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Workers (and executives) without borders – traps for the outwardly mobile taxpayer

Wednesday 17 May 2023

Session Chairs

Annabelle Bailleul-Mirabaud, CMS Francis Lefebvre Avocats, Paris

Stanley C Ruchelman, Ruchelman PLLC, New York


Panellists

Martin Phelan, Simmons & Simmons, Dublin

Paul Kraan, Van Campen Liem, Amsterdam

Joan C Arnold, Troutman Pepper, Philadelphia

Thierry Boitelle, Boitelle Tax, Geneva

Viara M Todorova, Djingov, Gouginski, Kyutchukov & Velichkov, Sofia

Clemens Philipp Schindler, Schindler Attorneys, Vienna


Reporter

Maximilien De Ridder, Lenz & Staehelin, Geneva


Introduction

The panel discussed the growth in recent years of nomad visas and permanent remote workers in a post-Covid world and the Organisation for Economic Co-operation and Development’s (OECD) guidance on this topic.

After an introduction, the panellists discussed practical considerations for remote workers and referred to recent case law and practices in Austria, Bulgaria, France, Switzerland and the United States (US).

Panel discussion

Growth of nomad visas and permanent remote workers

Martin Phelan highlighted the recent cultural changes both for nomad employees and for employers. For nomads, he mentioned their new lifestyle. For employers, he raised the availability of larger hiring pools.

Martin emphasised that the number of countries offering ‘nomad visas’ keeps increasing as these countries have identified benefits in making these programmes available (eg, reversing the brain drain). However, companies are often hesitant to sponsor applicants for these visas mostly because of the difficulty in complying with foreign policies that are generally not well designed for digital nomads, such as withholding tax, social security tax and risk of a fixed-base permanent establishment.

The entire panel agreed that tax certainty needs to be increased on this topic.

OECD guidance on issues concerning remote workers and practical experience

In his introduction, Paul Kraan described the theoretical framework of the OECD in this area. He analysed in detail how a remote worker’s home office can be viewed under the traditional criteria for a permanent establishment (PE).

Paul discussed in particular the latest Spanish ruling on whether a United Kingdom (UK) based employee who was initially forced to stay in Spain due to Covid-19 travel restrictions and decided to stay once the travel restrictions were lifted could constitute a home office PE.

In this case, the Spanish authorities ruled against the existence of a home office PE mainly on the ground that an office in the UK was still available to the employee and on the fact that the employer did not bear any of the costs of the home office. However, as stressed by Paul, in other cases this approach may not be a winning approach considering the distance between the available office and the ‘home’ office (eg, a Singaporean employer and Brazilian employee). An empty desk in the home office thousands of miles away may not be persuasive when a tax authority looks at a particular fact pattern.

Payroll obligations and other issues involving remote executives in the US

Joan Arnold illustrated, through a straightforward example, the US tax consequences of a chief operating officer (COO) of a US parent company formally employed by a foreign subsidiary and spending approximately 60 days in the US.

Joan highlighted the practical difficulties in determining the correct amount of taxes, including under the Federal Insurance Contributions Act (FICA), that should be withheld from the COO’s salary, as well as the entity liable for withholding such taxes.

Joan pointed out that although the person will not have a US social security number, the employer is still required by law to collect and pay US social security tax to the Internal Revenue Service (IRS). Failure to do so exposes the employer to penalties. Joan illustrated, through this example, the shortcomings of the current legislation.

The Bulgarian experience with remote workers

Viara M Todorova began by outlining the favourable framework conditions offered in Bulgaria regarding nomad employees.

In particular, Viara described the different ways to hire a nomad employee (eg, through an employment contract, service contract, etc) and the different tax and social security consequences. One of the most important and repeatedly emphasised points is that the highest income tax bracket is ten per cent. The maximum social security contribution is approximately €1,800 per month.

Viara then discussed practical examples, in particular a case where the employee in Bulgaria of a foreign company constituted a PE and an important case involving a US LLC.

PEs resulting from the remote location of the director/taxation of frontier workers in Switzerland

Thierry Boitelle addressed the particularities of French ‘cross-border commuters’ working in Switzerland and particularly in the canton of Geneva.

As explained by Thierry, there are very specific solutions that deviate from the OECD model depending on the Swiss canton in which the cross-border commuter works, as well as on the French department in which they live.

For example, an agreement dating from 1973 provides for a retrocession of 3.5 per cent of the cross-border payroll from the canton of Geneva to France. The agreement with the canton of Vaud dating from 1983 provides for exactly the opposite with a retrocession from France to the canton of Vaud of 4.5 per cent of the cross-border payroll.

Finally, Thierry drew particular attention to the specific agreements concluded within the framework for Covid-19 between Switzerland and France. Originally, a cross-border commuter working in the canton of Geneva could only benefit from the specific cross-border regime if their telework rate was 25 per cent, ie, 75 per cent of working time being physically present in Switzerland and 25 per cent teleworking in France. Under the specific agreement for Covid-19, this rate has been increased to 40 per cent, ie, 60 per cent of working time physically present in Switzerland and 40 per cent teleworking in France. However, for social security different rules may potentially apply.

Hidden PE issues in France resulting from changes in the function of a local company

Annabelle Bailleul-Mirabaud addressed the specific hidden PE issues potentially resulting from remote working situations involving changes in the functions of French companies. One example is of a French employee being hired by a French subsidiary to take on group level responsibilities, particularly in connection with functions initially allocated to the jurisdiction of the foreign parent company.

She described the practice of the French tax authorities in characterising the PEs of foreign parent companies in similar situations, leading to the application of longer statutes of limitations and higher penalties.

Exit taxes in Austria for executives assigned abroad

Clemens Schindler focused on potential exit taxes on capital investments for individuals leaving Austria for another country. In this context, he made a distinction between executives who travel outside the European Union and those who stay within the European Union, in a country other than Austria.

In a nutshell, Austria’s taxing rights are not limited when an executive moves to a non-EU or European Economic Area (EEA) Member State. In this case and although no actual realisation has taken place, Austria can immediately tax any built-in gains on capital investments made by the individuals. The tax basis is the fair market value minus the adjusted basis (investment cost).

On the contrary, if an individual moves to another EU or EEA Member State, Austria’s taxation rights are limited and the individual’s capital investments can only be taxed upon realisation.

Conclusion - practical example

Finally, Stanley C Ruchelman walked us through a practical example of an individual, co-owner and chief executive officer (CEO) of an investment management company, who wished to purchase a property in New York.

Stanley illustrated through this example that, in certain circumstances, the acquisition of an apartment in the US that serves as a home office during monthly visits by a foreign executive could trigger a series of tax exposures, including possible US tax residency for the individual, the imposition of US income and social security taxes on a portion of the remuneration in the US, and the creation of a PE for the employer. Ultimately all the relevant facts must be reviewed in making a determination.