There’s no doubt that the COVID-19 pandemic has popularised remote work. However, it should be noted that even before the pandemic, this form of work was very popular in some industries, e.g. IT. Its unquestionable advantage constitutes the possibility for the employee to work at a place other than the employer’s head office or branch. The employee may also perform work from the territory of a country other than the State where the employer is established. Nevertheless, in this case, there are doubts that concern the taxation method applied to the remuneration of such a worker.
1. Tax residence
The tax residence of the worker is essential when determining the country in which the employee’s remuneration should be taxed. This the worker’s place of residence for tax purposes. According to Article 3(1a) of the Personal Income Tax Act of 26 July 1991 (i.e. Official Journal of 2021, item 1128, as amended), a person residing in the territory of the Republic of Poland is an individual who:
- has a centre of personal or economic interests (centre of vital interests) in Poland or
- stays in the territory of Poland for more than 183 days in a tax year.
In order to obtain the status of a tax resident, one of the above-mentioned conditions must be fulfilled.
The Polish definition of tax residence is in line with definitions of this concept used by legislators of other countries and by the international legislator.
Persons who are tax residents in the State concerned are liable to taxation of all their income there, regardless of the location of sources of revenue (so-called unlimited tax liability). On the other hand, individuals who don’t have their tax residence in the State concerned are subject to tax only on income earned in the territory of that country (so-called limited tax liability).
2. Double taxation conventions
The above rules modify the provisions of double taxation conventions. According to these agreements, income from remunerated work, earned by a tax resident of the State concerned, is taxable in the country of residence. However, in the event that the remunerated work is performed in another State, the salary for this work is taxable in the country of its performance. This principle isn’t absolute. Double taxation conventions provide that income from remunerated work performed in another State can be subject to tax in the taxpayer’s country of residence. It will take place if the following cumulative conditions are fulfilled:
- the employee stays in the other country for a total of not more than 183 days in a year/12 months;
- the remuneration isn’t paid by an employer or on behalf of an employer who has the place of residence or the head office in the other State;
- the wage costs aren’t incurred by an establishment or a permanent site which the employer has in the other country.
3. Country of taxation of remote work
When determining the place of taxation of remuneration for remote work performed in the territory of a country other than the employer’s head office, the place where the work is carried out matters. This was confirmed by the Director of the National Tax Information in the individual interpretation of 24 September 2020, 0114-KDIP3-2.4011.490.2020.1.JM. He explained that: “The place of taxation of employment income, in accordance with double taxation conventions, depends not so much on the entity paying the salary as on the place of execution of work. The determination of the place of performance of work is crucial in order to settle the issue of where salaries from remunerated work are earned. The place of execution of work shall always be considered to be the place where an individual stays during the performance of remunerated work. Taxation priority related to income from paid employment always concerns the country where the work is carried out.”
If the above-mentioned conditions for the taxation of income for work at a place other than the place of performance of work are fulfilled, income for remote work can be taxed in the employee’s country of tax residence.
It should be emphasized that the localisation of the employer’s head office doesn’t matter when determining the place of taxation of remuneration for remote work. The place where the salary for the work performed is paid also doesn’t matter.
4. Place of performance of work
The tax authorities assume that the place of performance of work is this one where a natural person stays during the execution of remunerated work. The Director of the National Tax Information indicated it in the above-quoted fragment of the individual interpretation of 24 September 2020, 0114-KDIP3-2.4011.490.2020.1.JM. This position was presented by the Director of the National Tax Information in previous interpretations. For example, he stated in the individual interpretation of 19 October 2017, 0114-KDIP3-2.4015.52.2017.1.MZ, that: “The place of performance of work should always be trated as that one where a natural persons stays during the execution of remunerated work.”
5. Consequences for employers
Due to the need for taxation of remuneration of an employee working remotely in the Sate of performance of this activity, the employer may be required to make the registration with the local tax system and to fulfil the obligations resulting from the tax system of the country of performance of work, in particular to pay taxes to the competent offices.
There is also a risk that, in connection with remote work performed by an employee in a country other than that one where the employer has the head office, a taxable permanent establishment will be created in the State of performance of work.
6. Legal notice
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