In connection with the so called “war for talents”, the flexible division of working hours and locations is becoming an increasingly important criterion when choosing an employer. In cross-border constellations home office solutions can also trigger tax consequences that need to be considered. In this context an individual analysis of the respective facts is recommended in advance in any case.
1. Payroll taxes
a.) Income tax
In a first step, it is relevant in which country the employee’s home office is located and whether a double taxation agreement has been concluded with this country. With the application of most double taxation agreements, it is basically the case that income from activities in the country of the employer is taxable in this country, whether income that is attributable to the home office is taxable in the home office country. Double taxation is prevented in the home office country, depending on the applicable double taxation agreement – by exempting the employee’s Austrian earnings or by offsetting the Austrian tax against the foreign tax.
In this context the following aspects need to be checked under foreign tax law:
- requirement of filing a tax return for the employee in the home office country
- obligation for the employer to deduct wage tax in the home office country
b.) Social security
The principle of single insurance applies within the EU, EEA and Switzerland, so that only the legal provisions of one state apply. For example an employee who works in two Member States is subject to the legislation of the Member State of residence, if he or she carries out a substantial part of his or her work there (at least 25%).
If an employee therefore performs a substantial part of the work in the home office, the following aspects need to be considered:
- corresponding registration in the home office state is usually required
- contributions are to be paid according to foreign social security law
- ancillary wage costs can arise abroad
2. Home office as permanent Establishment (PE) for the employer
It may be the case that a foreign home office establishes a PE for the employer. The tax consequence would be that the employer company is liable to tax with the profits attributed to this PE (home office) by using a recognized transfer pricing method. If a PE is established, a registration for tax purposes is basically necessary abroad.
The establishment of a PE through a home office activity must be examined in accordance with foreign tax regulations. According to the Austrian tax authorities, indicators for a PE in connection with a home office could be (provided it is not merely a preparatory or auxiliary activity, but especially an activity that promotes sales):
- Activity requires an office, so home office is mandatory for the employee to perform the job
- more than 25% of the work is done from the home office
- employee deducts home office costs in the individual tax return
- employer bears costs for home office
- home office serves as the official company address (eg address on business cards, telephone numbers, door signs, client meetings, etc…)
Authors:
Christoph Puchner, Managing Partner and Tax Advisor
& Katharina Geweßler, Tax Advisor from ECOVIS Austria,
one of the leading tax consultants in Austria in the startup sector
