Chapter 3: Income taxes for remote work abroad
In the first two chapters of our step-by-step guide to remote work, we first defined the different forms of remote work and then looked specifically at the associated social security issues.
The following chapter is dedicated to the income tax aspects of remote work. Here, too, we need to distinguish between the two basic forms of remote work. As already described in Chapter 2, these are essentially:
- Remote work with predominant activity at the foreign place of residence
In this case, for example, a Swiss company hires an employee who primarily and continuously works "remotely" at a foreign place of residence. The employee receives an employment contract with the Swiss company that is adapted to foreign law. In general, the employee only comes to Switzerland for a few working days per month and otherwise works from a home office abroad.
- Remote work as a short-term activity abroad
In these cases, employees generally work in the country of employment. This means that the employees not only have a Swiss employment contract but also work mainly in Switzerland. If these employees now wish to work abroad for a shorter period, this is also referred to as "remote work". This type of remote work is often based on the employee's initiative and desire. The distinction between this kind of remote work and classic short-term assignments is fluid, and there are many recognizable parallels.
Version I: Remote work with predominant activity at the foreign place of residence
From the company's perspective, both forms of "remote work" initially involve additional clarification and, depending on the constellation, considerable administrative steps. In the first case ("remote work with predominant activity at the foreign place of residence"), it must be clarified whether the company is responsible for the payment and withholding of income taxes for the employee who works mainly abroad. This is likely to be the case in most countries. France, Italy, Poland, and the UK, for example, require income tax to be deducted from wages.
Due to the complexity and country-specific characteristics, in most cases, this cannot be managed by the foreign employer alone but requires the help of an experienced international payroll provider, who not only prepares the foreign payslips but also carries out the registration with the tax authorities and the monthly calculation of the tax burden.
Due to the Swiss employer in our example, the Swiss withholding tax must be calculated for each occasional working day in Switzerland and remitted to the relevant withholding tax office.
To coordinate the Swiss withholding tax and the taxes owed at the foreign place of residence and work, the respective country-specific regulations must be observed. This can result in different procedures depending on the country (e.g. monthly deduction of effective Swiss withholding tax, definition of a lump-sum withholding tax deduction and correction at the end of the year, deduction of effective withholding tax at the end of the year).
Due to the considerable effort and legal restrictions, double taxation is only avoided in very few cases via the payroll (e.g. Germany). In many cases, we only see the correction as part of the annual income tax return (e.g. France, Poland, or the UK).
Version II: Remote work as a short-term activity abroad
If, on the other hand, remote work is merely a short-term activity abroad and the employee goes abroad for a few days, weeks or even months, companies tend to be very interested in avoiding foreign tax liability to minimize the administrative burden.
It is typically possible to avoid foreign tax liability for short-term foreign assignments if all aspects of the so-called 183-day rule from the respective double taxation agreement (DTA) are observed. In simple terms, this means that
- the employee may not spend more than 183 days per calendar year or 12-month period in the foreign country in question;
- no costs may be borne by the foreign organization (including partial costs such as meals or accommodation);
- no salary may be paid abroad.
In addition, there must be no de facto or economic employer abroad. The definition of this theoretical construct is country-specific.
Income tax complexity is also the reason why companies often restrict remote work in terms of time (e.g. up to 30 days) and location (e.g. only in countries with double taxation agreements). From the perspective of payroll and HR departments, this is understandable, as short-term work abroad at the employee's request can involve considerable clarification on the part of HR departments, administrative efforts, and also significant tax aspects in order to make it legally compliant.
Remote work undoubtedly remains a complex matter. Nevertheless, it is worth taking a close look at this topic. On the one hand, it makes it possible to find qualified specialists abroad, and on the other, it offers companies the opportunity to position themselves as progressive employers with corresponding benefits for their employees.
The encouraging news is that the experience of remote working has grown significantly in recent years. With the support of qualified consultants, companies can find out exactly whether and how remote working can be implemented in their company.
- Chapter 1: A question of definition - What is remote work anyway?
- Chapter 2: Social security for remote work abroad
- Chapter 3: Income Taxes for remote work abroad
- Chapter 4: Work permits for international remote work
- Chapter 5 (Monthly Special): Detailed practical cases of remote work for HR departments regarding income taxes, social insurance, work permits, payroll, and employment contracts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
