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The current labour market has undergone several changes, one of the most relevant being the opening of the labour market, without borders, allowing today the performance of the professional activities from anywhere in the world. Employers can now consider recruiting without borders, searching for talents in a more competitive and efficient way for the expansion of their companies.
This growing trend, that has implemented a new employment relationship, has specificities in terms of the tax and labor framework, social security, and the nature of teleworking having the Employer headquartered in a certain country and the employee(s) based in another or several other countries.
From a tax point of view, the transfer of residence to another country in which the employee will exercise the activity through the telework modality, the employee, for IRS purposes, may fulfil the residence requirements set by the legislation of another country. In other words, the flexibility of remote working, by allowing the worker to move between other countries, may change their tax residence.
For the employer, there is a risk that the work performed abroad may be considered the creation of a permanent establishment of the company, with the consequent taxation in accordance with the rules of another country, regarding the profits generated in that other country.
In the relationship between employer and employee, under an international teleworking regime, especially because there are different countries involved, it is important to safeguard and analyse the rights of both parties and prevent future litigation, both by ensuring compliance at the level of Social Security and taxes.
Teleworking from abroad must be analysed carefully and on a case-by-case basis in order to reduce the risks for the Employee and for the company.
In this article we will address some topics that arise from this situation.
International Employment: Labour Framework
Regarding the applicable law when the employment relationship is established between an Employer based in Portugal and an Employee who works remotely from abroad, the Rome Convention, that regulates the law applicable to contractual obligations, allows the contract to be governed by the law chosen by the parties.
Where the law applicable to the contract has not been chosen by the parties, the contract shall be governed by the law of the country with which has a strongest connection.
However, without prejudice to the right of choice regarding the applicable law, the parties’ choice of the law shall not deprive the employee from the protection afforded by the mandatory provisions of the law which would be applicable in the absence of choice.
In the absence of choice of law by the parties, the employment contract is governed:
a) by the law of the country in which the employee habitually carries out the work , even if he is temporarily seconded in another country, or
b) if the employee does not habitually carry out the work in the same country, by the law of the country in which the place of business through which he was engaged is situated, unless it results from the whole circumstances, that the employment contract is more closely connected with another country, in which case the law of that other country will apply.
As mentioned, the choice of law cannot deprive the employees from the core protections, qualified as mandatory provisions of the law that would be applicable if the choice did not take place, such as, the guarantees regarding minimum wages and dismissal.
Thus, there are two possibilities:
- The parties choose the law applicable to the contract and must declare the choice in the employment contract or its addendum. As a rule, the law to be applied will be the chosen one. However, the employee cannot lose the essential protections of the law that would have been applicable in the absence of the choice of law.
- The parties do not choose the law, and it will be applicable the law of the country in which the employee habitually carries out his work.
International Teleworking: Social Security
Regarding Social Security, the Regulations of the European Union stipulate the rules for coordination of national social security systems which are based on the:
- principle of equality and non-discrimination;
- principle of aggregation of periods;
- principle of exportability of rights in situation of residence in different countries.
- Employees moving within the European Union must be subject to a single social security legislation: principle of single applicable legislation.
Under the general rules, it is provided that a person who exercises an activity as an employed person in a State of the European Union is subject to the legislation of that State where his or her activity is exercised.
To simplify the circulation, there are some exceptions to this rule:
Secondment: when the employer, who habitually carries out its activity in a certain State (of posting), sends workers to another State (of employment) for a period of up to 24 months. Employee remains subject to the legislation of the state of posting, provided the following conditions are met:
a) the foreseeable duration of the work does not exceed the time limit of 24 months and
b) the worker in question is not sent to replace another posted person.
Employees who carry out their activity in two or more States: a person who normally pursues an activity as an employee in two or more States of the European Union shall be subject to the legislation:
a) of the State of residence if he pursues a substantial part of his activity in that State; or
b) of the State in which the registered office or place of business of the undertaking or employer is situated if he does not pursue a substantial part of his activity in the State of residence.
To ascertain whether a substantial part of an employee’s activity is performed in a state, the indicative criteria, such as, remuneration and time of work.
International Teleworking: Personal Income Tax
The payment of taxes is strictly connected to the country where a person is considered as tax resident, in order to be a resident in Portugal, a person must:
- remain in Portuguese territory for more than 183 days, consecutive or interpolated;
- have a dwelling available under conditions that imply a current intention to maintain and occupy it as a habitual residence;
- be a crew member of a Portuguese ship or aircraft; or,
- perform public functions or commissions abroad, in the service of the Portuguese State.
Thus, a person will pay taxes in the country from which provides the work, if the person meets the legal requirements to be considered a tax resident. However, when, due to teleworking, the employee fulfils the concept of residence in more than one country, the double taxation conventions, between the countries in question, are used to identify the criterion for determining, in such cases, which country will be considered the State of residence, that is to say, the country in which taxes shall be paid.
The first tie-breaker criterion of the OECD Model Convention is the existence of a dwelling.
Even if employee maintains two residences, will be considered a resident in the country with which has the closest personal and economic relations (centre of vital interests) – a concept that may be assessed and fulfilled in the case of teleworking regime.
According to the OECD model convention, which is the basis and template for more than 3,000 double taxation treaties, the rule of taxation of wages in the state of residence of the worker’s worldwide income has been established.
When teleworking from a second country, the employee will be taxed – as a rule – in the country of residence.
Corporate Income Tax
By hiring employees abroad, a Company will have activity in a different country which raises the assessment of the eventual creation of a Permanent Establishment.
According to the OECD Model Convention, a permanent establishment exists where there is a fixed place of business through which the activity of an enterprise is wholly or partly carried on and may include, in particular, an office, factory or shop.
Therefore, it is important to assess the case in order to identify the creation of a permanent establishment for the Employer. In case there is a permanent establishment, the Employer company will have to pay income tax in that country on income attributable to the permanent establishment.