Guide to Cross-border Worker Tax
Table of contents
Valoris Avocats, Valoris Advisory, and their global mobility team assist French and foreign companies whose employees are travelling for business or personal purposes, but also individuals facing international situations.
An international situation arises as soon as a border is crossed by an individual or by the individual’s income. There are various situations (expatriations, secondments, frontier work, pluriactivity, etc.) for which the legal, fiscal, and social consequences are not the same.
Taxation advice for cross-border workers
Anticipating and managing the legal, fiscal, and social consequences of cross-border taxation issues can be complex and time-consuming, especially when it already means dealing with life changes both on a professional and personal level. Our global mobility team has successfully advised clients on legal, fiscal and social consequences of mobility for ten years. Feel free to contact us for more information.
What is cross-border tax?
Cross-border tax is at stake when several countries could be claiming taxation on the same income (either because it comes from this country or because it is linked to an activity performed in this country, etc.).
When facing such an international situation, the first parameter to be considered and the first analysis to be carried out is the one about residence.
Residence will be a determining factor for cross-border tax, as all worldwide income will have to be declared in the State of residence. The right of taxation of each State involved will also be determined by reference to this concept.
From a tax perspective, residence is both defined by internal and international law.
On an international level, cross-border tax is regulated by Double Tax Treaties (DTT) signed between two countries to avoid double taxation on the same income by the two countries involved. These DTT are often based on the OECD Model Tax Convention.
Article 4 of this model deals with the notion of residence by defining the resident of a contracting State with reference to their “domicile, residence, place of management, or any other criterion of a similar nature”.
If it is not possible to determine the residence of an individual with this definition, the model convention gives several other criteria to be considered in cascade until the residence can be determined:
- Permanent home
- Centre of vital interests (State with which personal and economic relations are closer)
- Habitual abode
- Nationality
If residence can still not be determined after analysis of all these criteria, the competent authorities of the countries involved shall settle the question by mutual agreement.
Practically, if you have or your employee has a domicile in several countries, the residence will be determined by looking at the personal and family situation:
- Are you/they married? Do you/they have children? If yes, where does the family live, go to school, etc.?
- If you/they are single, the residence will certainly shift to the country where the employee actually lives.
In absence of a legal text, residence may be established in all the countries involved, resulting in the risk of double taxation.
Who needs to pay cross-border tax?
Both individuals and businesses might be subject to cross-border taxation.
Individuals that might need to deal with cross-border tax include:
- Frontier workers: living in one country and commuting to another to work
- Expats: workers from one country going to work temporarily or permanently in another country
- Full remote workers: workers performing their activity from home but employed in another country
- Retirees from one country going to live in another country
This guide will focus on advice on cross-border tax for EU and UK citizens (individuals).
Planning taxes for cross-border workers
Double Tax Treaties
As explained above, cross-border taxation is regulated by Double Tax Treaties (DTT) which are signed between two countries, and which are often based on the OECD Model Tax Convention. However, each treaty may have its own specific provisions.
To determine in which country a cross-border worker will have to pay tax on a certain type of income, i.e. which country has the right of taxation, it is necessary to consult the relevant Double Tax Treaty (DTT) to check what is provided for each type of income (income from dependent/independent professional activity, dividends, interests, capital gains, pensions, etc.).
Regarding this aspect, there is no difference whether the worker is moving inside the EU, or from/to a country outside the EU. Indeed, even inside the EU, each Member State has signed its own Double Tax Treaties with other EU and non-EU countries. There is no harmonized tax regulation for cross-border workers at the EU level.
How are cross-border workers taxed?
As soon as an income is received from a country (or for an activity performed in a country) that is different from the country of residence, there is the question of the right of taxation for all the countries involved. Following are the OECD model rules for some types of income.
Salaries or income from a dependent professional activity / employment[1]
The principle is taxation by the country where the employment is exercised by the cross-border worker, i.e. where the activity is carried out.
However, there is an exception to this principle with the so-called “temporary assignment clause” or “183-day rule” which provides 3 conditions:
- The employee stays less than 183 days in the country where the activity is performed.
- The employer is not a resident of this country.
- The wages are not ultimately borne by a permanent establishment of the employer in this country.
If these 3 conditions are met, the salaries remain taxable in the country of residence of the employee.
If not, the wages will be taxable in the country where the activity has been carried out. This could lead to a split of taxation if the activity has been performed both in the country of residence and in the other country.
In any case, the employees will have to declare their worldwide income to their country of residence, which will apply one of the methods for elimination of double taxation provided for by the relevant DTT: exemption method or credit method.
Exception to this principle: focus on the frontier worker tax status
Some countries that share a border have introduced a “frontier worker” regime by signing a specific agreement to change the rule for the taxation of salaries received by individuals who work in the country neighbouring the one in which they live.
The definition of the “frontier worker” is specific to each agreement, which often provides the particular area on each side of the border in which the individuals have to be working and living to be considered as “frontier workers”.
Important: the “frontier worker” status for tax purposes should not be confused with the one introduced by the UK for immigration purposes following Brexit. Indeed, the UK has created the “frontier worker permit” for citizens from the EU, Switzerland, Norway, Iceland, or Liechtenstein living outside the UK but who had been working in the UK by 31 December 2020. Find out more on the UK frontier worker permit.
Self-employed income or income from independent personal services[2]
The principle is the taxation of the income derived by independent personal services in the country of residence, unless the activity is performed in another country where the individuals have a permanent establishment, i.e. a fixed base regularly available to them.
It could therefore also result in a split of taxation if the activity has been performed both in the country of residence and in the other country where they have a fixed base.
The self-employed workers will have to declare:
- their worldwide income to their country of residence, which will apply one of the methods for elimination of double taxation provided for by the relevant DTT; exemption method or credit method.
- the profits attributable to the permanent establishment/fixed base in the other country to the tax authorities of this country.
Pensions[3]
The principle is taxation of pensions, and other similar remuneration paid to individuals in consideration of past employment, only by their country of residence.
Retirement pensions are therefore taxed by the country of residence, regardless of which country’s pension scheme they are paid from.
Important: The rules described above are those set out in the OECD model[4] on which most DTT are based. However, it is necessary to check in the relevant treaty whether the same principles apply.
Valoris Avocats remains at your disposal for a personalised analysis of your situation.
Optimising cross-border tax and other consequences of an international situation: what you need to take into account
Double taxation
When there is a Double Tax Treaty between the countries involved in the situation of the cross-border worker, the right of taxation needs to be determined. There can be a split of taxation between the different countries involved for a single income, e.g. salaries taxed in several countries in application of the pro rata of days worked in each country. Our global mobility team can help you to determine the amount to be taxed in each country.
When there is no Double Tax Treaty between the countries involved, the cross-border worker risks a double taxation on their income. This should be verified before the mobility and taken into account when determining their remuneration package.
Tax incentives
Some States, such as the UK, Spain, the Netherlands, Belgium, or France have some tax incentives to encourage individuals to move their tax residence to these countries.
For example, France has the impatriates favourable tax regime[5], which grants the beneficiaries an income tax exemption on elements of their remuneration linked to their impatriation and on worked days abroad. Taxpayers must complete several conditions (in particular linked to the tax residence) to beneficiate from the impatriates favourable tax regime.
Our global mobility team would be happy to help you determine the applicability of the regime to your situation.
Permanent establishment risk
When a cross-border worker leaves to another country to work from there, it is necessary to consider the risk of the company setting up a permanent establishment in that country. Indeed, depending on the employee’s role and duties, the company may set up a permanent establishment that will be liable for corporation tax in that country even though it has no premises there. It is therefore important to check whether the employee’s presence creates a permanent establishment in this country, so that the necessary formalities can be carried out in order for the company to be fully compliant.
Other consequences of cross-border situations
Social security
Regarding social security, residence is also an important parameter to consider in cross-border taxation. Indeed, most of the legal texts defining the applicable social legislation (bilateral social security agreements or regional legislation, such as Regulation (EC) No 883/2004[6]) refer to the residence of the individual.
However, some texts refer to the nationality of the individuals instead of residence (for example, agreement on social security between the USA and France).
For the EU, EEA, and Switzerland, according to the above-mentioned regional regulation, “residence” means the place where a person habitually resides[7], as opposed to the place of “stay” which means temporary residence[8].
As of 1 January 2021, and the end of the post-Brexit transitional period, the above-mentioned European regulation no longer applies for the United Kingdom. This issue is now governed by the Protocol on Social Security Coordination under the EU-UK Trade and Cooperation Agreement, which provides similar rules.
- Residence will be referred to by the texts to distinguish between two or several countries where the professional activity is carried out, to help determine the applicable social legislation, i.e. where the worker should be affiliated and pay social security contributions.
- In absence of a legal text, residence may be established in all the countries concerned, resulting in the risk of double social security affiliation.
It is then necessary to look at where the professional activity is carried out, and whether the individual is an expatriate or seconded worker.
The rules for determining the social legislation applicable to a cross-border worker, i.e. where the international worker will be affiliated and will have to pay social security contributions, will either be set out in a bilateral social security agreement or in regional regulations (for example Regulation (EC) No 883/2004 for the EU, EEA and Switzerland[9]).
Some bilateral social security agreements have a limited scope of application based on nationality. These agreements therefore only apply to nationals of the two signatory countries. For example, the agreement between France and the USA clearly refers to nationals of both countries, and only certain provisions apply to third-country nationals. On the other hand, the agreement between France and Canada applies to anyone covered by the legislation of one of these two countries, whatever their nationality.
One of the main goals of international regulations on social security is to eliminate dual coverage for international employees or self-employed working in several countries. This is known as the principle of “single applicable law” and is provided in most of the texts on the matter[10].
As a general rule, individuals must be affiliated to the social security scheme of the country in which they carry out their professional activity (principle of territoriality[11]).
If there is nothing provided between the 2 countries involved, both home country and host country legislation must be studied. For example, there is no bilateral social security agreement between France and Australia.
Exception to this principle: Focus on secondment
As a derogation to the principle of territoriality, which provides that individuals are affiliated in the country where they carry out their activity, social security regulations may provide that cross-border workers remain affiliated in the same country when they leave on an assignment in another country, i.e. when they are seconded/posted in another country.
This possibility exists both for employees and self-employed persons and is generally time limited. For example, inside the EU/EEA/Switzerland, the secondment should not exceed 24 months (unless otherwise approved)[12].
The secondment must be provided by the international social legislation.
If it is not the case, and if individuals want to remain affiliated in their home country, they will have to be socially insured in these 2 countries involved, on a voluntary basis in the home country.
“Pluriactivity” inside the EU/EEA/Switzerland
There are cases where individuals carry out their activities in several countries on a regular basis, rather than for a limited period as in the case of secondment.
In this particular case, the above-mentioned regional regulation provides specific rules for determining the applicable social security legislation[13]:
- For employees: legislation of the country of residence if they carry out more than 25% of their activity in this country or if they have several employers located in several countries. Otherwise, the legislation of the employer’s country applies.
- For self-employed: legislation of the country of residence if they carry out more than 25% of their activity in this country. Otherwise, it is the legislation of the country where the self-employed have the centre of interest of their activity (i.e. main place of business).
- For individuals carrying out both an employed and self-employed activity: legislation of the country where the employed activity is carried out.
In the context of the development of telework, a Framework Agreement has been signed between some countries of the EU/EEA/Switzerland area to derogate from the “25% rule” described above and increase this quota to 50% for habitual cross-border telework[14]. As a result, international workers may carry out up to 49.9% of their activity as a teleworker without this having any impact on their social security affiliation.
The UK, which could have signed the agreement, has announced its decision not to do so.
Labour law
It should also be noted that internal labour law of most countries contains overriding mandatory provisions that apply to any professional activity performed on their territory[15].
Therefore, even if an employment agreement has been signed in application of the labour law of the country of the employer, some provisions of the labour law where the employee is working should apply. It is therefore important to find out about the labour law of the country in which the worker is going to work.
Immigration
From an immigration point of view, cross-border/international workers (or the entity employing them) always have to check 3 aspects:
- the right of entry,
- the right of stay
- the right to work.
These are 3 different matters trigger 3 different types of documents to be held by foreigners in one country: visa, resident permit, and work permit.
These documents have to be applied for at different stages of the recruitment process or visit in the country.
The rights and obligations are different depending on the nationality of each individual.
Indeed, some countries’ citizens will have the right to enter, reside and work in France without having to take any particular steps: citizens from the EU, EEA and Switzerland.
On the other hand, some countries’ nationals will need a visa to enter in France even for less than 3 months (short-stay visa), for example Indians, South Africans, Syrians, or Vietnamese, whereas some countries’ nationals will be exempted from this document for a short stay (less than 90 days over 180 days), for example Americans, Australians, Brazilians, or Canadians.
It is strongly recommended that employers consult an immigration specialist before hiring a foreign national to check their obligations as an employer. Valoris Avocats can assist you on theses cross-border taxation matters as soon as France and Switzerland are involved. Kindly note that our firm can also refer you to one of our partners if any other country is involved.
[1] Article 15 of the OECD model “Income from Employment”
[2] Article 14 of the OECD model “Independent Personal Services” deleted in 2000, now dealt with by article 7 “Business Profits” – However, it should be noted that a dedicated article is often provided in double tax treaties.
[3] Article 18 of the OECD model “Pensions”
[4] See note 1.
[5] Article 155B of the French Tax Code (“Code général des impôts”)
[6] Regulation (Ec) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems
[7] Article 1 j) of Regulation (EC) No 883/2004
[8] Article 1 k) of Regulation (EC) No 883/2004
[9] See note 2.
[10] For example article 11.1 of Regulation (EC) No 883/2004 or article 5 of the Agreement on Social Security between the United States of America and the French Republic
[11] Article 11.3.a of Regulation (EC) No 883/2004
[12] Article 12 of Regulation (EC) No 883/2004
[13] Article 13 of Regulation (EC) No 883/2004
[14] Framework Agreement on the application of Article 16 (1) of Regulation (EC) No. 883/2004 in cases of habitual cross-border telework
[15] Inside the EU, the application of these overriding mandatory provisions is provided for in article 8 of Regulation (Ec) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (so-called “Rome I”).
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