The rise of remote work, particularly across international borders, is presenting unexpected tax challenges for businesses. According to Skarbiec Corporate Services, remote work conducted from abroad could potentially be classified by tax authorities as work carried out through a “permanent establishment” (PE) in another country. This classification carries significant tax implications, possibly requiring companies to pay taxes in the country where the PE is deemed to exist.
The Concept of Permanent Establishment
A permanent establishment (PE) is a term used in tax law to describe a fixed place of business through which a company wholly or partially conducts its operations abroad. If a company is considered to have a PE in another country, it may be liable to pay taxes there, in addition to its home country. According to the OECD Model Tax Convention, which guides international tax treaties, a company’s profits are generally taxable only in its home country, unless it operates through a PE in another state. In such cases, the profits attributed to the PE can be taxed in that second country.
Remote Work and Tax Obligations
A recent ruling by the Polish tax authorities highlighted the potential risks. In one case, an Irish company employed two individuals in Poland who performed their duties remotely from their homes. The Polish tax office determined that this arrangement constituted a PE in Poland, obligating the company to also pay taxes there. Despite the workers having no involvement in the company’s sales activities or decision-making processes, the provision of laptops and IT equipment by the employer was enough for the authorities to consider the workers’ homes as a fixed place of business.
This ruling was upheld by the Voivodeship Administrative Court in Gliwice, which emphasized that even in the absence of formal office space, the consistent use of a specific location for work could constitute a PE under current tax law.
International Implications
Another case involved a Polish entrepreneur working remotely from Egypt, Spain, and Portugal. Despite believing that her tax obligations were solely in Poland, the tax authorities disagreed, citing the long-term nature of her work abroad as grounds for considering it a PE in Portugal.
Minimizing Risks
To avoid the creation of an unintended PE and the associated tax obligations, companies should carefully consider the nature of remote work performed abroad. If the work is regular, systematic, and integral to the company’s core activities, it may trigger PE status. Companies can reduce risks by ensuring that remote work abroad remains ancillary and not central to the business operations.
In conclusion, the complexities of international remote work require careful navigation to avoid unforeseen tax liabilities. Each situation should be assessed individually, considering both international tax treaties and local laws, to determine the potential risks and obligations.