Because of the COVID-19 situation, companies are dealing to an increased extent with matters relating to working from home. Particular care is required with regard to employees who live abroad (cross-border commuters).
In this blog we would like to draw your attention to the issues under tax law that arise if you permit your cross-border commuters resident in Germany to work from home. You need to give consideration both to the employee’s individual tax liability and to the risk of their activity constituting a permanent establishment under tax law and the associated corporate tax liability and documentation obligations. Things that were possible without implications under social insurance and income tax law while special measures were in place to contain the virus need to be looked at more closely as soon as the situation normalises.
Memorandum of understanding with Germany (COVID-19)
On 11 June 2020 Switzerland and Germany agreed a time-limited memorandum of understanding in the context of COVID-19. In this, the two countries agreed that working from home in connection with the pandemic would have no implications for employees’ tax liability. Specifically, this means that days for which employment income is received and that cross-border commuters have spent at home solely because of the COVID-19 measures are considered to be days spent at their place of employment. The implications for employers have thus far not been dealt with. The current extension of the memorandum of understanding will not be terminated until at least 31 March 2022.
Cross-border commuter status ceases to apply if a total of 60 non-return days per calendar year is exceeded. Days that employees spend in their country of work without returning to their country of residence because of COVID-19 (e.g. nights in hotels paid for by their employer) do not count as non-return days. The number of non-return days is reduced on a pro rata basis for the remaining period of the calendar year (60/366 multiplied by x). To ensure that this reduction can be implemented correctly, you as the employer must confirm the relevant period of time (x) in written form. However, with the addition to the memorandum of understanding from 27 November 2020 (Section 6) it was agreed more specifically that such certification of the place where work is performed, or of the place where work is interrupted with continued remuneration of cross-border commuters, is not required for COVID-19 non-return days, only for “normal” non-return days based, for example, under employment contract provisions.
Creation of a permanent establishment
On 27 April 2021 a further addition to the memorandum of understanding of 11 June 2020 was signed and published. This additional Section 7 explicitly confirms that, when employees perform their work from home in their country of residence solely as a result of the COVID-19 measures, their activity does not constitute a permanent establishment of the employer within the meaning of Article 5 of the Double Taxation Treaty.
Nonetheless, other aspects not covered in this blog, such as mandatory provisions under employment law in the country of residence applying to physical activity, also need to be borne in mind.
Forewarned is forearmed
Although this new addition to the memorandum of understanding clarified the risk of constituting a permanent establishment abroad in connection with the pandemic, the risk nonetheless remains in the case of employees working from home for other reasons (contractually agreed, at the employee’s request etc.). This results in higher costs and a greater administrative workload well beyond the tax liability, and for that reason you are advised as an employer to think twice before approving working from home abroad – particularly for cross-border commuters. In order to be able to respond to enquiries from the relevant authorities, you should look into all the circumstances and document the facts. By the way, provisions under social insurance law may differ from the assessment for tax purposes. You therefore need to assess these separately.
