The governments in Belgium and our neighbouring countries took a number of important decisions shortly after the start of the first lock down and concluded bilateral agreements that ensured that in many situations the tax and parafiscal levy on the wages of frontier workers in cross-border situations with neighbouring countries could be maintained unchanged.
But if you still want to offer your employees the opportunity of cross-border teleworking after those (temporary) COVID-19 measures have been lifted, there are a lot of elements that play a role which you should examine carefully beforehand to avoid adverse (para)tax consequences for both the employee and the employer concerned.
Specific measures for frontier workers during COVID-19
Social security
The social security authorities in Belgium and our neighbouring countries decided fairly quickly from the initial lock down to exclude the periods of telework performed by frontier workers in the home country as a result of the COVID-19 measures when determining the applicable social security system. These exemption measures served to prevent a temporary shift of social security during the COVID-19 pandemic.
Income tax
Tax authorities in Belgium and neighbouring countries concluded bilateral agreements to avoid the unforeseen consequences of a tax shift as much as possible. These bilateral COVID-19 agreements provided for a number of derogations from the provisions of the double taxation treaties concluded by Belgium with these countries.
The bilateral agreements stipulated, among other things, that all employment services of employees exercised at home as a result of the COVID-19 measures could be considered as working days exercised in the country where the activities would have been exercised in the absence of the measures. Consequently, income relating to these services could continue to be taxable in the State of employment.
Despite the fact that the bilateral COVID-19 agreements concluded between Belgium and neighbouring countries did not include specific measures relating to permanent establishments, the OECD recommended that, as a result of the COVID-19 measures, the exceptional and temporary performance of the work from the country of residence (home office) would not give rise to a taxable permanent establishment under the treaty on the part of the employer.
COVID decisions and bilateral agreements now expired
The COVID-19 agreements were finally terminated on 30 June 2022.
Initially, this would also have been the case for social security measures. However, in mid-June, the European Administrative Commission introduced a new transition period until 31 December 2022 for social security purposes. Recently, this transition period was extended till 30 June 2023.
During this transition period, Member States and the Administrative Commission will examine specific situations whether a structural change in the applicable rules is necessary. It also allows all parties involved to adapt to the changed working patterns. Consequently, until that date, teleworking days will not be taken into account for determining the employee's applicable social security legislation. Cross-border teleworking will then only trigger a change in the applicable social security system from 1 July 2023.
However, a Limosa notification (if applicable) is again mandatory from 1 July 2022 (this notification was not mandatory during the Covid neutralisation period).
What after the end of the COVID-19 measures?
It has now become clear that for quite a few professions, much of the work can be done from home. In practice, we are already seeing employers offering the option of working from home one or more days a week in the 'war for talent' and employee retention.
In any case, for companies wishing to allow their frontier workers to work part of their working hours from home even post COVID, it is important to thoroughly investigate the consequences of this in advance and align it with the relevant legislation. After all, working from home can have tax, labour and social security law implications for the employee. For the employer too, teleworking can have an impact in terms of the (withholding) obligations and taxation of its results.
Social security
The main rule is that an employee is socially insured in the country where he performs his work. If a frontier worker also performs part of his work from his country of residence, the social security legislation of the country of residence applies on condition that he performs at least 25% of his total working time from the country of residence. If this share is less, then the social security legislation of the country where the employer is established applies.
Income tax
A frontier worker who also carries out part of his work from his country of residence will be taxed in both countries. The wages and benefits paid for the working days in the original country of work are now still taxed in that country. Wages for teleworking days in the country of residence as well as for business trips outside the country of residence and the original country of work, for example, may be taxed in the country of residence.
In contrast to social security, when working in the country of residence, no minimum share applies whereby taxation shifts to the country of residence. Even if the employee only occasionally works at home, these days are in principle subject to taxation in Belgium.
The income of cross-border teleworkers could therefore potentially be taxed twice, leading to (lengthy and costly) disputes between employees/employers and Member States' tax administrations.
Labour law
The 'usual place of work' is the place where the employee spends most of his working time. This does not change when the employee works temporarily in another country. Consequently, for a frontier worker who performs teleworking from his country of residence, it must be ascertained whether the situation is only temporary or will continue over time.
In the first case, the originally chosen employment law continues to apply as before, unless employer and employee agree otherwise. If the situation is of a more permanent nature, it may impact the employee's usual place of work.
If teleworking is so extensive that the country of residence becomes the employee's usual place of work, the mandatory provisions of the labour law in the country of residence that are more favourable to the employee must be applied. But even in the situation where an employee works on average one day a week from home, the provisions of the special mandatory law in the country of residence must be taken into account, and the employment will consequently be governed by two legal systems.
Each situation therefore requires a specific analysis to determine whether the mandatory provisions of the country of residence are more favourable to the employee than the labour law originally chosen by the parties.
Supplementary pension accrual
If, as a result of teleworking, the employee becomes subject to the social security legislation of the country of residence, it should also be checked whether the supplementary pension plan affiliation requirements in the original country of work continue to be met. Indeed, pension schemes sometimes require that the employee must be subject to the social security legislation of the country where the employer is located.
Even if the conditions for affiliation are otherwise met, it is also important to consider whether the tax shift will have an impact on pensionable salary.
Corporate tax
Teleworking in a cross-border context can also have corporate tax implications for the company.
Before agreeing to telework from the country of residence, it is best for the company to examine whether working from a home office will give rise to a taxable permanent establishment in that country. A number of material elements may come into play here (is the home office an essential condition in the employment contract, is the employee free to decide from where they will carry out their work, etc.).
If representatives are also given the opportunity to work from home, it should certainly be verified whether they have the authority to structurally enter into contracts or negotiate their essential elements on behalf of the foreign company from their country of residence without material intervention by the foreign company.
For directors it is important to consider whether the company is still managed from one central location, or whether they take and implement decisions from their place of residence.
If insufficient account is taken of the tax consequences of teleworking on behalf of the company, discussions with the foreign tax administration are imminent. In practice, these discussions often result in double taxation and costly and time-consuming procedures not only for the company itself, but also for employees and directors.
Harmonised policy for teleworkers
Many ranks are calling for a structural and harmonised regulation for frontier workers in the Benelux. In an own-initiative opinion, the European Economic and Social Committee cites some pain points in the current national regulations of the Member States concerned and makes recommendations to the European Commission to elaborate such a structured solution in concrete terms. However, given the lengthy legislative process to implement such measures, we cannot expect the new measures in the short term.
What can you do already?
If you are a company that wants its frontier workers to telework post COVID from their country of residence, it is best to make a thorough analysis of the implications beforehand. After all, it is expected that both the authorities where the company is based and those of the country of residence of the frontier workers will carry out targeted checks on correct compliance with national and international legislation.
You can already get started with the following.
- Preliminary analysis of:
- The concrete tax and legal implications of the new employment situation for the company and for the teleworkers involved;
- the financial impact - gross net and by labour cost;
- Informing employees of the concrete tax and legal consequences related to the new modalities for exercising work.
- Employment law:
- Preparation of an addendum to the employment contract taking into account the mandatory provisions of the country of residence:
- Drafting / adaptation of the labour regulations / staff manual in the country of residence / original country of work;
- drafting/adapting teleworking policy that strives for equal treatment of all employees regardless of place of residence.
- Social security:
- Registration as an employer in the country of residence when applicable social security legislation shifts;
- Check need to take out/update other insurance policies for telecommuting your foreign employees;
- Application A1 declaration
- Check need for prior notifications in border worker's country of residence when continuing social security in original country of work.
- Taxation - Payroll:
- Setting up a payroll in the employee's country of residence if social security contributions are due and/or withholding liability for payroll tax in the country of residence;
- Adjustment of payroll processing in the original country of work;
- Informing or assisting cross-border workers on changes in tax returns in the country of residence and original country of work;
- Filing corporate income tax return in country of residence if permanent;
- Assessment and compliance with other tax obligations based on the tax laws of the country of residence if there is no permanent establishment by the company.
- Supplementary pension accrual: Assessment of potential impact on shifting social security on top-up pension accrual.
- Reimbursement structure:
Assessment of need/desirability of adjusting compensation structure: commuting allowance, lump-sum home office allowance, ...
Contact
BDO has the experts to help you analyse the impact cross-border teleworking has on your company. Feel free to contact one of them or your usual BDO contact.
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