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Written by: Chris Gore

Chris Gore

Associate Director

UK employees working overseas could fall into a tangled tax web

When working arrangements changed for millions of people on 23 March, few would have anticipated how long this would last. Almost overnight, employers transitioned their employees to working from home. Employers have seen first-hand that employees can work efficiently from home and many are enjoying an improved work/life balance.

But where is home? It is an interesting question. Some employers have actively engaged in allowing their employees to fly to other tax jurisdictions, while their offices remained closed. Others have discovered employees working overseas without their knowledge. We need to be mindful that any relaxations as a result of coronavirus may not apply, where employees have elected to remain in, or specifically relocated to, a different tax jurisdiction.

Tax

The employer may not be interested if the employee triggers a personal tax obligation, after all this is the employee's own liability. They may be going to a tax jurisdiction with which the UK has a Double Tax Treaty so, providing the employee is there for less than 183 days, there may not be a local tax liability. Even where an employee meets the conditions of a relevant DTT, they may still be obliged to file a local tax return to claim relief under the treaty.

If the UK does not have a DTT with the local tax jurisdiction, the employee may have a local tax liability, even as a non-resident, as employment income is sourced where the duties are performed. 

Employers should consider whether the employee's presence will lead to payroll tax or social security withholding obligations for them as an overseas employer. There is also a risk of the employee's presence creating a Permanent Establishment for the UK employer.

Although many tax jurisdictions require the employer to have a local address to create a payroll tax withholding obligation, this will not be the case for all, and local advice should be sought. In the US, local payroll tax withholding may be required at city or state level, even where the DTT would give relief at federal level.

Future complications may arise regarding bonus payments and equity vesting.

Social Security

Where an employee is going to a jurisdiction covered by the EU Social Security Regime, or one with a reciprocal agreement, the employer should apply for a posted worker A1 certificate or certificate of coverage, to provide exemption from local social security contributions. Legislation introduced on 1 January 2019 means employees may need to carry an A1 certificate to avoid liability for social security contributions and potential fines in another EEA country.

If the employee travels to a “Rest of the World” location (not covered by the EU regime or an agreement country), the employee and employer may have a local social security liability and potentially a payroll withholding obligation.

Permanent Establishment

An employee working remotely overseas will always raise the question of the Permanent Establishment (PE) risk so local advice should be sought.

Where an employee works temporarily from their overseas home, temporary accommodation or other remote location, this should minimise the risk of the UK employer being considered to have a fixed place of business in that jurisdiction.   

If the employee has influence over the business, such as a CEO, any decisions made on behalf of the business while overseas may increase the risk of triggering a PE, or potentially bringing the tax residency of the UK employer into question. 

Where an employee has the authority to negotiate and conclude contracts, exercising this authority may raise an agency PE.

As UK employers become more receptive to international remote working and these working arrangements become more permanent, the risks of creating local reporting obligations increase significantly. These obligations can be retrospective, and we are already talking to clients about how this could impact their future working arrangements.

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