The COVID-19 pandemic has fundamentally changed the way that employees work. Having a presence in office buildings has quickly been replaced by solutions such as ‘working from home’, and could soon be effectively replaced again by ‘working from anywhere’ – an option which had seemed impossible in Romania a year ago.
In Romania, the relaxation of the restrictive measures imposed by the authorities, led to many employees choosing to move their activity as far as possible from their adapted daily routine at home after a repetitive three months. The ‘new office’ can even be situated thousands of miles away, if it comes bundled with a good internet connection. However, the mirage of ‘work from anywhere’ can attract a range of tax and legal challenges, which must be considered by both employers and employees.
In this scenario, it is important to analyse under which circumstances that the salary income obtained from the home country employer, could become taxable in the country where the individual carries out their activity. Some key aspects in this analysis would be the period of presence abroad, the country with which the individual’s personal and economic relations are closer, and the place available to the individual abroad, e.g. a rented or owned property, or hotel accommodation.
For example, a presence of more than 183 days, the fact that the individual is accompanied by their family, or has a place available anytime for use in the host location, could trigger tax residence in the respective state, and taxation on salary income from the first day of presence there. Taxation could be triggered not only on salary income in the host location, but also on personal worldwide income (e.g. interests, dividends, capital gains, rental income, obtained from home or host locations, as well as from other countries).
The legislation of the country where the employee plans to temporarily move, as well as the double tax treaty and the totalisation agreement on social charges, in place between the respective country and the home country should be carefully analysed. This would assist to establish the income tax and social charges obligations of the parties involved, employee or employer, and avoid potential tax exposures and double taxation on the same income.
For example, in the EU member countries, working remotely in another country may result in the employer's obligation to register for social security reporting and payment in the country of destination. Additional obligations under local law in the state where the employee chooses to work temporarily could also arise. Another key tax topic within cross-border remote work arrangements is the potential permanent establishment risk that the home employer could face in the host location.
The request for overseas remote working could come not only from the employees seeking for a change of their home office, but also from businesses which are starting to consider within global mobility policies virtual work for new hires, and virtual assignments in response to the pandemic. A virtual assignee does not physically relocate and works for the benefit of the host location from the home country. A virtual assignment could come with several benefits, such as reduced concerns about personal and family health and mitigating immigration risks. However, at the same time, it may face various challenges, also from a tax perspective, where multiple factors should be considered, such as the permanent establishment risk, income tax and social charges implications, individual tax residence.
It is recommended for the employer to have a pre-established framework for cross-border remote working, by personal or business requests, that sets out the rights and obligations of all parties involved (i.e. home employer, employee or host ‘beneficiary’ employer), covering both tax and legal aspects.
Some states have even decided to facilitate a process by which foreign nationals can live and work temporarily in their territory. Some of these countries are popular tourist destinations, which are trying to partially compensate for losses caused by the pandemic. Among the countries that are facilitating the immigration process include Barbados, Bermuda, Estonia and Georgia.
The immigration rules for work in the countries where the employees choose to temporarily move should be carefully looked at, since in many cases they differ significantly from the rules applicable for tourism, the latter usually being less restrictive.
Romania still does not offer related tax or immigration facilities in this respect, specific to remote work, although a flat salary tax rate of 10% could be attractive for foreign employees. Such a working model in Romania could also attract a tax residence, with only 10% tax on most types of personal worldwide income.
At opposite poles, in the case of virtual assignments to Romania, the salary income derived by a foreign tax resident for activities performed remotely from abroad (where the employment is exercised) for the benefit of a Romanian entity should not be subject to income tax or social charges in Romania. The right of taxation should normally stay with the home country, where the employment is exercised. There are no specific provisions in Romanian tax law on virtual assignments and, consequently, the general ones should be observed, closely together with the ones from the double tax treaties.
As the requests for remote working are here to stay, from people and organisations, companies must be legally and fiscally prepared for the paradigm shift from ‘work from home’ to ‘work from anywhere’, and consider the various domestic laws and double tax treaties, agreements on social security coordination and OECD guidance.
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