they have paid sufficient social security contributions? Will they be able to claim cross-border? Have they properly filed tax returns in their country of residence, or have they simply ignored the law? In a world with aging populations, the rules around state pensions can only be expected to tighten. Quick fixes now can have long-term effects.

Conclusion

The problem now is that people are beginning to believe it is their right to work remotely, that their employer is being unreasonable or that the system must change. Except the system will not change easily and it will certainly not change fast. It has taken over 100 years for the concept of PE to become almost universally accepted. That cannot be unpicked in a few years because internet speeds have allowed functional remote working. Instead, companies should be aware of the issues these changes bring. They should monitor and understand the tax consequences of the locations of their senior managers and other staff. They should be aware of the consequences of what appears to be an HR-related decision.

Remote working brings risk. It should not be something that happens without analysis of that risk. Most importantly, good advice in the relevant jurisdictions should be taken. The world is a patchwork of jurisdictions with slightly different rules, and this article can only be a high-level summary of a few potential issues. Greater awareness is required – only then can the issues be dealt with, and companies can avoid pitfalls that could lead to lengthy tax investigations and large tax bills.

Grahame Jackson is a partner at Hassans International Law Firm. He can be contacted on +350 200 79000 or by email: grahame.jackson@hassans.gi.

Grahame Jackson

Hassans International Law Firm