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Home office and taxes - what do companies with cross-border commuters have to consider?
National Tax Law
If an employee in Germany changes his or her usual place of work to the home office, this in itself has no tax consequences, neither for employees nor for their employers. An exception may arise in the case of trade tax if the home office would be considered a permanent establishment in a municipality outside that of the company. This is usually not the case, however, as employers do not have power of disposal over home office premises. The situation may have to be assessed differently in cases where employers rent co-working spaces or hotel rooms to provide their employees with a quiet and safe working environment.
International tax law
Work at the home office is primarily important in an international context where tax issues arise primarily in connection with employees, senior executives, and members of corporate bodies whose home office is not located in the country in which they usually perform their duties. In addition to national statutory provisions, the regulations of international tax law, the relevant double taxation treaties (“DTTs”), and intergovernmental agreements need to be observed. In addition, the OECD published Guidelines (“OECD Guidelines”) on the impact of the COVID-19 crisis on April 3, 2020.
1. Cross-border workers
In the times of the corona pandemic, it is important how remuneration for work of employees who normally work abroad, but now from their home office, is taxed. From a German perspective, this applies primarily to the many employees who work in one of the neighboring countries. To avoid corona-related tax disadvantages, Germany has therefore concluded temporary bilateral treaties with Austria, Luxemburg, The Netherlands, Belgium, France, and Switzerland. Their core statements are:
- Workdays for which wages are received and on which workers perform their activities in the home office as a result of the measures to combat the COVID-19 pandemic are considered workdays in the State in which workers would normally have performed their work. This does not apply to workdays spent in the home office independently of those measures or for workers who work in the home office under an employment contract.
- Cross-border workers who are working in the respective other State rather than in the State of residence and who normally return to their place of residence every evening are also treated as if they had performed their work as usual at their actual place of work – and not in their home office.
The bilateral treaties are intended to ensure that, due to corona, there are no changes in the basic right to tax of the respective States. They were initially effective until June 30, 2020 and will be automatically extended by one month unless terminated by one State one week prior to the beginning of the subsequent month.
Additionally, it has been agreed with Austria that short-time work allowance or short-time working assistance will be taxed in the respective country of payment, as is the case in Switzerland for the short-time work allowance paid there. On the other hand, the respective country of residence has the right to tax in the treaty with France.
Despite the bilateral treaties, each individual case must be examined closely to meet the respective documentation and tax declaration obligations. This applies in particular to wage tax and social security contribution obligations and to tax-free short-time work allowance, which is subject to the reservation of tax progression and may therefore lead to subsequent tax payments.
2. Creation of a permanent establishment
If employees work from home and not in the country of employment for an extended period of time, the question arises whether this will create a permanent establishment in the country of residence and thus a right to tax. The OECD Guidelines state that the exceptional and temporary change of the location of employment or the temporary conclusion of contracts in the home of employees or agents should not create permanent establishments for the businesses. If employees do not only work temporarily from home or as agents with power to conclude contracts in their country of residence, the right to tax may change. Tax authorities or the courts have not yet issued decisions on the threshold presence required for tax purposes in corona-related cases.
3. Place of effective management
In the case of cross-border activities, the right to tax companies is generally based on the country where management is based, i.e., according to international understanding the place where the key management and business decisions are made. This raises the question of whether a country’s right to tax ceases to apply if that company’s executive bodies, such as chief executive officers or other senior executives, are only able to make decisions in their home office in another country. In principle, the OECD Guidelines do not consider the extraordinary and temporary change of location due to the COVID-19 crisis grounds for triggering a change in residency, although they rightly point out possibly differing national provisions and advise to examine all relevant facts and circumstances in each individual case with respect to the place of effective management. The German tax authorities have not yet commented on this issue.
4. Change in personal tax liability
Ultimately, the question can be raised as to whether personal tax liability is changed by the fact that individuals have to remain in another country due to the corona crisis. The OECD Guidelines rightly state that in this case there no personal tax liability would be triggered in the other country. In cases where a DTT is applicable, the person would not become a resident of that country under the tax treaty.
In summary, it should be noted that despite bilateral treaties with Germany’s neighboring countries and the relevant provisions in the DTTs, the tax implications of corona-related cross-border home office cases must be assessed with great care, particularly given the fact that neither the tax authorities nor the courts have issued any guidance yet on the relevant issues.