Businesses operating across Europe face a never-ending challenge to navigate the complexities and nuances of in-market tax laws. Over the last 18 months though—due to the impact of Covid-19 on business travel and an increase in remote working—one area of finance that has seen some respite among employers in Europe is the need to assess accurate taxation for workers based in different jurisdictions.
However, with vaccination programs continuing to roll out successfully and an economic rebound anticipated, it is time for business leaders and their CFOs to reassess the practical requirements and updates to Europe’s economic employer tax landscape.
For many years, corporates have followed the “183-day rule,” which dictates that as long as an employee working in another jurisdiction is not there for more than 183 days a year, no income tax is payable in said country.
The “economic employer” model is, in essence, a replacement for the 183-day rule of thumb described above that many have used historically to assess a worker’s accountability for taxation when operating in a different country. It is led by the desire of many tax authorities to more accurately and fairly assess taxable revenue based on more than simply how long a person has been in the country. Now, instead of only calculating time spent in a country, the economic employer model uses criteria to define the worker’s true “employer,” and consequently who is liable for the individual rate of income tax.
What is the ‘Economic Employer’?
The challenge that this brings for CFOs is that, market to market, there is no standardization of what these criteria are. In order to avoid the risk of over- or under-taxing employees, and facing penalties for errors or negative reputational damage, there is a greater need than ever to accurately understand the terms of what it means to be the economic employer of a worker in individual European (or indeed global) jurisdictions.
By and large the economic employer is classified as the company—whether the domestic employer in the workers’ home country or the entity they are contracted to in-market—that is closest to the work being undertaken in terms of their supervision of the work and direct benefit financially from it.
Section 8.14 of Article 15 of the Organization for Economic Co-operation and Development’s guidance lists the general criteria of what defines the economic employer. The challenge, as is evident upon reading the terms, is that it is not possible to apply a hard and fast rule to all employees, roles or contracts for employers with mobile workforces.
The exact terms of an economic employer are:
- who has the authority to instruct the individual regarding the manner in which the work has to be performed;
- who controls and has responsibility for the place at which the work is performed;
- the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided;
- who puts the tools and materials necessary for the work at the individual’s disposal;
- who determines the number and qualifications of the individuals performing the work;
- who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose;
- who has the right to impose disciplinary sanctions related to the work of that individual;
- who determines the holidays and work schedule of that individual.
To demonstrate the nuances between markets, one can look at two jurisdictions like Sweden and Germany, which are respectively newly established, and long-term implementers of the economic employer model.
Sweden—Economic Employer Market Since 2021
One of the newest official adopters of the economic employer model, Sweden now implements the concept in its national law as part of the special income tax act for nonresidents. There is still a threshold of days that an employee can work in the country without meeting the requirements, but rather than the 183-day rule, the threshold is now just 15 consecutive workdays and 45 over a full calendar year, for non-tax residents. Within this time frame, only consecutive workdays are counted (no weekends) and any workdays in the employee’s home country discontinue the consecutive workdays in Sweden.
The economic employer assessment only needs to take place if the employee exceeds the thresholds, and will thus necessarily not always arise in Swedish tax liability. Travel calendars for all mobile personnel as well as robust processes to evaluate their roles is thus crucial.
Similarly, if there is an economic employer in Sweden the formal employer is obliged to:
- register for employer reporting purposes in Sweden;
- file monthly payroll returns;
- pay/report withholding tax (30%–25% for nonresidents) for employees performing services in Sweden; and
- pay/report social security contributions (as a general rule).
The administrative burden for the foreign employer will increase with regard to Sweden applying the economic employer concept. Although the Swedish tax agency offers guidance information on its website, foreign entities still face challenges in dealing with the reporting in a foreign jurisdiction.
In addition to these reporting changes, there is now also an obligation for all foreign entities that conduct services in Sweden to register for “F-tax” paid by the self-employed. If this is not done, the Swedish customer will need to withhold 30% tax at source of the invoice and transfer this to the tax agency. When registering for F-tax, a permanent establishment assessment is performed by the tax agency, implying an increased exposure for foreign companies becoming liable for corporate taxes in Sweden on revenue allocated to projects performed there.
The registration should take place even though the foreign personnel don’t become tax liable in Sweden under the economic employer model. Naturally the withheld 30% will be repaid upon request, but not until the tax agency has assessed the foreign entity’s tax status in Sweden during the regular taxation process. As far as is known, Sweden is one of only a few countries that has increased compliance for foreign entities to this extent.
Germany—Economic Employer Market Since 2004
Germany is one of the most longstanding economic employer concept users, implementing the system since 2004 through a provision of the German Income Tax Act (ITA) (Section 38 (1) sentence 2 ITA).
Unlike Sweden, there is no statutory exemption limit and individual assessments must be defined on a case-by-case basis. The consequence of the missing statutory exemption limit is that the economic employer is obliged to withhold wage tax from the first day of work in Germany. There is also an increased administrative effort in assessing eligibility given the frequent requirement of a German “shadow pay-roll.”
However, fortunately the criteria themselves are decisive in that, if the activities of a worker are undertaken in the clear interest of a German company and the employee is involved in the business activities, then the entity is very likely the economic employer. This applies regardless of whether the German company actually pays the remuneration of the employee. The decisive factor is whether the German company is in theory required under the arm’s-length principle to pay the wage for the employee. Whether financial compensation is actually paid isn’t relevant.
Regardless of the market in which a company operates, there are three best-practice steps to follow. These are to:
- create an open channel of communication with the relevant tax authorities so that queries or issues are directed to the right source in a timely and productive manner;
- ensure that the administrative capacity within your company is staffed appropriately to deal with the complexity and time requirements of these taxes; and
- engage where necessary with a tax adviser who has in-market knowledge for each and every one of the markets you or your staff operate in.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Pernilla van der Capellen is Skattejurist, Global Mobility Services, Skeppsbron Skatt AB and Christian Hick is Associated Partner with Flick Gocke Schaumburg.
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