Solicitors in Westminster, London
The legal implications of employees working abroad - UK Charities
Whilst it is accepted that multinational enterprises doing business in foreign countries are typically subject to the domestic tax laws of the countries where they are engaged in business activities, the legal implications are less clear where individual employees chose to work abroad.
In an increasingly interconnected and globalised economy it is unsurprising that there has been an increase in the number of employees working remotely both within the UK and abroad. In this article we consider the implications where an employee works abroad for part of the year, particularly where the UK entity is a charity. Allowing employees to work abroad can trigger a range of tax, social security and other implications. Shorter periods of working overseas such as whilst on holiday are unlikely to trigger any consequences. However, longer periods or regular periods of working outside of the jurisdiction where the business is established can lead to liabilities.
Permanent establishment (PE)
A PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on which includes a place of management, or branch or office. This concept is defined for UK tax purposes in sections 1141 and 1142 of the Corporation Tax Act 2010. The legislation defines PE as:
A fixed UK place of business through which the business of an enterprise is wholly or partly carried on, including a place of management, a branch, an office, a factory, a workshop, an installation or structure for the exploration of natural resources, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources or a building site or construction or installation project. An agent acting for a non-UK resident company who habitually exercises (in the UK) authority to do business on the company's behalf may also create a UK permanent establishment.
Other jurisdictions have similar definitions through the implementation of Base Erosion Profit Shifting (BEPS) legislation. This is an Organisation for Economic Cooperation and Development (OECD) policy focused on responding to the perceived aggressive tax avoidance by multinational corporations. As part of this policy each jurisdiction was encouraged to introduce and implement local legislation aimed at incorporating the policy changes. Whilst the intention of the OEDC when devising the BEPS policy was not to catch individuals working whilst on holiday, it also did not have in mind the way in which employees continue to work more remotely post COVID-19. In particular where an individual is working abroad in a situation that is more permeant than a holiday.
The Spanish approach.
The Spanish Tax authorities considered whether a UK resident entity was deemed to operate in Spain due to PE. In this case an employee had worked from his Spanish home during lockdown until February 2021. Whilst the employee was unable to return to the UK initially due to the COVID-restrictions he later decided to remain in Spain voluntarily. Ultimately the UK employer refused his request to continue to work in Spain and the employee resigned in February 2021. He was a high-ranking official in a consulting firm. However, he was not senior enough to sign contracts on behalf of the firm.
The Tax Authorities held that PE did not occur during the COVID-19 travel restrictions due to lack of permeance. However, once the ban was lifted, such permeance is possible due to the ‘habitual’ nature of the residence. Though on the facts PE did not occur for the following reasons:
- The employee’s activity did not change during his stay in Spain.
- The decision to stay in Spain was made voluntarily by the employee.
- The UK entity had a UK office which the employee could have worked from and employees were not required to work from home.
- There were no costs/payments made to the employee for working from Spain.
For these reasons and the fact that the employee was not senior enough to sign/authorise contracts on behalf of the UK entity meant that the Tax Authorities did not deem the employee to be a dependent agent nor did the UK entity have Spanish PE. This decision, though not binding on others provides an interesting insight into the factors the Spanish Tax Authorities will consider including seniority of the employee.
The French approach.
The Tax residency rules as they apply in France state that an individual will be domiciled in France for tax purposes if:
- their home is in France;
- their main place of abode is in France;
- they carry on a professional activity in France, salaried or not, unless they can prove that it is a secondary activity;
- they have the centre of their economic interests in France.
The third ground is particularly of note to UK Charities as it would include unpaid professional activity. The French legislation defines the threshold of PE as “operating in France”. This means an entity which carries on a regular business in France, either in an autonomous establishment or, if there is no establishment, through representatives without independent professional status, or as part of operations forming a complete business cycle. Therefore, a permanent establishment (including a branch) in France is always subject to corporate tax in France. It is not clear that charitable enterprises would be exempt from such obligations.
Social security obligations for employees working overseas can be overly complicated. An employee and employer will normally be liable to social security contributions in the country in which they perform their employment duties.
However, where an employee is temporarily working overseas for their employer, it is often possible to stay in the home country social security system. This requires an application to be made either under the EEA rules or the networks of global reciprocal agreements for social security. These applications should be made to cover retrospective periods and be monitored for coverage dates.
However, where an employee permanently relocates overseas or it is not possible to remain in the home country system by making an application, a local social security liability would normally arise. In most circumstances, this would also create a social security payroll withholding obligation, even if there is no presence in the second country for payroll tax withholding. Employers will also need to consider whether there is a bilateral or multilateral social security agreement between the UK and the country the employee is working in.
An employee working in another country for a period might be covered by the employment law applicable in that country causing complexity and conflict between the two-state employment legislative systems. In such instances there may be a need to seek legal advice from the country the employee is working from.
Where the employee is not a national of the country, immigration obligations should also be reviewed to ensure they have the right to work in the UK (for UK entities) and potentially the other country the employee is working from (depending on the duration and the immigration rules of that country). This may be particularly relevant post Brexit as many of the rules on the free movement of workers have changed. Employers should always be mindful of the immigration status of their employees and the importance of avoiding the offence of employing an illegal worker.
UK entities having employees teleworking from outside the UK should analyse whether their employees may create or not a PE for tax purposes in order to correctly assess their tax obligations in other jurisdictions. Charities should be aware that such obligations may apply to them in the same way they apply to for-profit organisations.
LBMW has a specialist Charities team which can provide practical guidance and assistance for Charities on their compliance obligations. Please contact us for more information on how we can help.
 Resolución Vinculante de Dirección General de Tributos, V0066-22 de 18 de Enero de 2022. Via Resolución Vinculante de DGT, V0066-22, 18-01-2022 Iberley
 Under Article 4 B of the CGI, Article 4 B - Code général des impôts - Légifrance (legifrance.gouv.fr)
 An entity will be resident in France for tax purposes where the entity is operated in France, whatever its nationality (Article 209 (I) of the CGI). Article 209 - Code général des impôts - Légifrance (legifrance.gouv.fr)
The contents of this article do not constitute legal advice and are provided for general information purposes only. The contents are copyright of Lee Bolton Monier-Williams LLP. All rights reserved.