Remote working from abroad and tax - how to avoid the pitfalls?

Remote working from abroad - a new reality and new tax risks

Remote working has become a permanent part of the way many Polish businesses operate. Increasingly, it no longer means simply performing duties from your own home, but also the ability to provide services from anywhere in the world. The so-called workation, i.e. combining work with leisure, is gaining particular popularity - a model in which an employee or business owner temporarily moves their place of work to another country, e.g. Spain, Portugal, Thailand or Italy.

From a business perspective, such flexibility can be an attractive tool for retaining specialists and building a competitive advantage. At the same time, however, remote work performed from the territory of another country may have significant tax consequences - for both the employee and the employer. The biggest challenge remains determining whether carrying out activity abroad will give rise to a tax obligation there, and in particular to the creation of a so-called foreign permanent establishment.

This is precisely why, before agreeing to work from abroad, it is worth carefully analysing all the legal and tax aspects. A lack of proper preparation may result in unexpected obligations towards foreign tax authorities and costly financial consequences.

Employee tax residence - the significance of the 183-day rule

One of the fundamental issues connected with remote working from abroad is determining the employee's tax residence. Residence decides in which country a person is taxed on their worldwide income. Under Polish regulations, an individual is resident in Poland for tax purposes if they meet at least one of two conditions:

• they have in Poland their centre of personal or economic interests (the so-called centre of vital interests), or
• they stay in Poland for more than 183 days in the tax year.

The popular 183-day rule is often wrongly interpreted as an automatic threshold determining a change of tax residence. In reality, exceeding this period of stay abroad does not always mean losing Polish residence. It is necessary to examine additional circumstances, such as where the family lives, property owned, main sources of income and economic ties with Poland.

For example, an employee of a Polish company who works from Spain or Italy for several months may still remain a Polish tax resident if their centre of vital interests is still in Poland. At the same time, the country of actual stay may try to treat them as its own resident. In such situations, the provisions of the double tax treaties concluded between Poland and other countries are of key importance.

Foreign permanent establishment - when does remote work create one?

One of the biggest risks for a business owner is the possibility of a foreign permanent establishment arising. This concept appears in double tax treaties and, in principle, means a fixed place of business through which an enterprise carries on business in another country. The creation of a foreign permanent establishment may result in the need to account for part of the enterprise's income in the country where the establishment is located.

When does an employee's private home become a permanent establishment?

Traditionally, a foreign permanent establishment was associated with the physical presence of a company - an office, branch or production plant. The growth of remote working, however, means that increasingly the question is whether the private home of an employee or business owner may be treated as a place where the enterprise carries on business. Working from abroad does not in itself automatically create a permanent establishment - each case requires an individual assessment.

Tax authorities pay attention above all to the following elements:

• the nature and scope of the work performed,
• the employee's degree of independence and ability to take business decisions on behalf of the employer,
• the actual use of the foreign place of work by the company,
• the duration of work abroad - the longer it is, the greater the risk,
• whether the employee performs functions that are key to the enterprise's activity.

A practical example - a sales representative

The greater risk of a permanent establishment arising concerns employees responsible for sales, negotiations with clients or concluding contracts. If, for example, a sales representative of a Polish company is permanently based in Germany, conducts negotiations with counterparties there, and their actions in fact lead to the conclusion of contracts on behalf of the company, the foreign tax authorities may take the view that the enterprise's activity is being carried on in their territory. This issue is also particularly important for entrepreneurs running a sole proprietorship (JDG) and providing services under a B2B model.

Employer obligations with remote working from abroad

The decision to allow an employee to work from abroad should be preceded by a comprehensive analysis not only of tax matters, but also of legal and organisational ones. The employer should verify a number of important circumstances, including:

1. Whether the employee can legally work in the given country and whether additional permits are required.
2. What obligations apply in respect of social security - in particular, whether the EU rules on the coordination of social security systems will apply.
3. Whether there will be an obligation to register the business abroad.
4. Whether the employee's remuneration may be taxable in another country.
5. What consequences remote working from abroad has for the employment law of the host country.

In practice, many companies introduce internal procedures on remote working from abroad. These set the maximum permitted time for working outside Poland, a requirement to obtain the employer's prior consent and the need to carry out a prior analysis of the tax consequences. Such a solution helps to limit risk effectively, because the business owner retains control over where and for how long employees perform their duties.

The risk of double taxation and methods of eliminating it

One of the most serious problems connected with remote working from abroad is double taxation. This occurs when two countries simultaneously consider that they have the right to tax the same income - one as the country of tax residence, the other as the country where the work is actually performed.

Such conflicts are resolved by double tax treaties. They provide specific mechanisms for eliminating double fiscal burden, including above all:

• the exemption with progression method - foreign income is exempt from tax in Poland, but affects the tax rate applied to other income,
• the proportional credit method - tax paid abroad is deducted from the Polish tax liability, in proportion to the share of foreign income.

This does not mean, however, that the employee or employer will always avoid additional formalities. In some cases it may be necessary to file tax returns in two countries, keep additional documentation or obtain a certificate of tax residence. It is worth remembering that these procedures differ depending on the country and the specific bilateral treaty, so each case requires an individual approach.

Summary - how to manage remote working from abroad safely?

Remote working from abroad gives employees greater flexibility and is an attractive benefit, but for business owners it means a need for more careful analysis of the tax and legal consequences. The mere fact that an employee performs their duties from another country does not automatically create a foreign permanent establishment. However, in certain situations - particularly with longer stays and where the employee performs key functions - it may lead to an obligation to account for tax outside Poland.

In an age of growing popularity of cross-border work, business owners should treat the possibility of working from abroad not only as an employee benefit, but above all as an issue requiring appropriate tax risk management. Properly prepared internal procedures, prior legal analysis and ongoing monitoring of changes in regulations help to limit effectively the risk of unexpected obligations towards foreign tax authorities.

Are you planning to allow your employees to work remotely from abroad, or considering such a working model yourself? Contact our firm - we will help you analyse the tax risks, prepare appropriate procedures and protect your business from unforeseen consequences. We look forward to hearing from you!