Dennis Strijker reveals 9 common conceptions regarding one of the best-known but not always understood principles of expat taxation.
Many people dealing with global mobility have heard about the 183-days-rule. People who have been expats themselves, or know people who have been on international assignments, may tell you at the golf or tennis club that everything is fine, as long as you do not work more than 183 days in the other country. There are a number of misconceptions about the 183-days-rule, which in practice often lead to a tax liability abroad or unexpected tax consequences. Dennis Strijker of TTT-Group summarizes the most made mistakes for you.
Sure, there are many situations where the 183-days-rule applies. But it is not a universal rule. As a matter of fact, it is a rule that is usually included in bilateral tax treaties between countries and determines how the rights to tax employment income are allocated between treaty countries in the event of cross border employment. Sometimes, and especially in case of really old tax treaties, a different rule than the 183-days-rule may apply.
So before even considering whether the conditions of such a rule are met, always check first whether the rule even applies. This is only the case if the country where you live and the country where you work have concluded a bilateral tax treaty and they have included this rule in that tax treaty. So check if a treaty applies, and what the treaty actually says.
Sometimes people think that as long as the conditions are met, no tax consequences arise in the host country. But actually it is rather the exception to the rule, than the rule. This is a very subtle difference, but important to understand how tax law works in cross-border situations. I will explain the difference below.
As soon as you cross borders for your work, and work in another country than where you live or usually work, you will be subject to the laws and regulation of at least two jurisdictions. Conceptually, usually your home country would want to tax you for your worldwide income (so anything you earn irrespective where it is earned, located, received etc.) and the country where you work would want to tax the part of your employment income tax is related to your work days in the host country.1
Obviously, this may result in double taxation. The basic rule in tax treaties regarding employment income is that you will be taxable in the country where you work. So let’s assume you work 250 days in a year, of which you spend 50 in the work country, than this country in principle has the right to 25% of your employment income. If they can and will depends on the domestic law of the work country.
And this depends on the answer to the question whether you can claim the escape card that the 183-days-rule offers. This rule is included in tax treaties in an effort to keep things simple and avoid taxability in the host country in specified situations. The exception to this rule is that only if all three conditions of the 183 days rule are met, you may be fully subject to taxation in your home country, rather than your work country.
Our recommendation is to always be aware that as soon as you set foot on the ground abroad to work, that no longer only your home jurisdiction applies, but that you are subject to the local tax legislation.
Think you don’t need a working visa if you spend less than 183 days in the work country? Or that your social security position will follow your tax position? Think again. This is absolutely not the case.
In terms of visa and immigration law, the rules of the host country will be leading. Very generally, those rules will be focused on protecting the local market and be aimed at limiting the foreign workers allowed, both in absolute numbers, as in the type of workers and competences attracted to such country. As you can guess, countries are usually more friendly towards scarce professions than those that are readily available on the labour market. And usually it is easier to obtain work permits for short-term work, with the business trips as the best-known example.
Sometimes countries may have concluded friendship treaties, which make it easier for citizens of those countries to obtain the relevant work visa. Sometimes special rules apply between countries based on shared history, such as for instance between the commonwealth countries). Also, regionally, note that within the EU special rules apply for EU citizens that allow them to work cross border without restrictions in most situations. For now, bear in mind that the 183-days rule does not apply to immigration law and that the recommendation is at least for each cross-border trip to gain an understanding of what conditions apply.
The same applies for social security. The tax treaties contain no rules around the allocation of social security coverage rights. So where you need to pay social security premiums and where you can apply for benefits usually depends on domestic law in the first place. The number of social security treaties concluded between countries is limited, Within the European Union, regulation 883/2004 arranges the allocation of social security rights. Note that the rules significantly differ from the 183-days-rule.
Besides checking the tax consequences of your cross-border employment situation, also check the consequences from a visa and immigration perspective and where applicable, even other rules (labouw law, data privacy, import and export restrictions)
This is an important misconception. The 183-days-rule counts days of physical presence, rather than workdays.
Remember the example of 50 workdays we used in paragraph 2? The allocation of employment income itself follows a different rule and is based on workday ratio. Should the employee in the example also spend 134 weekend and vacations days in the work country (for instance from visiting your boy or girlfriend you met during your activities abroad!) the first condition of the 183-days-rule is no longer met and the employee definitely becomes taxable in the work country.
All days spent in the work country count, so work days, weekend days, public holidays, vacation days and sick days normally as well2. Even all parts of a day count as a full day spent abroad, so arriving at the night before a meeting, or leaving the morning thereafter would also need to be included. This only differs for international transits spent on the airport.
Always keep a travel log if you work extensively abroad, and especially if you plan your taxability abroad around applicability of the 183-days-rule.
Actually, this one may not be a myth but a truth. But also very well not. In fact, this will highly depend on the text of the applicable tax treaty. Let me first give you an historical insight.
In the past, the OECD model treaty (used by many countries as a guideline for their treaty policies) and many bilateral tax treaties had a definition of the first condition of the 183-days-rule that was met if employee would not spend more than 183-days in a calendar year in the host country. You can guess what happened…
Exactly! Companies would plan back to back periods of employment in the host country of 182 days in year one, and 183 days in year 2, effectively applying the exception to the main rule that an employee is taxable in the host country in their favour for extended periods of time! In recent years, newer tax treaties include definitions that apply to either a 12 month rolling period, or any work day spent in a year starting and or ending of such a 12 month rolling period.
This makes the planning much more complex and the changes of the 183-days-rule not being fulfilled (e.g. the employee becoming taxable in the host country) significantly higher. In practice we see that employees for instance spend a planned 180 days in the work country but than visit the work country sometime later (but within span of the 12 month period) for private purposes, for instance to show and share with the beloved-ones the fine restaurants and other places they discovered during their assignment, and trigger unexpected and undesired tax consequences after all!
Always check the exact wording of the 183-days-rule between your home country and the work country. Bear in mind that if the tax treaty is updated, that this may impact earlier periods. Keep monitoring the days spent abroad also after the assignment activities ended!
Many people forget (or don’t even know!) that the 183-days rule also contains two additional conditions, and that all three of them need to be consecutively met. The other conditions are that the salary is not paid by or on behalf of a employer in the work country and that the employment costs are not borne by the foreign employer’s permanent establishment in the host country. Let me give an example of both.
If an employee lives in country A and concludes an employment agreement with an employer established in country B, the employee will be taxable in country B for the income that can be allocated to any workday in country B. The 183-days-rule will never be met, even if the periods of stay in county B are limited.
Controversially, this condition (and not the third!) also triggers taxation in the work country if the employee concludes an employment agreement with a branch office in country A of the legal entity established in country B.
Regarding the last condition, a permanent establishment is simply put a fixed place of business in a country of a legal entity incorporated in another country. Branch offices are good examples of these. So, if you have an employment contract with a legal entity in country A (where you also live) but (also) work for a branch office of this entity in country B, you may become taxable in country B after all if the employment costs are borne by the permanent establishment. Now, who would normally know this without consulting the finance department or internal controller?
Besides counting days, always look at the entire employment set-up and check with your HR and or finance department what the implications are if you are in any of the situations as described above.
Okay, here it becomes really complex. In the past, countries would usually apply kind of a formal approach to the second condition, that the salary can not be paid by or on behalf of a employer in the work country. That means that if the employee has an employment contract with a legal entity outside the work country3, this condition would be met, even if the salary costs are cross-charged to an entity in the host country.
However, work countries have the freedom to re-qualify the employment relationship in case domestic law would qualify the relationship between an individual and a host entity as employment (even without the availability of a formal employment agreement) or if they consider the situation as disabuse of the tax treaty.
As a consequence, taxability may occur in the host country, even if there is not a formal employer. More and more countries use the two above-mentioned exceptions to re-qualify employment relations and conclude taxability much easier in the work country by applying a more economical approach.
In general two conditions apply here, that are that the employee works for the risk and benefits of an entity established in the host country and that the activities of the employee are fully embedded in the business operations of this entity.
The first condition is usually considered to be met if there is a direct link between the salary costs of the employee, the time spent working on behalf of the host country entity and costs charged to the host entity by the home entity. The second condition is met if the host employer for instance has the entitlement to instruct the employee, determine working hours etc.
In group relationships this can now easily lead to taxability in the host country even if presence in the host country is under 183 days, for instance if an employee is “borrowed” or “seconded” to a host entity to temporarily work on a project there, and the salary costs are recharged to the host entity.
This complicates the determination of taxability in practice. In many situations it is unclear upfront what the entities agree upon on the costs. Or this is not known on a line management or HR level, but decided upon by finance. In addition, countries tend to apply different approaches towards the question whether the conditions for an economical approach are met, making it unpredictable what the consequences are on a case-by-case basis.
Always check what the view of the host country is on application of the second condition of the 30% ruling. Also make sure you check with the finance department what will happen with your employment costs. The doctrine on this condition is rapidly changing, so a regular check is advised and, provided the complexity of this matter, expert advice recommended.
Wrong. And you won’t be surprised. There are still a number of situations where a treaty may contain a 183-days-rule but still does not apply to you.
It may for instance also not apply to civil workers, military, cabin crews and professors etc. Or in case you are a statutory director. In those situations (and there may be more!) other allocation rules may apply to your employment than the 183-days-rule.
In addition, there are situations that a treaty may be in place but not apply to you. Examples are if two countries anticipate taxing the same employment income (for instance because your employer is located in one and you (also) work in the other) but you are not regarded as a tax resident in any country! Or if the tax treaty only applies to resident citizens of such country, such as the Dutch people living in Dubai are not protected by that particular treaty!
Be sure to factor in all relevant facts and circumstances if you determine taxability based on the 183-days-rule and don’t make any assumptions. You won’t be the first to go from zero taxes to a full pull for the local tax authorities…
Sure, it avoids a lot of administrative hassle if you can solely remain taxable in your home country. You (may) avoid the obligation to file income tax returns in the host country4. And your employer may avoid a local withholding obligation for which, if they cannot shift this obligation to a subsidiary or branch abroad, they would have to register themselves in the work country.
But, it is not true that it is always more beneficial to apply the 183-days-rule from a tax perspective. This will highly depend on the (differences between) tax rates in the home and host country, and the method applied to avoid double taxation.
Let me explain this in a bit more detail. In the first place, the work country would usually only want to tax the employment income related to work days in the host country. Most countries apply progressive tax rates. In such cases5, as only part of the employment income is taxable in the work country, you may benefit from the lower tax rates in that country. Some countries even have a (low) fixed percentage for non-residents working in that country, or even no tax at all.
Now here comes the important part. Remember that in paragraph 2 we mentioned that your home country would want to tax your worldwide income? If they apply the so-called exemption with progression method to avoid double taxation, they will provide you a reduction of tax in the home country based on your average tax rate on your employment income in the home country.6 If this is higher than the tax rate you paid in the home country, the tax relief in the home country also is higher than the tax you paid in the work country! This phenomenon can arise naturally (you live in country A and have your employer in country B where you work) or can be actively planned (for instance by for instance concluding employment contracts with multiple (group) entities). This is known as a salary split and can depending on the situation be very beneficial tax wise.
So good news, not meeting the conditions of the 183-days-rule may sometimes also be beneficial. When there is an international work pattern and there is some steadiness of the activities abroad, it is an opportunity to investigate to what extent it may be beneficial to create taxability in more than one country.
There are many misconceptions about the application of the 183-days-rule in the situation of cross-border employment. These may result in tax risks or undesired and unaccounted tax consequences, such as double taxation. The application of the 183-days-rule in practice has become more complex with countries applying a more economical approach and each country combination may have it’s own set of rules to be applied; with each country applying it’s own interpretation to this set of rules. In any situation, the 183-days-rule may still be used in the advantage of taxpayers, either avoiding complexity or achieving tax benefits. A certain level of expertise and knowledge is however to play the rules at your hand!