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Update on the international tax implications for cross-border workers and expats during COVID-19

An De Reymaeker, Tax Lawyer-Partner, Vandendijk & Partners, and Chair of AmCham Belgium’s Employee Tax Subcommittee

Background

To combat the COVID-19 crisis, exceptional measures have been implemented by the Belgian and other governments. Some of these measures, like home-teleworking, have a direct taxation impact for many employees who are in normal times traveling frequently for international companies. They are often, for months now, prohibited from traveling and forced to spend their working days in their state of residence and to perform full-time telework from their home office.

The fact that these cross-border workers must now spend working days at home that, under normal circumstances, would have been (fully or partially) spent in another country, can potentially result in various unforeseen and extremely burdensome tax implications for companies and employees, both from an administrative and a financial / cost perspective.

General tax rules with regard to international employment

In application of the general tax rule of the employment income article of the double tax treaties (Article 15 of the OECD’s Model Tax Convention), taxation of employment income is attributed to the work state, but only if the employee is actually and physically performing his or her activities in that state.

Taxation in the work state will generally be triggered either:

  1. when the employee exercises his or her professional activities abroad (in the work state) for more than 183 days in a calendar year or any 12-month period, OR
  2. when the remuneration is paid by, or an behalf of, an employer in the work state, OR
  3. the cost of the remuneration for the activities performed abroad is simply borne by a foreign employer or a foreign permanent establishment in the work state.

For example: If now, due to COVID-19, the employment is not exercised physically in the United Kingdom, but from home in Belgium, this income will in principle become subject to income taxes in Belgium (residence state) and no longer in the UK (work state), where the employment should have been exercised in normal circumstances. This will have a significant impact as much higher taxes will have to be paid.

Agreements concluded between Belgium and its neighboring countries (The Netherlands, France, Germany and Luxembourg)

In order to avoid uncertainty and extra costs for employees and employers, it has been agreed between Belgium and the tax authorities of our neighboring countries that the COVID-19 pandemic and its consequences qualify as a situation of “force majeure”.

This means that for employees who are now working from home (due to COVID-19 measures), these working days should be counted as days performed in the habitual place of work, namely in the work state, where the employee would have physically performed his or her employment activities, in a normal, non-COVID-19 situation.

For example: If an employee works normally 60% of their time in The Netherlands, but due to COVID-19 is forced to work from their home in Belgium, they will in principle be taxed on this 60% of salary in Belgium instead of The Netherlands. However, on the basis of the principle of “force majeure” and the agreement concluded between the tax authorities of Belgium and The Netherlands, it will be accepted, under certain conditions, that these days will continue to be taxed in The Netherlands and not in Belgium.

On the basis of these agreements, there will be no impact on the tax position of the concerned employees. This will avoid a significant additional administrative burden for Belgian companies in terms of payroll obligations and other related formalities. However, agreements have only been reached with The Netherlands, France, Germany and Luxembourg (see website of the Ministry of Finance for more details). The mutual agreements are applicable to working days during the period as of March 11, 2020 until at least December 31, 2020. Please note that the Belgian tax authorities request an attestation from the employer as well as a proof that the days outside Belgium have been taxed (see FAQ of the Belgian tax authorities of June 17, 2020 for further details).

What are the tax implications for employees normally working outside The Netherlands, France, Germany and Luxembourg?

Unfortunately, no agreements have been made between the tax authorities of Belgium and other countries. This means that the normal international tax rules with regard to international employment remain applicable. As mentioned above, an employee will in general be taxable in the state where he or she works. If now, due to the COVID-19 crisis they are forced to work from home, the employee will be taxable in the state where they effectively physically perform their activities (i.e. their home country/residence state).

For example: If an employee has a function in the UK and in Belgium, and normally exercises physically 60% of their time in the UK, but is now working 100% in Belgium, their full salary will be 100% taxable in Belgium, as no agreement based on “force majeure” has been reached between Belgium and the UK. This will have a big impact on the taxes that need to be paid as taxes are much higher in Belgium than in the UK!

However, on April 3, 2020, the OECD Secretariat issued its recommendations on implications of the COVID-19 crisis on cross-border workers. In this OECD guidance, it is stated that “exceptional circumstances call for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with involuntary and temporary change of the place where employment is performed.” In this respect, the OECD encourages countries to alleviate the unplanned tax implications and potential new burdens arising due to the effects of the COVID-19 crisis.

In order to avoid unforeseen and extremely burdensome tax implications, additional administrative burdens, increased employment costs and complexity, and to have a uniform approach between all countries impacted by the COVID-19 crisis, AmCham Belgium recommended already the application of a general “force majeure” interpretation during the COVID-19 crisis to Article 15 (employment income) of the OECD MTC in the double tax treaties concluded by Belgium, in a position paper which was sent to the Cabinet of the Minister of Finance and other important policymakers on April 23, 2020 (see position paper for more details).

However, until now only mutual agreements have been concluded with our neighboring countries. A similar tolerance is unfortunately not expected with other (European) countries.

With regard to the application of the social security rules, the Belgian National Social Security Office published a decision already in March 2020, in which they confirmed that they will disregard a temporary change in working pattern due to COVID-19, in order to avoid situations where the competent state for the social security would change (with regard to the application of the EU Regulation 883/2004 if an employee is normally working in several states).

What are the tax implications for expats in Belgium who benefit from the special tax status for foreign executives (on the basis of the Administrative Circular of 8/8/1983) ?

For these employees, in principle no application of the double tax treaties that Belgium concluded with other countries can be made (and by consequence no application of the above tax agreements concluded with our neighboring countries can be made ).

A travel exclusion can in principle, under the application of the expat status, be applied on the days spent outside of Belgium. This means that if an expat is travelling 25% outside of Belgium, 25% of their salary will be exempt from tax in Belgium. If however, now due to the COVID-19 crisis, he or she cannot travel anymore outside Belgium, his or her total salary will be taxable in Belgium, without the tax exemption for travel.

For this category of employees, until now no tolerance has been foreseen by the Belgian tax authorities. This means that expats who are working from Belgium during COVID-19 will in principle pay much higher taxes in Belgium. This will have important consequences also for the employer, with regard to payrolls which need to be adapted and discussions that employers may expect with employees on their net salary.

Conclusion

Agreements for cross-border workers have been reached only with The Netherlands, France, Germany and Luxembourg on the basis of a “force majeure” principle which implies that the days worked at home will be counted as days spent normally in the work state. There will by consequence be no negative tax implications.

However, for employees who normally work outside these countries, no specific agreements with regard to COVID-19 have been concluded. This means that for this category of employees (mostly high-level functions) there will be significant consequences from a tax point of view. As they work now from home (i.e. Belgium), more taxes will need to be paid as, on the basis of the international tax employment principle (Article 15 of the OECD MTC), the salary is taxed in the work state where the activities are physically performed, even if the international function stays the same.

For international companies it is therefore important to have a look at their international employees as home working will become more normal and it can have a big impact on the taxes which need to be paid. As Belgium has for the moment still one of the highest costs for labor in the world, it will be important that this is reduced by the new government in order to attract and retain foreign investors in Belgium.

About the author

An De Reymaeker, Tax Lawyer-Partner, Vandendijk & Partners

An is specialized in personal taxation in an international context. She has been Chair of AmCham Belgium's Employee Tax Subcommittee since December 2017 and, since last year, she is also a Vice-Chair of AmCham Belgium’s Legal & Taxation Committee.

About the Employee Tax Subcommittee

The Employee Tax Subcommittee focuses on personal taxes and social security issues which are related to international employment and drafts recommendations through position papers to advocate with Belgian government officials and political decision-makers.