Enforced remote working during the pandemic coupled with today’s connected technologies have emboldened many employees to feel they can work from anywhere. At the same time, a growing number of countries have introduced digital nomad visa schemes to entice individuals to come and work within their borders.

It's no surprise then that employers increasingly receive requests from employees eager to work remotely overseas – whether it’s a working week tagged onto a holiday or a more permanent arrangement. Deciding whether or not to say ‘yes’ requires careful consideration of the tax, payroll and employment implications.

Will working remotely overseas create a corporate tax liability in the host country?

The biggest concern for employers allowing remote working overseas is that the arrangement could create a permanent establishment (PE) in the host country. This could arise if the employee’s home office is considered a fixed place of business at the disposal of the employer or if the employee is deemed a ‘dependent agent’ who habitually exercises the authority to conclude contracts on the employer’s behalf.

An important reference point is updated guidance from the Organisation for Economic Corporation and Development (OECD), which has recently clarified the circumstances in which overseas remote work creates a taxable presence for a business. It states that where an individual works from home in an overseas jurisdiction for less than 50% of their total working time over the course of a 12-month period, the individual’s home office should generally not be considered a fixed place of business (though not in all cases).

Where an individual works from home overseas for 50% or more of their total working time over the course of a 12-month period, their home office could be considered a fixed place of business, depending on the circumstances. Key considerations include whether the individual’s presence in the overseas jurisdiction serves a commercial purpose, such as enabling direct engagement with customers or suppliers.

Please note that the guidance is limited to home working arrangements. Employees who rent office space to work from or who negotiate with customers on behalf of the employer could still create a PE. The domestic rules should still be considered for each location along with whether that country follows the OECD guidance.

Will the employee be liable to tax and social security in the host country?

Cross-border working does not always generate a tax liability in the host location for an individual. A number of inter-country agreements exempt individuals from personal tax or social security in the host country. However, those agreements are subject to conditions that must be met in order to secure an exemption.

Employees who add a week’s work overseas to a planned holiday are unlikely to be liable to tax and social security in the host country. This will depend, though, on their personal circumstances, including whether they are a national of the host country and whether there is a double taxation agreement in place.

Employees staying longer in a country will need to consider the tax residence position for that location to determine if they will be taxable.

Will there be any payroll obligations in the host country?

Where there is a PE, it is almost certain that there will be payroll obligations. In addition, some jurisdictions have a lower threshold for imposing payroll obligations even where there is no PE. Under UK/EU social security co-ordination rules, for instance, an employer is required to operate a payroll in the host country to account for the social security for any employee liable to pay in that country.

Use of an overseas employer of record may be beneficial (though expensive) in the short term, but engaging local payroll providers should be considered for long-term remote working.

Are there other considerations?

Employers should have a policy in place making it clear what sort of remote working will be approved and the processes for obtaining approval, including which roles are authorised to review and approve requests.

For longer-term remote working arrangements, employers should be aware that local employment laws in the host country are likely to apply and may override the terms of the employee’s contract.

Employers should also consider whether their IT infrastructure can securely support overseas access, including data protection, encryption and other security measures. Bear in mind that local laws could restrict data transfers or require additional safeguards for accessing company systems from abroad.

Further guidance

THE OECD is currenting consulting on the various concerns that create barriers to overseas remote working opportunities. It is hoped that agreement can be reached leading to further guidance in respect of both personal income tax and corporate tax alongside connected issues such as social security and immigration.

Responsibilities beyond borders

Overseas remote working can offer real benefits for both employers and employees, but it requires clear boundaries and informed decision-making. Given the complexity and implications, early input from specialists in the UK and destination country can make a material difference.

RSM can provide tailored, practical advice to help you assess and implement overseas remote working arrangements effectively. To discuss your circumstances, please get in touch with Joanne Webber or your usual RSM contact.

Latest related insights