Travel restrictions could have resulted in companies inadvertently creating permanent establishments in other jurisdictions and, for certain businesses, dealing with the tax implications of migrating tax residency.
Many businesses rely on employees who move across borders for client meetings, conferences, deal-making or long-term assignments. As the Covid-19 pandemic spread and international flights were grounded, both short-term business travellers and those working overseas for longer periods of time were left stranded.
If your employees are working from another country, even temporarily during the pandemic, you should consider the tax implications of these cross-border working arrangements.
The unexpected tax implications of employees stuck abroad
Working from home, “remote” or “agile” working, has become increasingly prevalent over the last few years. However, the Covid-19 outbreak has, over a very short period, seen a huge volume of employees, contractors and agents move from working in an office to being forced to work from home.
In a purely domestic context, such changes may not cause many immediate tax concerns for a business. However, for businesses that have suddenly gone multinational, there are a number of issues to consider.
Permanent establishment risk
A permanent establishment is a fixed place of business in another country that results in an income tax liability in that country. While many countries have different rules on permanent establishment, typically, a permanent establishment arises where a company has:
A fixed place of business
A place is considered a fixed place of business when work is carried out there with a certain degree of permanence. There is no minimum time for a fixed place of business to become a permanent establishment, but generally, a place of business will not be treated as a permanent where it exists for less than six months and is not a recurring place of business.
A dependent agent
A dependent agent is someone who does business on behalf of the company to conclude binding contracts in the name of the business. This does not only include the signing of a contract, but also determining terms and conditions of a contract, with the power to negotiate.
Not every activity carried out on behalf of the company will result in establishing a permanent establishment. The activities must be regular and permanent.
In many countries, the mere act of engaging an employee can trigger a determination from the local revenue authorities that the employer has a permanent establishment, which can create local taxation obligations. This can cause the company to become liable for various taxes, including corporate income tax, Value Added Tax (VAT) and payroll taxes. Cross-border employees will likely be subject to foreign country payroll tax and foreign individual income tax filings may be required. Individual income tax returns filed in the home country may also become more complex as a result of the foreign country taxes.
Tax residency risk
Under the UK’s domestic laws, a non-incorporated company would be considered resident if its “central management and control” is exercised in the UK – i.e. where the governing body or the directors meet, and where the shareholders at large hold their general/special meetings and exercise their power and make decisions.
HMRC's approach, for example, is to:
- Ascertain whether the directors of the company actually exercise central management and control
- If they do, establish in which jurisdiction such management and control is exercised, or
- If they do not, establish who does exercise central management and control of the company, and where
Many companies with an international management team will have protocols in place to ensure that board meetings are the forum through which central management and control is exercised. However, under current conditions, directors who would previously have travelled to a quarterly board meeting in a single jurisdiction may no longer be able to do so, and instead these meetings are conducted via phone or video call. However, if management and control is in a different jurisdiction from where the company is incorporated, the company may be considered to be dual resident.
A tie-breaker test may be applied to determine the country of residency, but this is only possible if there is a relevant tax treaty between the two countries.
Should a company wish to keep its tax residency outside the UK, directors should avoid joining a meeting remotely from the UK
Other tax issues
There are other tax issues to consider. Stranded employees who are forced to work in another country may risk unintentionally becoming tax resident.
The pandemic has created highly complex cross-border individual and corporate regulatory and tax risks. We offer accounting services and financial management to small businesses that are faced with these challenges. Get in touch with our accountants on +44 (0) 20 7759 7553 or email@example.com
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