Before COVID-19 changed our lives, it was commonplace that people could work from the office without any problems, even if this was abroad. Due to COVID-19, working from home became the rule rather than the exception. A potential problem arises with cross-border employment. Because what happens if you are obliged to stay in your country of residence longer than you intended due to COVID-19? Does this have consequences for your wage tax, income tax and for social security?
The issue at hand
In the case of cross-border employment – apart from COVID-19 – the following occurs. Living in one country and working in another country means that both countries want to tax the wages attributable to the country of employment. The country of residence justifies this because it wants to tax its residents on their worldwide income. The country of employment justifies this because it wants to tax income earned on its territory. The result: double taxation. This issue is addressed by tax treaties, which allocate and regulate taxation of income from employment.
Wage tax and income tax: article 15 of the OECD Model Tax Convention
Tax treaties concluded by the Netherlands are based on the OECD Model Tax Convention. The OECD aims to promote economic growth and employment. Dealing with double taxation plays an important role in that context. That is why the OECD has developed a model tax convention. For each article in the convention the OECD provides a detailed commentary on how the article in question should be interpreted.
Article 15 of the OECD Model Tax Convention describes the distribution of taxing powers on employment income. The main rule is that the country where the employment is exercised has the power to tax this income. An exception applies to seconded workers and to those who perform work on board ships or aircraft that are operated in international traffic. The latter group will not be discussed here.
The exception for seconded employees is that it is not the country of employment, but the country of residence that is authorized to tax the ‘country of employment’-income. To do this the following three (cumulative) requirements must be met:
- The employee physically resides in the country of employment during a period (usually a tax year) of less than 183 days AND
- The employment benefits are paid by an employer who is not established in the country of employment AND
- The employment remuneration is not charged to a permanent establishment of the employer in the country of employment.
The 183-day rule (requirement 1) and obliged working from home due to COVID-19 could clash. The problem that arises here is that employees who work from home and who are forced to stay in the country of residence for longer than 183 days may inadvertently be confronted with a shift in the taxing authority over (part of) their income from work. This could be the case with a salary split and losing the qualification ‘qualifying non-resident taxpayer’.
A German resident works entirely in the Netherlands. His employment income is € 100,000. As more than 90% of his income is subject to Dutch income tax, this person is regarded as a ‘qualifying non-resident taxpayer’.
Due to COVID-19, this person is obliged to work from home for 6 weeks. This means that € 88,000 is taxed in the Netherlands and € 12,000 in Germany. This also means that less than 90% of his total global income is taxed in the Netherlands, which leads to this person to no longer be categorized as a ‘qualifying non-resident taxpayer’.
Social Security: EU Regulation 883/2004
COVID-19 and cross-border employment can have consequences not only for wage and income tax, but also for the question in which country someone is covered by social security. Employees who work in the EU and outside their country of residence are in principle covered by EU Regulation 883/2004. This EU Regulation also applies to the Netherlands. In addition to this, the Netherlands also has agreements with a number of non-EU countries for the allocation of social security coverage (such as Switzerland). This text only considers the EU Regulation. Also, the consequences for employees who carry out their work on board a ship or aircraft will not be discussed here.
The EU Regulation aims to ensure that an employee can only be covered by social security in one EU member state: the country of employment.
An exception is made for posted employees. A posted employee will remain covered by the country of residence’s social security for a maximum of two years. The possible extension of this period to five years is not discussed in this article.
This is different in the case of an employee who carries out his employment activities in two or more EU member states. To determine the country in which he is covered by social security, it needs to be determined in which country he works at least 25% of his time (or earns at least 25% of his income). This will be the country were the employee is covered by social security. If this cannot be determined, the employee is covered by the social security of the country where the employer is domiciled.
Ben lives in the Netherlands. His employer is located in Germany. For this employer he works 30% of his time in the Netherlands and 70% of his time in Germany. Because Ben works more than 25% of his time in the Netherlands, Ben is covered by Dutch social security.
John lives in the Netherlands. His employer is located in Germany. For this employer he works 20% of his time in the Netherlands and 80% of his time in Germany. Because John works less than 25% of his time in the Netherlands, John is covered by German socially security.
These examples illustrate that – as with the 183-day rule mentioned above – a conflict can arise with the question where someone who is obliged to work from home due to COVID-19 restrictions is covered by social security: if someone obliged to work from home exceeds the 25%-mark, a shift in social security coverage could occur.
What does this mean for payroll tax and income tax?
Without further agreements, obliged working from home due to COVID-19 restrictions means that with normal application of a tax treaty a shift in the right to tax will take place if more than 183 days of obliged work from home occurs.
Belgium and Germany
In this regard, the Netherlands has made agreements with both Belgium and Germany about the tax consequences for cross-border employees who are obligedto work from home due to COVID-19 restrictions. The agreements made entail that these ‘home office days’ are deemed to have been spent in the country where the employee would usually perform is employment.
The agreements with Belgium and Germany concern temporary measures that came into effect on 11 March 2020 and end on 1 July 2022.
The Netherlands has only made temporary agreements with Belgium and Germany. In relation to other countries, the relevant tax treaty should be applied, without temporary exceptions.
In April 2020, the OECD released an analysis concluding that no tax consequences should be associated due to the special circumstances resulting from working from home due to COVID-19 restrictions. It is important to note that this is an OECD analysis. This does not have the same status as the aforementioned OECD commentary to the model tax convention. It is up to each country to determine whether they follow this analysis. The Netherlands has indicated that it will follow the OECD analysis for treaty applications. Spain, for example, does not. This means that in Dutch/Spanish situations, the tax treaty must be applied in a ‘regular manner’. It is therefore important to find out what the position of each country is.
What does this mean for social security?
Following the webinar ‘Coronavirus tax measures and the consequences’, the Dutch tax authorities provided a list of frequently asked questions. One of the questions concerns social security coverage. The Dutch position is that obliged working from home due to COVID-19 restrictions will not lead to a shift in social security coverage.
COVID-19 makes tax returns for 2020, 2021 and 2022 challenging for many. This also applies to cross-border employees. We are on unknown territory. Fortunately, agreements have been made between the Netherlands and Belgium, as well as between the Netherlands and Germany. But dealing with other countries, the tax return can become complicated. It is important to be aware of this and to ask for help if necessary. Please feel free contact me.