It cannot be denied that we are living in the times of global digital economy. Young people from Generation Z are not the only ones who do not take into account something that was the norm for older generations, i.e., the option to work 9-17 for 5 days a week in one company for 10-15 years. And young people are not the only ones who want to feel free. Does the current situation encourage also entrepreneurs to create new working conditions, conquer new markets? This raises the important question of what is associated with work from a place around the world different from the employer’s registered office – we are dealing, of course, with the tax consequences of relocating employees.
With the dynamic expansion of Polish companies, but also openness to remote cooperation, it is worth considering what is associated with posting your employees to work or giving them the freedom to work remotely “no matter where from”. In this article, we will address the issue of what happens when temporary relocation of employees occurs as part of foreign expansion, particularly of the provision of services in another country. What and how should you check in terms of taxation and social insurance contributions on the remuneration of your team? Most employees do not think about it much, shifting the burden of collecting taxes and contributions onto the employer – the payer. And the burden and responsibility of payers may grow large and unfortunately require cooperation on the part of the employee, because without such basic information as place of residence, PESEL (personal identification number) number or knowledge about other labour relationships, it is not possible to properly calculate and collect public-legal liabilities and avoid the risk of double taxation.
The work of a posted employee – where to tax it?
Whenever you consider where a given income should be taxed, it is worth considering two aspects: the place of income source and the taxpayer’s place of residence (this does not necessarily equate their citizenship!). In the case of income from an employment relationship, the place of income source is the place where the work is carried out, i.e., where the person who performs the work resides. Here it is important to assess who is the taxpayer and where the tax should be paid (in the country of the employer or employee).
In the simplest model, the country of employment, the employee’s residence, and the employer’s registered office are the same. The issue becomes complicated when a foreigner is employed, or a Pole temporarily goes to work abroad. In this case, the source country is different from the taxpayer’s country of residence, and we have a conflict of tax jurisdictions, when each country wants to get something out of this tax cake for itself. Consequently, in order to avoid double taxation, it is necessary to refer not only to the national law, but also to the provisions of the relevant double taxation avoidance agreement.
Remote work vs. double taxation and posting of employees – A note
It is important to prepare well for a situation where work is carried out in a different place than the employer’s country of residence. When are we bound to deal with this?
There are many options: a Pole working in Poland for a foreign company, a Spaniard working for a Polish company in Spain or finally a Polish employee sent by a Polish employer to assemble a machine at a customer’s site in Switzerland or to implement a project in Germany. There are also cases where a Polish employee is posted to work in a foreign branch, e.g., in Spain, and then is sent to France to carry out assembly.
In all these cases, the country of employment differs from the place of the employer’s registered office, and in most systems the payer’s obligations in the case of salaries from the employment relationship (due to taxes and social security contributions) are incumbent on the employer. Apart from the issue of a foreign work establishment (which should always be verified in the case of such cross-border activities), as a payer you may be obliged to register and fulfil your payment obligations in the country of employment. Sometimes (e.g., in Poland), the function of the payer (of both contributions and taxes) under the contract may be taken over by the employee.
After all, the most difficult situation seems to be the one in which the employee and the employer reside in one country and the work is done elsewhere. Following the principle of the taxation of work at the place of work, i.e., in the source country, it could happen that an employer posting employees to assemble a machine park at a customer’s site in Switzerland would be forced to register as a payer and pay taxes for, let us say, 1 month in the territory of Switzerland.
The 183 days rule – rescue in the Double Taxation Avoidance Agreements (DTAA)
In case such situations arise, double taxation avoidance conventions based on the OECD Model Tax Convention provide for provisions allowing labour income to remain taxable only in the employee’s country of residence.
However, this is only possible if the three conditions laid down in that provision are met simultaneously:
- the employee stays in the other country for a period or periods not exceeding a total of 183 days (the period in which these 183 days should be calculated results from the provisions of a specific double taxation avoidance agreement)
- the remuneration is paid by or on the behalf of an employer who is not residing nor has registered seat in another country,
- the remuneration is not borne by the company or permanent establishment which the employer owns in the other country
Therefore, as a Polish employer, you are still obliged to collect tax advances in Poland, according to Polish taxation rules.
This solution greatly simplifies the matter in situations such as the example given of machine park assembly. However, if we are talking about projects or situations when the duration of the posting is uncertain (it is close to 6 months), great caution should be exercised. Due to the fact that the conditions should be met jointly, deviation in one of them is sufficient to make it impossible to apply taxation only in the employee’s country of residence.
And there are several risk areas: the period of stay may exceed 183 days, the activity of your employee in a given area may cause setting up your company’s establishment in another country.
it may happen that the country of employment considers that the conditions have not been met in the past and may therefore require the registration of the taxpayer and the fulfilment of obligations retroactively. This raises very practical problems with the collection and payment of such advances abroad and the correct indication of advances collected already in Poland.
The social security system works differently in various countries. There are different bases for calculating contributions, their rate, as well as the scope and amount of benefits to which the insured are entitled. In order not to hold back the free movement of workers in the European Union, a regulation on the coordination of social security systems was introduced[i]. It determines, among others, which security system a person should be subjected to in the situation of converging insurance titles, that is, among others, in the case of performing work in several countries. The principle is to be subjected to one social security system.
Thus, in accordance with the general principle expressed in the regulation, a person is subjected to the social insurance in the country where they work. It would seriously complicate the situation in the case of employees delegated by their employer to work in another country. This would involve registering the employer each time as a taxpayer and paying contributions in the country of employment (often in an unfamiliar legal system) but would also complicate the employee’s usage of insurance benefits. Counteracting this problem in Art. 12 of the regulation we have an exception to this rule. It applies to posted workers and allows them to remain “under the authority” of the legislation of the employer’s country if the period of posting does not exceed 24 months and the person is not sent to replace another posted person. Similar rules apply to persons conducting business activity on their own behalf. They can benefit from this solution, too. Thus, this makes the situation much easier. However, the nuances resulting from these provisions need to be borne in mind, i.e., consideration of when a delegation occurs or what the activity normally performed in a given country is.
The regulations mentioned here result from the EU Regulation, and therefore concern the countries of the European Union, the European Economic Area and Switzerland. As for the other countries, always verify whether there exist bilateral agreements on the coordination of social security systems and where the contributions should be paid.
Two words on labour laws, in the context of the posting of workers
It is impossible not to mention the EU Directive on the posting of workers in the framework of the provision of services[ii]. Its aim is to unify the rights and obligations of both employers and employees, so that the rights of workers moving within the European Union are respected and, at the same time, the freedom of movement does not negatively affect competition. When posting a worker to another country, it is necessary to familiarise yourself with the local conditions of labour law and the rules resulting from the implementation of the directive.
Expanding your business beyond the borders of Poland is a complex process. It requires business planning, tax planning, marketing planning. Moreover, when employees are involved, especially when you are so conciliatory and your team can work remotely from another place in the world – remember, there are new topics regarding their tax residences, labour laws and payment obligations of the company, and sometimes even your company’s establishment, and this directly affects your taxes. At some point, you may be surprised by various responsibilities, and yet your goal was smooth development and business activity, not solving and tidying formal matters. We recommend that when it comes to international cooperation, employee posting or working with an employee staying in another country for a long time, you should always consult experts.
[i] Regulation 883/2004 on the coordination of social security systems OJ L 2004.166.1 of 30 April 2004
[ii] Directive 96/71/EC on the posting of workers in the framework of the provision of services; OJ L 1997.18.1 of 21 January 1997