In the past few years, teleworking has become a standard working arrangement worldwide. Teleworking is ‘business as usual’ in many industries now, while for workers, it is a defining part of their lifestyle. Remote work has changed its status from a ‘nice to have’ to a ‘must have’. The OECD has taken note and highlighted the trend in its Future of Work report: “Teleworking has become a permanent feature in working practices. However, much remains unknown about its impact on employment relationships within firms.”
Remote work is also a highly successful model in the EU that perfectly illustrates its fundamental pillars: the freedom of movement and of residence of EU citizens, and the freedom to choose an occupation and right to engage in work in any member state.
Nevertheless, before 2020 and the COVID pandemic years, this was not a real point of interest on states’ tax agenda. It was discussed as a theoretical topic but not really seen as a core and practical subject.
Post pandemic, the phenomenon of individuals choosing to work remotely has expanded and has led to an accelerated growth in the number of cross-border teleworkers, thanks to globalisation, digitalisation, and highly advanced technological development over the past decade.
Companies have also spotted strong business advantages in using teleworking arrangements, especially for part of their cross-border projects, since many of the envisaged activities can be performed with a reduced global mobility burden that is complex from multiple standpoints. For instance, a standard cross-border scheme requiring physical presence of the workers in the other country involves increased tax and legal compliance requirements from the individual and corporate sides, high mobility and relocation costs, and higher difficulties in attracting talents for cross-border jobs, but also in managing them afterwards in the destination country.
By comparison, a teleworking model has obvious advantages for employees and employers since it removes a big part of the mobility burden. This model does not lack compliance issues and implications; however, the bureaucracy and tax burden seem to be reduced. On the other hand, teleworking may increase the ambiguity with regard to taxation rights and allocation between tax jurisdictions.
The current regulatory position on cross-border teleworking
Even though there are some commonly accepted international tax principles for cross-border arrangements – as provided, for instance, by the OECD’s Model Tax Convention on Income and on Capital (the OECD Model Convention) or the United Nations Model Double Taxation Convention between Developed and Developing Countries and implemented by multiple states within double tax treaties – there are still unclarities on how to implement a fairer tax system for cross-border teleworking structures. Technical discussions are taking place at various levels within the OECD and within the EU forums and it is expected that during the next year(s) some more concrete actions, recommendations, or even rules will appear.
Currently, there is no unified tax legislation at an EU level for remote working arrangements and therefore the statal tax authorities are generally trying to attract the taxes within their jurisdiction, using arguments based on their domestic legislation and tax principles laid down in the applicable tax conventions (which are not adapted to the reality of this new working model).
In practice, there were some initiatives on regulating teleworking during COVID so that extraordinary situations (e.g., lockdown, travel restrictions) do not generate adverse tax consequences for individuals who would not otherwise have physically stayed in that country.
Also, in February 2024, the European Economic and Social Committee (EESC) published an opinion in which it analysed the topic from a two-sided storyline:
The employer’s residence state; and
The individual’s residence state.
By publishing this opinion, the EU, via the EESC, recognises the importance and growing popularity of this subject but also its complexity, emphasising the need to achieve mutual agreement between member states and that the current EU tax framework should be supplemented, amended, or enriched in a manner that would result in a fairer, clearer, and simpler tax reporting and tax allocation mechanism between the residence state of the employer and the residence state of the teleworker.
The current EU practice is based on the principle of taxing the wages within the country where the employee is physically undertaking the employment activity. However, if the employer does not have a permanent establishment in that country, nor does the employee spend a certain time in the destination country (usually, more than 183 days in a 12-month period or a period longer than the one provided by the double tax treaty), the right to tax the salaries may revert to the employer’s state of residence. For a cross-border teleworking structure, it would mean that the taxation right would be granted solely to the state from where the employee is physically teleworking and could be considered as unfair for the state from where the actual salary cost is entirely borne/supported.
Proposals for reform
Various reforms have been suggested by the EESC, including introducing standardised tax rules for teleworking in the EU, to clarify and define the status of cross-border workers, and striving to improve tax cooperation between member states. One solution recommended by the EESC is to levy the tax in the employee's country of residence, similar to the taxation of self-employed individuals. On the other hand, a taxation right should also exist in the residence country of the employer (in which, after all, salary costs are borne and are deductible when calculating the profits tax).
However, the EESC supports a non-discriminatory tax treatment and suggests that the country of origin of the employer could be the preferred option for taxation. Nevertheless, a revenue-sharing mechanism would be essential to compensate for the loss of tax revenue in the employee's country of residence.
The EESC recommends that tax authorities should be able to share income using data on the physical presence of the individual in each country or using a standardised macroeconomic key. If this happens, it will require many bilateral and multinational agreements to be revised and the introduction of new provisions in the OECD Model Convention would also be needed. A few key questions are worth being answered or clarified:
Is there a recommended threshold for (tele)working in a jurisdiction that will not trigger taxation in the other?
What solutions can be implemented to ease the compliance processes in both jurisdictions for the employee and the employer?
Is there a possibility to avoid triggering permanent establishments of the employer in the employee’s residence country during the cross-border remote work?
How can the taxes due for cross-border teleworking be allocated and calculated in a fairer way?
Final thoughts on cross-border teleworker taxation
Clearly establishing where and how the income of a cross-border teleworker should be taxed represents a continuous challenge. Once this key issue has been regulated, a more transparent and equitable tax allocation system between countries should be achieved.
International bodies are expected to propose various initiatives for facilitating cross-border work and to harmonise the tax legislation. Until then, companies and employees should seek to respect in good faith the existing tax and legal framework as provided by their domestic tax legislation, and by any relevant bilateral conventions and treaties.
