Teleworking expanded considerably during the Covid-19 pandemic, which forced millions of workers overnight to carry out their duties from home, leading to the widespread adoption of new working methods and tools such as videoconferencing.
Since then, many companies have incorporated teleworking into their current practices, aware of the new habits that have become established and the expectations of workers, who see many advantages in terms of flexibility, savings on commuting time and work-life balance.
However, when it comes to cross-border teleworking, i.e. when workers carry out their duties from a country other than that of their employer's head office where they usually carry out their activities, the tax and social implications are still largely ignored.
Let’s have a look at the latest developments in this area.
What do we mean when we talk about “cross-border telework”?
"Teleworking" (in the private sector) means a form of organisation and/or performance of work, using information technologies within the framework of an employment contract, in which work, which could have been carried out on the premises of the employer, is carried out outside these premises on a regular and structural (i.e. not occasional) basis. According to circular letter 2021/C/20 of 26 February 2021 of the Belgian tax authorities, telework is considered to be performed on a structural and regular basis when it corresponds to at least one day per week.
The concept of "cross-border telework" refers to a telework situation that is organised across the border, i.e. the worker provides teleworker services from a country other than that where the employer has its registered office or place of business.
A relaxed social security framework for cross-border (tele)working in the EU
European Regulation 883/2004 determines the social security system applicable in the event of (tele)working within the European Union, the European Economic Area (EEA) and Switzerland.
According to this regulation, teleworkers are in principle affiliated to the social legislation of the state where they work. In the case where the work is usually carried out in several Member States (pluri-activity), the social legislation of the state of residence applies when the worker carries out a substantial part of their activity (at least 25%) in this state of residence. In the absence of substantial activity in the state of residence, it is the social legislation of the state in which the employer has its registered office or place of business that applies. Specific rules are provided for in the event of multiple employers or a combination of salaried and self-employed activity, as well as for posted workers (secondment).
Until the end of June 2023, a tolerance established in the context of the health crisis made it possible to maintain affiliation to the social legislation of the state of establishment of the employer despite the threshold of 25% of activity in the state of residence being exceeded. Since 1 July 2023, this tolerance has ended, having been replaced by a framework agreement on cross-border teleworking in the EU which offers the possibility for employers and employees to deviate from the usual rules of social security coordination in specific situations of cross-border teleworking.
According to this framework agreement, the employer and the employee can agree to opt for the maintenance of the social security legislation of the Member State of the registered office or the place of business of the employer in the case where:
- The employee has only one employer (or several employers having a registered office in the same Member State)
- The employee usually works in the Member State where the registered office of the employer is established
- The employee usually practises cross-border telework in their state of residence which is not the state of the employer's place of business
- This cross-border teleworking represents less than 50% of total working time.
This new possibility is only available if the state of residence and the state of the employer’s registered office are both signatories to the framework agreement. To date, 18 countries have officially signed the framework agreement, including Belgium and neighbouring countries (the Netherlands, France, Germany, Luxembourg). The list of signatory countries is kept up to date on the National Social Security Office (NSSO) website.
Thanks to this framework agreement, employers and dependant workers can agree on a cross-border teleworking situation (from the worker's home office) without switching the applicable social security legislation, provided that the worker continues to work usually the major part (> 50%) of their time in the country where the employer is established. This framework agreement does not cover a certain number of cases, in particular when teleworking represents less than 25% of total working time or when teleworking takes place elsewhere than in the state of residence of the worker.
But no harmonisation with the tax framework
The tax framework for cross-border telework has not been adjusted as quickly as the social security framework.
The tax rules for cross-border telework depend on double tax treaties concluded between the countries concerned.
The OECD model tax treaty (on which most of the tax treaties concluded by Belgium and neighbouring countries are based) provides, as a general rule, that it is the worker's country of residence that has the power to tax wages, unless the work is performed in the other contracting state and some conditions are fulfilled (the employee carries out activities for more than 183 days in the country of work, or if the wages are paid by a company, or by the local branch of a company, resident in the country of work). If either of these conditions is met, the power of taxation is split amongst the two countries according to the number of days worked in each state on a pro rata basis.
Hence, cross-border (tele)work ends up in a division of taxation power between the worker's country of residence and the country of activity, which differs fundamentally from the approach to social security, where the guiding principle is the application of a single national legislation of a Member State.
For completeness’ sake, it should be noted that some tax treaties concluded by Belgium (namely with France and with Luxembourg) include specific rules for frontier workers. The treaty with Luxembourg allows up to 34 days per year of (tele)working in the state of residence without calling into question the exclusive taxation in the state of activity (the country of the employer's premises) and the treaty with France allows up to 30 days per year of (tele)working outside the Belgian border zone without calling into question the exclusive taxation in France.
We must also mention that during the Covid-19 pandemic period, Belgium concluded amicable agreements with neighbouring countries (Germany, France, Luxembourg and the Netherlands) to avoid unwanted (and unanticipated) tax implications linked to temporary travel restrictions. These amicable agreements made it possible to assimilate the days of work from the worker's home office as days worked on the territory of the state of habitual employment (at the employer’s premises) provided that the work at home was the result of travel restrictions for public health purposes. These amicable agreements allowed to avoid the tilting of the power of taxation towards the state of residence of the (tele)worker. These amicable agreements ended on 30 June 2022 and the normal rules provided for in the tax treaties have been fully applicable again since, with a division of the power of taxation between the state of residence of the (tele)worker and the state of the employer's premises in proportion to the days worked on each side of the border (unless specific rules for frontier workers apply).
This division of the taxation power with respect to the salaries of cross-border teleworkers is a source of complexity that must be well understood and managed.
Workers might have to complete two income tax returns: one in their country of residence and the other in their usual country of employment (employer's premises). It is important to maintain supporting evidence of the reality of the days worked in both countries to be able to answer any questions from the tax authorities of the countries concerned. Teleworkers should also consider the potential impact on their overall tax burden in the event of a difference in tax pressure between the country of habitual occupation and the country of residence.
The employer for its part must manage, and ideally anticipate, various potential consequences of cross-border teleworking.
Regarding payroll, it may be necessary to adjust payroll taxes in the usual state of activity and to organise a shadow payroll in the country of residence in the event of a wage withholding tax obligation in that jurisdiction.
In terms of corporate tax, it must be checked whether cross-border teleworking induces a tax obligation for the employer in the state of residence of the worker. This will be the case when the home office or the activity of the teleworker constitutes a permanent establishment for the company with the need to allocate part of the taxable profit to this permanent establishment. Transfer pricing issues (profit allocation key between head office and permanent establishment) may arise as well.
The concept of permanent establishment is defined in the tax treaties. It is also necessary to consider the concept of Belgian establishment according to Belgian domestic law, which is broader than that of permanent establishment.
Note that a permanent establishment can take several forms, including:
- The material permanent establishment, which consists of a fixed business installation through which a company carries out all or part of its core business (therefore no preparatory or auxiliary activities), such as an office, for example. This installation is characterised by a certain permanence and its availability for the company. The central question in assessing whether there is a material permanent establishment is whether or not the home office is at the disposal of the employer. This is a factual question that will have to be answered on a case-by-case basis depending on how teleworking is organised and the context (does the teleworker also have a workspace at his employer's or elsewhere? Is telework imposed by the employer or is it the result of the personal convenience of the worker? etc).
- The agency permanent establishment, which is constituted by a person, other than an agent enjoying an independent status, who has the mandate of the company to conclude (sign) contracts on behalf of the company or who plays a leading role in the negotiation of contracts which are then finalised (signed) by the company without substantial modification.
During the pandemic, given the unique and temporary circumstances, most countries followed the OECD recommendation not to consider the home office a permanent establishment due to teleworking from home.
Since the end of the pandemic, the normal rules for admitting a permanent establishment have once again been fully applied and these are of course likely to encourage employers to be extremely cautious when admitting cross-border telework.
Company policies in this area generally make cross-border teleworking subject to the prior authorisation of the employer and stipulate a maximum number of (consecutive) days abroad as well as exclusions for certain positions or activities.
More recently, an EU working group looked at the tax consequences of cross-border teleworking in a post-covid world and recommends the adoption of specific rules. For the time being, however, harmonisation of tax and social rules does not seem to be on the agenda.
On the occasion of a parliamentary question (QP 1424 of 29 March 2023 from Mr Arens, Q&R, Chambre, 55, n°110, p. 136-137), the Minister of Finance indicated that Belgium favours the search for a structural solution at the international level for cross-border workers, rather than working through bilateral agreements (tax treaties). It must be noted that the new tax treaties recently concluded with France (9 November 2021) and the Netherlands (21 June 2023) have not been used to agree on a specific rule for situations of cross-border teleworking.
Initiatives to obtain a European framework for the taxation of workers are multiplying and recently, the Euroregions between Belgium, the Netherlands and Germany wrote to their respective Finance ministers to obtain a European fiscal framework on the issue of telework.
* * *
This communication is for general informational purposes and reflects the author's personal perspective. AKD does not provide professional advice or services through this communication and shall not be held liable for any losses incurred by individuals relying on its content. AKD's experts are at your disposal to assist you in understanding the tax and social implications of cross-border teleworking, adjusting your payroll processes, identifying your tax obligations, assessing the risk of permanent establishment and other potential corporate tax consequences for the company and more generally define and draft a company policy in this area. Do not hesitate to contact us at Fjacquet@akd.eu or +32 2 629 42 61
Teleworking expanded considerably during the Covid-19 pandemic, which forced millions of workers overnight to carry out their duties from home, leading to the widespread adoption of new working methods and tools such as videoconferencing.
Since then, many companies have incorporated teleworking into their current practices, aware of the new habits that have become established and the expectations of workers, who see many advantages in terms of flexibility, savings on commuting time and work-life balance.
However, when it comes to cross-border teleworking, i.e. when workers carry out their duties from a country other than that of their employer's head office where they usually carry out their activities, the tax and social implications are still largely ignored.
Let’s have a look at the latest developments in this area.
What do we mean when we talk about “cross-border telework”?
"Teleworking" (in the private sector) means a form of organisation and/or performance of work, using information technologies within the framework of an employment contract, in which work, which could have been carried out on the premises of the employer, is carried out outside these premises on a regular and structural (i.e. not occasional) basis. According to circular letter 2021/C/20 of 26 February 2021 of the Belgian tax authorities, telework is considered to be performed on a structural and regular basis when it corresponds to at least one day per week.
The concept of "cross-border telework" refers to a telework situation that is organised across the border, i.e. the worker provides teleworker services from a country other than that where the employer has its registered office or place of business.
A relaxed social security framework for cross-border (tele)working in the EU
European Regulation 883/2004 determines the social security system applicable in the event of (tele)working within the European Union, the European Economic Area (EEA) and Switzerland.
According to this regulation, teleworkers are in principle affiliated to the social legislation of the state where they work. In the case where the work is usually carried out in several Member States (pluri-activity), the social legislation of the state of residence applies when the worker carries out a substantial part of their activity (at least 25%) in this state of residence. In the absence of substantial activity in the state of residence, it is the social legislation of the state in which the employer has its registered office or place of business that applies. Specific rules are provided for in the event of multiple employers or a combination of salaried and self-employed activity, as well as for posted workers (secondment).
Until the end of June 2023, a tolerance established in the context of the health crisis made it possible to maintain affiliation to the social legislation of the state of establishment of the employer despite the threshold of 25% of activity in the state of residence being exceeded. Since 1 July 2023, this tolerance has ended, having been replaced by a framework agreement on cross-border teleworking in the EU which offers the possibility for employers and employees to deviate from the usual rules of social security coordination in specific situations of cross-border teleworking.
According to this framework agreement, the employer and the employee can agree to opt for the maintenance of the social security legislation of the Member State of the registered office or the place of business of the employer in the case where:
- The employee has only one employer (or several employers having a registered office in the same Member State)
- The employee usually works in the Member State where the registered office of the employer is established
- The employee usually practises cross-border telework in their state of residence which is not the state of the employer's place of business
- This cross-border teleworking represents less than 50% of total working time.
This new possibility is only available if the state of residence and the state of the employer’s registered office are both signatories to the framework agreement. To date, 18 countries have officially signed the framework agreement, including Belgium and neighbouring countries (the Netherlands, France, Germany, Luxembourg). The list of signatory countries is kept up to date on the National Social Security Office (NSSO) website.
Thanks to this framework agreement, employers and dependant workers can agree on a cross-border teleworking situation (from the worker's home office) without switching the applicable social security legislation, provided that the worker continues to work usually the major part (> 50%) of their time in the country where the employer is established. This framework agreement does not cover a certain number of cases, in particular when teleworking represents less than 25% of total working time or when teleworking takes place elsewhere than in the state of residence of the worker.
But no harmonisation with the tax framework
The tax framework for cross-border telework has not been adjusted as quickly as the social security framework.
The tax rules for cross-border telework depend on double tax treaties concluded between the countries concerned.
The OECD model tax treaty (on which most of the tax treaties concluded by Belgium and neighbouring countries are based) provides, as a general rule, that it is the worker's country of residence that has the power to tax wages, unless the work is performed in the other contracting state and some conditions are fulfilled (the employee carries out activities for more than 183 days in the country of work, or if the wages are paid by a company, or by the local branch of a company, resident in the country of work). If either of these conditions is met, the power of taxation is split amongst the two countries according to the number of days worked in each state on a pro rata basis.
Hence, cross-border (tele)work ends up in a division of taxation power between the worker's country of residence and the country of activity, which differs fundamentally from the approach to social security, where the guiding principle is the application of a single national legislation of a Member State.
For completeness’ sake, it should be noted that some tax treaties concluded by Belgium (namely with France and with Luxembourg) include specific rules for frontier workers. The treaty with Luxembourg allows up to 34 days per year of (tele)working in the state of residence without calling into question the exclusive taxation in the state of activity (the country of the employer's premises) and the treaty with France allows up to 30 days per year of (tele)working outside the Belgian border zone without calling into question the exclusive taxation in France.
We must also mention that during the Covid-19 pandemic period, Belgium concluded amicable agreements with neighbouring countries (Germany, France, Luxembourg and the Netherlands) to avoid unwanted (and unanticipated) tax implications linked to temporary travel restrictions. These amicable agreements made it possible to assimilate the days of work from the worker's home office as days worked on the territory of the state of habitual employment (at the employer’s premises) provided that the work at home was the result of travel restrictions for public health purposes. These amicable agreements allowed to avoid the tilting of the power of taxation towards the state of residence of the (tele)worker. These amicable agreements ended on 30 June 2022 and the normal rules provided for in the tax treaties have been fully applicable again since, with a division of the power of taxation between the state of residence of the (tele)worker and the state of the employer's premises in proportion to the days worked on each side of the border (unless specific rules for frontier workers apply).
This division of the taxation power with respect to the salaries of cross-border teleworkers is a source of complexity that must be well understood and managed.
Workers might have to complete two income tax returns: one in their country of residence and the other in their usual country of employment (employer's premises). It is important to maintain supporting evidence of the reality of the days worked in both countries to be able to answer any questions from the tax authorities of the countries concerned. Teleworkers should also consider the potential impact on their overall tax burden in the event of a difference in tax pressure between the country of habitual occupation and the country of residence.
The employer for its part must manage, and ideally anticipate, various potential consequences of cross-border teleworking.
Regarding payroll, it may be necessary to adjust payroll taxes in the usual state of activity and to organise a shadow payroll in the country of residence in the event of a wage withholding tax obligation in that jurisdiction.
In terms of corporate tax, it must be checked whether cross-border teleworking induces a tax obligation for the employer in the state of residence of the worker. This will be the case when the home office or the activity of the teleworker constitutes a permanent establishment for the company with the need to allocate part of the taxable profit to this permanent establishment. Transfer pricing issues (profit allocation key between head office and permanent establishment) may arise as well.
The concept of permanent establishment is defined in the tax treaties. It is also necessary to consider the concept of Belgian establishment according to Belgian domestic law, which is broader than that of permanent establishment.
Note that a permanent establishment can take several forms, including:
- The material permanent establishment, which consists of a fixed business installation through which a company carries out all or part of its core business (therefore no preparatory or auxiliary activities), such as an office, for example. This installation is characterised by a certain permanence and its availability for the company. The central question in assessing whether there is a material permanent establishment is whether or not the home office is at the disposal of the employer. This is a factual question that will have to be answered on a case-by-case basis depending on how teleworking is organised and the context (does the teleworker also have a workspace at his employer's or elsewhere? Is telework imposed by the employer or is it the result of the personal convenience of the worker? etc).
- The agency permanent establishment, which is constituted by a person, other than an agent enjoying an independent status, who has the mandate of the company to conclude (sign) contracts on behalf of the company or who plays a leading role in the negotiation of contracts which are then finalised (signed) by the company without substantial modification.
During the pandemic, given the unique and temporary circumstances, most countries followed the OECD recommendation not to consider the home office a permanent establishment due to teleworking from home.
Since the end of the pandemic, the normal rules for admitting a permanent establishment have once again been fully applied and these are of course likely to encourage employers to be extremely cautious when admitting cross-border telework.
Company policies in this area generally make cross-border teleworking subject to the prior authorisation of the employer and stipulate a maximum number of (consecutive) days abroad as well as exclusions for certain positions or activities.
More recently, an EU working group looked at the tax consequences of cross-border teleworking in a post-covid world and recommends the adoption of specific rules. For the time being, however, harmonisation of tax and social rules does not seem to be on the agenda.
On the occasion of a parliamentary question (QP 1424 of 29 March 2023 from Mr Arens, Q&R, Chambre, 55, n°110, p. 136-137), the Minister of Finance indicated that Belgium favours the search for a structural solution at the international level for cross-border workers, rather than working through bilateral agreements (tax treaties). It must be noted that the new tax treaties recently concluded with France (9 November 2021) and the Netherlands (21 June 2023) have not been used to agree on a specific rule for situations of cross-border teleworking.
Initiatives to obtain a European framework for the taxation of workers are multiplying and recently, the Euroregions between Belgium, the Netherlands and Germany wrote to their respective Finance ministers to obtain a European fiscal framework on the issue of telework.
* * *
This communication is for general informational purposes and reflects the author's personal perspective. AKD does not provide professional advice or services through this communication and shall not be held liable for any losses incurred by individuals relying on its content. AKD's experts are at your disposal to assist you in understanding the tax and social implications of cross-border teleworking, adjusting your payroll processes, identifying your tax obligations, assessing the risk of permanent establishment and other potential corporate tax consequences for the company and more generally define and draft a company policy in this area. Do not hesitate to contact us at Fjacquet@akd.eu or +32 2 629 42 61