‘Workations’ Create Risky Tax Traps When Traveling Overseas

Work and personal life have been blurred since the Covid-19 pandemic, as employees have proved that remote working can be sustainable. Some also find that working remotely while vacationing overseas is increasingly attractive.

In a market where there’s a scarce supply of available talent, companies are starting to offer these working arrangements, referred to as workations, as an employee perk in their benefits structure.

While workations may seem ideal for those who can’t afford to leave work altogether while vacationing, there are potential tax implications. Failing to understand and comply with applicable tax regulations can lead to unpleasant surprises for both employer and employees, including financial penalties or even legal consequences.

While every jurisdiction has different rules, here are some common concepts and suggested best practices to follow to avoid falling into any tax traps around workations.

When an individual extends their presence in a jurisdiction outside of their tax home, they should consider their local tax residency status and applicable rules. Tax residency can be determined by different factors, such as legal status, length and/or purpose of stay, and other personal connections to the country.

Each country has its own set of income tax filing requirements that may differ for residents and nonresidents. It’s essential for an individual to identify and understand those requirements to confirm proper compliance. It’s equally important to confirm the tax reporting required in the individual’s home country with respect to the income earned during the workation to avoid double taxation.

Permanent Establishment

Employers that allow workations should understand the issue of nexus, or minimum connection that exists between a company and a tax jurisdiction that allows the jurisdiction to impose a tax filing requirement on that business. Physical nexus can be created from having an office, business assets, or employees working in that jurisdiction.

As of today, more than 60 countries have entered into bilateral tax treaties with the US, mainly to avoid double taxation by allocating reciprocal taxing rights between the two countries, as they can override the standard local tax regulations.

Every tax treaty may have different provisions, but they generally provide guidelines to determine residency for individuals, and a higher threshold for what constitutes a permanent establishment for companies.

An individual may be considered a tax resident, or a company may be considered to have nexus in a foreign country based on the domestic tax laws of the foreign country. But provisions of a tax treaty may provide relief from the application of such rules. For example, tax treaties may allow certain limited activities to be performed by an employee of a company in a foreign country without creation of a permanent establishment.

Other Considerations

Additional issues stemming from an unplanned workation may include payroll tax filing requirements for the employer in the foreign country, including social security and mandatory pension plan obligations.

In terms of legal requirements, a work and/or residency permit may be required in the foreign country. Performing work without a valid permit (if applicable) may result in penalizations for either the employer or the employee.

Suggested Guidelines

Companies that allow workations should take necessary measures to avoid any risks or exposures associated with the employee’s presence overseas. Having a formal manual with all the required steps for employee would be valuable. Below is a sample guideline:

Identify the geographical area for the proposed workation location.
Gather background information related to the foreign jurisdiction.
Verify potential tax implications and requirements for both the company and the employee.
Collect facts about the employee’s departure, length of stay, and activities to be performed during the workation.
Consult with a local tax adviser for an in-depth analysis.
Determine if the workation creates any risk or exposure and approve or deny the employee’s request accordingly
Monitor any possible factual changes regarding the employee’s workation.
Comply with any required filings.

Outlook

Workation overseas offers individuals the opportunity to enjoy new experiences in new locations while maintaining their job positions or to extend planned vacations without hindering their work obligations. However, there must be a clear understanding of the possible tax implications to prevent unexpected consequences.

Pre-set company guidelines, and local professional guidance, are key to enjoying the benefits of workations without falling into any tax traps for the unwary.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Christina Lee is partner in CohnReznick’s New York office and practice leader of the firm’s international tax services nationally. She has over 20 years of public accounting experience in a wide range of industries, primarily focusing on multinational companies.