Tag: tax implications

Digital nomads, international remote working and tax implications (Part II)

Posted on | by Paschalis Paschali

In the previous part, we briefly touched upon the type of tax issues that digital nomads (and/or their employers) might encounter. In this part, we review the legal position in Cyprus. We also review how some jurisdictions have dealt with some of the tax implications affecting international remote workers for non-resident companies and whether they gave rise to a permanent establishment.

So far, the Cyprus tax authorities have adopted a light touch approach. This is facilitated by the Cypriot legislation’s objective test for tax residency of individuals. As of 2017, an individual is a tax resident of Cyprus if it satisfies either the ‘183-day rule’ or the ‘60-day rule’ for the tax year. The 183-day rule is satisfied for individuals who spend more than 183 days in any one calendar year in Cyprus. The 60-day rule for Cyprus tax residency is satisfied for individuals who, cumulatively, in the relevant tax year do not reside in any other state for a period exceeding 183 days in aggregate, are not considered tax resident by any other state, reside in Cyprus for at least 60 days, and have other defined Cyprus ties.

During the COVID-19 pandemic, the Cyprus tax authorities followed the OECD’s non-binding guidance and as such, the presence of persons within Cyprus (or abroad) due to restrictions related to the pandemic were not taken into account when assessing the existence of a permanent establishment. Similarly, the tax residency of a foreign company or a non-resident individual were not affected by extended stays in Cyprus as a result of the pandemic. However, the provisions of this guidance are no longer relevant after the lifting of all restrictions. Therefore, the 183-day rule and the 60-day rule are to be strictly adhered.

For digital nomads working from their holiday home in Cyprus or from a temporary location, even if they do not meet the test for tax residency, they could still trigger a permanent establishment for their employer/company. For this, an assessment of all the facts needs to be made to determine whether the arrangement has sufficient permanency. Furthermore, Cyprus legislation and any underlying tax treaties between Cyprus and the state of the employer need to be reviewed.

It is useful to keep abreast of how other jurisdictions have dealt with some of the tax issues relating to digital nomads.

In 2022, the Spanish tax authorities issued guidelines and later on a binding ruling to confirm that individuals who stayed at home to work remotely during the COVID-19 pandemic were doing so by an extraordinary event. This was not at the employer’s request. The activity lacked a sufficient degree of permanency or continuity and as such, it did not create a permanent establishment for the employer.

Whether after the termination of the public health measures the home office in Spain would give rise to a permanent establishment in Spain, this depended on whether the home office was at the disposal of the foreign employer (in this case a UK employer).

In assessing this, a number of factors were taken into account, such as whether the activity previously performed by the employee changed after he moved to Spain, whether the move was for a purely personal decision, whether the employer had asked the employee to move to Spain for a specific business reason, whether the employer bore the costs of the move, whether the employer had an office in the UK which could be used by the employee etc.

In 2022, a number of rulings were given by the Danish tax authorities relating to international remote work. One ruling found that a CEO of two Norwegian companies who was working from home three days per week was a permanent establishment. By contrast, in another ruling, it was found that a managing director working from home due to personal reasons was not a permanent establishment. One important factor was that the director was not involved in sales-related activities taking place in Denmark. Similarly, a CFO working from home two days a week for a Swiss employer was not a permanent establishment for similar grounds. Although the CFO was also a member of the board of directors, this was not determinative as his functions primarily related to activities in Switzerland.

The Swedish tax authorities have also updated their guidance on remote working. According to the updated guidance, working from home due to government restrictions or force majeure cases (e.g. the COVID-19 pandemic) will not give rise to the existence of a permanent establishment. Similarly, if an employee works from home for personal reasons and this is not required or imposed by the foreign employer and there is no commercial interest for the foreign employer, then the employee’s home will not be considered to be at the disposal of the foreign employer and as such, will not give rise to a permanent establishment.

More recently, the Dutch tax authorities issued a ruling accepting that a foreign EU company did not have a Dutch permanent establishment as a result of having three employees who worked fully remotely from their home offices in the Netherlands. It was crucial that the home offices were not at the disposal of the employer. It was also important that the employees had no authority to bind the company, the foreign company was subject to tax where it was based and, very importantly, the employer offered an office but the employees preferred to work from home. This appears to be the first ruling involving multiple employees.

Of course, these rulings do not bind the tax authorities of other countries, including Cyprus, but they provide useful guidance. It would appear from some of the rulings issued so far that someone generating sales, or a management team or senior staff could give rise to a permanent establishment in Cyprus for the employer/company. For senior management or employees creating significant value for the employer, it is advisable to obtain a tax ruling from the Cyprus tax authorities before any international remote working arrangement is approved by the employer.

We can help you in this process and protect you and your employee from triggering any unexpected tax liabilities. Of course, given Cyprus’ very competitive tax regime and relatively low tax rates, it might be tax efficient to create a permanent establishment in Cyprus, or even transfer your tax residence. Currently, many incentives are offered by the Cypriot government for relocation to Cyprus, especially for non-domiciled individuals, which might make the change of tax residency a very appealing option. However, the transfer of tax residence, whether by an individual or a company needs to be carefully planned, in order to avoid creating dual tax residency. A relocation before you break your previous tax residency could give rise to double taxation of the employee’s worldwide income.

Our experienced lawyers can help you navigate this complex area whether you prefer to avoid the creation of taxable presence in Cyprus, or whether you wish to transfer your tax residency as an employer or that of your employees in Cyprus. We can assist you with all the technical formalities (e.g. registration as a local employer, maintaining payroll in Cyprus etc.) and we can help you obtain any necessary tax rulings from the tax authorities for a seamless transition.

For more information, please get in touch with us.

Digital nomads, international remote working and tax implications

Posted on | by Paschalis Paschali

Digital nomad arrangements are becoming very popular. Although there is no single definition of a digital nomad, the concept tends to encompass remote workers who regularly travel while working. These could be employees or self-employed people who use digital telecommunications technology to carry out their work. Traditionally, digital nomads were mostly self-employed people but since the start of the COVID-19 pandemic, the number of digital nomads who are employees has increased exponentially.

There is a wide range of digital nomads. Some could live completely nomadic lives with no permanent home base, moving from one jurisdiction to another. Others might only work remotely for short periods of time, or during workcations. The rise of digital nomads means that the workplace is no longer geographically restricted, with flexible location-independent working arrangements on the rise. A working environment with remote work is now the rule rather than the exception. However, complete freedom for international remote work is still rare due to a number of obstacles such as local immigration rules, employment, tax, social security etc.

Although many digital nomads might rely on tourist visas to work from a jurisdiction, working on a tourist visa for extended periods might be against local law. Getting a work permit or work visa each time a nomad goes to a new jurisdiction might also be too cumbersome. In order to cut down on red tape and boost the economy through tourism, many countries now give out digital nomad visas. The conditions of such visas vary and could include a minimum earnings threshold, private health insurance, proof of employment, police background checks etc. Cyprus also has a digital nomad visa scheme and in March 2022 increased the number of available visas from 100 to 500.

Taxation is one of the biggest obstacles to international remote work.

Depending on each country’s tax residency rules, a digital nomad might be found to be tax resident in the jurisdiction they are working from. This could lead to double taxation if the jurisdiction of his employment continues to tax him/her as resident. Sometimes, double taxation is eliminated through tax treaty mechanisms or agreements between tax authorities, but this is not always the case.

Even if the digital nomad is not found to be tax resident in the jurisdiction they are working from, or if they are found tax resident, double taxation is avoided, a travelling employee could trigger taxation for the employer in the form of a permanent establishment. Generally, countries can tax non-resident companies or individuals if they have a permanent establishment in another jurisdiction. Therefore, the foreign employer could be taxable in the jurisdiction where the employee is working from if under local rules, the activities and overall working arrangements of the employee give rise to a permanent establishment.

Although each jurisdiction might have its own rules in determining when a permanent establishment is established, there are several common triggers derived from the OECD Model Tax Convention, which jurisdictions tend to follow. An employee who has an office or fixed place of business in another jurisdiction could trigger a permanent establishment for their employer. This can include a co-working space, hotels, Airbnb spaces, if they are paid and chosen by the employer and especially if they are used repeatedly by the same employee or other employees of the same firm. In some jurisdiction, a home office might also be considered as a giving rise to a permanent establishment.  

A permanent establishment might also be triggered by having someone locally who has the authority to sign contracts on the employer’s behalf, or who has an executive or senior management role, or who provides core business services or undertakes sales activities.

If a permanent establishment is established in the jurisdiction where the remote work is taking place, then profits of the employer/company might be allocated (and taxed) by that jurisdiction. This could have serious cost implications, especially if the remote worker is in a senior management position. Let us not forget that prolonged presence of a director of a company in another jurisdiction could affect that tax residence of the company.

Apart from the taxes that may be due (which could be negligible), an employer who has a permanent establishment abroad might need to register the permanent establishment according to local rules. This can be a significant burden especially for partnerships. The employer might also have to run a local payroll and undertake transfer pricing analyses to show the allocation of profits to the permanent establishment. This is likely to be costly, especially if the employer has no foreign presence elsewhere.

EU nationals who wish to work remotely within the EU obviously do not need a digital nomad visa, as they benefit from the EU’s freedom of establishment and the free movement of workers. Nevertheless, EU nationals face the same tax issues, as far as the possible change of tax residency, or creation of a permanent establishment. It is up to Member States to decide whether a remote worker is tax resident in their jurisdiction, or generates a permanent establishment of their employer. EU law and the fundamental freedoms are not triggered, unless there is discrimination (i.e. different treatment of a foreign remote worker with a resident remote worker).

In order to mitigate the tax risks, companies/employers need to assess and approve requests for travel on a case-by-case basis, as the threshold for triggering a permanent establishment might vary under local rules. So far, tax rulings in this area have gone in all directions. We will be reviewing these and the situation in Cyprus in the next instalment of this newsletter.