International employment: tax and social security challenges of cross-border teleworking from the 'home office'

The outbreak of the COVID-19 pandemic and the subsequent shift to working from home, accompanied by widespread digitalization, led to a totally new way of working.

Today, it seems that teleworking is here to stay for many companies – sometimes at the request of the employee (because of better work-life balance and flexibility), or other times, at the request of the employer (because of cost saving  on office space and travel).

During the pandemic, international guidelines were issued regarding the tax and social security aspects of “home working”. However, post-COVID, the general principles of international employment, which are not adapted to this new way of “home working”, are applicable. When an employee works in a country that is not their home state, it can lead to a lot of, sometimes unexpected, tax and social security consequences, both for the employee and the employer.

What are the tax consequences of "working from home"?

With regard to international employment situations[1] (i.e. cross-border working), it is important for employers to analyze the tax consequences of teleworking from the “home office” beforehand:

1. What is the risk if the “home office” is qualified as a permanent establishment of the employer (situated in another state)?
2. Which country (the home state or the work state) may tax the salary income?
3. In which country do social security contributions need to be paid on this salary?

The fact that an employee uses part of his private home as office space can create a permanent establishment for the employer (as foreseen under article 5 of the OECD Model Tax Convention and double tax treaties Belgium has concluded with other countries).

A taxable permanent establishment could lead to discussions regarding profit allocation and transfer pricing. Moreover, a permanent establishment will lead to a lot of administrative obligations, such as registration of the permanent establishment, affiliation with a recognized social secretariat for withholding tax and payment of social security contributions, annual tax return obligation, etc. It is therefore important to analyze each case carefully beforehand to determine what the impact could be and to limit the risk for the employer of the “home working” days of an employee. Since there are no specific rules on this to date, it is important to check this on the basis of factual elements. For example, what the contractual arrangements are in the employment contract, whether a rent is paid by the employer for the use of the home office, whether the employee has another office available through their employer outside their home office, whether the home address is used by the company externally on their website or business cards, what is the importance of the function being performed, who concludes contracts or plays an important role in them…

A second question is related to the taxation right on the salary. Which state may tax the salary? In international tax law for employees, the condition of physical presence still applies in order to grant taxing rights to the state of employment[2]. Specifically, this means that for a Belgian resident who works for a foreign employer, but performs their job 100% (or partly) from their "home office" via teleworking, the salary income from this is taxable in Belgium, even if they have a foreign employment contract and are on a foreign payroll. This is due to the fact that the activities are physically exercised in Belgium.

The obligations that this situation entails for employers regarding withholding taxes in Belgium and payment of social security contributions should be taken into account.

In order to avoid complex situations (with double taxation, double payroll, etc.), Belgium has already concluded a bilateral agreement with Luxembourg. The agreement provides that a Belgian resident residing in Belgium but working in Luxembourg for a Luxembourg employer can still work outside Luxembourg (in Belgium or a third country) up to a maximum of 34 days without Belgium becoming competent to levy tax. However, the fact is that the limit of 34 days is far too low given that, in practice, employees work two to three days a week from home.

What are the social security implications of “working from home”?

If an employee, who is simultaneously working in two or more EU Member States, performs at least 25% of their total working time from home in their state of residence (in Belgium, for example), this could lead to a change of the applicable social security system[3]. This means that a foreign employer could have to pay social security contributions in Belgium if the total working time from the “home office” exceeds 25%.

However, a transitional period until June 30, 2023, has been foreseen, with the same effects as during the COVID measures, which means that there will be no change in the competent Member State due to telework of 25% or more in the state of residence. The intention is to come up with more structural measures on the specific situation of telework by the end of this year, taking into account that teleworking from home today is often at least two days a week (which means that it would be around 40% instead of 25%).

International tax initiatives

On July 13, 2022, the European Economic and Social Committee (EESC) approved an opinion proposing that a cross-border worker should only be taxed in their state of residence once their home working days exceed 96 per calendar year (thereby allowing cross-border employees to enjoy roughly two days teleworking per week without any tax repercussions). The aim is to keep the rules simple for employers and employees and to address the specific situation around "cross-border teleworking". The European Parliament has recently set up a “think tank” in order to find a solution on EU level.

Also at OECD level, the tax impact that teleworking can bring is currently being looked at in the context of "global mobility" and further digitalization.

Conclusion

Since the COVID pandemic, teleworking from the "home office" has become a new reality. This shift, in conjunction with the "war for talent" that many companies are facing in their search for highly qualified international staff, has led to many companies promoting working from home. However, they often do not, or insufficiently, consider the fact that this can have tax and social security consequences (e.g. regarding permanent establishment, profit allocation, payroll, withholding tax and payment of social security contributions). These consequences can result in double taxation and extra costs, as Belgium consistently leads the rank of countries with the highest “tax wedge,” due to the high progressive individual tax rates and uncapped social security contributions

Therefore, an adapted tax and social security regulation on "home working" in the context of international employment is necessary.

If you are interested in this topic, please do not hesitate to contact An De Reymaeker, International Tax Lawyer and Partner of the law office Vandendijk & Partners and Chair of AmCham Belgium’s Legal & Taxation Committee and Employee Tax Subcommittee.