On 3 April 2020, the OECD Secretariat issued its analysis on tax treaties and the impact of the COVID-19 crisis. The guidance deals with (a) concerns related to the corporate residence status (place of effective management); (b) concerns related to the creation of Permanent Establishments; (c) concerns related to cross-border workers, and (d) concerns related to the residence status of individuals. In this special edition we focus on the issue of cross-border commuting and the residence status of individuals.
The COVID-19 crisis may raise concerns about a potential impact on taxing rights on the remunerations paid to cross-border commuters who are compelled to telework and/or received (subsidized) income. Furthermore, the COVID-19 crisis may raise concerns about a potential shift in the residence status of an individual who is stranded or has temporarily returned to its ‘‘previous home country’’. Below we deal with the OECD analysis as well as the perspective of our L&L home markets – Belgium, Luxembourg, Netherlands and Switzerland – on cross-border commuting and the residence status of individuals.
OECD Analysis on cross-border commuting and the residence status of individuals
Although income from employment is generally taxable in one’s residence state, employees which are active in a cross-border context are often taxed in the country in which they are economically active (the “work” state), provided that a minimum amount of the (professional) time is effectively spent in that country (specific conditions apply depending on the country in question). Considering the general advice of foreign authorities to telework to the largest extent possible, the period spent in the work state by these employees could significantly decrease, which could potentially limit the work state’s right to tax the employment income, or even entirely shift this right to tax to the residence state of the employee concerned. It is thus very important to keep record of the days that the employee(s) concerned have worked from their home office, in order to assess any changes to the applicable tax regime.
The OECD is of the view that the exceptional circumstances during the COVID-19 crisis require a specific level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with involuntary and temporary change of the place where employment is performed. Such compliance and administrative costs for employees and employers may arise in case a cross-border commuter is compelled to telework due to the COVID-19 crisis. For instance, if the country where employment was formerly exercised should lose its taxing right, additional compliance difficulties would arise for employers and employees. Employers may have withholding obligations, which are no longer based on a substantive taxing right. On the other hand, the cross-border commuter would have a new/increased liability in their state of residence.
Article 15 of the OECD Model states that employment income is taxable in the state where the employment is actually exercised (save for the exception as set out in paragraph 2 of article 15 of the OECD Model). During the COVID-19 crisis, governments may have adopted stimulus packages to keep employees on the payroll. In such case the question arises where such remuneration should be considered to be ‘‘derived from”. According to the OECD guidance the (subsidized) income that a cross-border commuter receives most closely resembles a termination payment. Paragraph 2.6 of the OECD Commentary on article 15, states that such termination payment should be considered to be derived from the state where it is reasonable to assume that the cross-border commuter would have worked during the period of notice. Further, the Commentary states this is an ‘‘all facts and circumstances test’’ that in most cases will result in the last location where the employee worked for a substantial period of time before the employment was terminated. Consequently, following the application of article 15 of the OECD Model, no change in taxing rights should occur solely on the basis that a cross-border worker receives subsidized income.
Some bilateral treaties contain special provisions that deal with the situation of cross-border commuters and which may be affected due to the COVID-19 crisis. These provisions may contain limits on the number of days that a commuter may work outside the jurisdiction he/she regularly works before triggering a change in his/her status. In order to address this issue the competent authorities of some countries – see the treaties of Luxembourg with Belgium, France and Germany or of Belgium with France, referred below – have already reached an agreement for the interpretation of these provisions.
Residence status of individuals
The OECD is of the view that it is unlikely that the COVID-19 situation will affect the residence status of individuals. First of all, the OECD is of the opinion that it is unlikely that in case (i) a person is temporarily stranded in a ‘‘host country’’ or (ii) a person is temporarily returning to their ‘‘previous home country’’ during the COVID-19 crisis, such person would be considered resident under the applicable domestic rules. However, even if this would be the case, according to the OECD guidance the person would not become a resident of the other country under the tax treaty due to such temporary dislocation (provided the person is considered dual resident and a tax treaty applies). The OECD guidance states that because the COVID-19 crisis is a period of exceptional and temporary circumstances, in the short term tax administrations and competent authorities will have to consider a more normal period of time when assessing the residence status of an individual.
Non-residents are taxable on their Luxembourg-source income, including salary income, subject to any adverse provision of a tax treaty. Luxembourg has 200,000 non-resident employees that cross-border from Belgium, France and Germany. As referred to above, as a result of the exceptional COVID-19 restrictions, many cross-border workers are required to telework since several weeks which can trigger potential additional tax liability in their State of residence.
Under certain Luxembourg double tax treaties, such as the tax treaties concluded by Luxembourg with Belgium, France and Germany, there is a maximum number of days cross-border workers can work from home without becoming taxable in their home country (respectively 24 days for Belgium, 29 days for France and 19 days for Germany). In line with OECD guidance promoting coordination between countries in order to avoid the unplanned tax consequences of the Covid-19 crisis, Luxembourg has reached agreements with its neighbouring countries in order to limit the risk for cross-border workers of exceeding this tolerance threshold. According to these agreements, during the Covid-19 crisis, days spent working from home by Belgium, French and German cross-border commuters employed in Luxembourg will be deemed spent working in Luxembourg and should therefore not affect their tolerance threshold.
Luxembourg resident individuals are liable to tax on their worldwide income. An individual qualifies as a tax resident of Luxembourg provided that he has his tax domicile or usual abode in Luxembourg.
The tax domicile of an individual is the permanent home that the individual actually uses and intends to maintain. In practice and in case law, residence is a question of facts and circumstances. For example, an individual that has an apartment in Luxembourg, which is permanently available to him and that he regularly uses and intends to keep, is considered to have his tax residence in Luxembourg. Individual taxpayers with no tax domicile in Luxembourg will qualify as tax residents if their usual abode is in Luxemburg. A usual abode is deemed to exist after a continuous presence in Luxembourg of six months that may be spread over two calendar years.
Based on these Luxembourg resident criteria, that require a certain permanence and, in certain cases, the intention to keep its tax domicile in Luxembourg, non-residents that are currently in Luxembourg and are restricted from traveling back to their home countries should likely not become Luxembourg tax residents. However, this question may become more problematic in case the current travel restrictions (be they compulsory or voluntary) will last longer. The same should apply to Luxembourg tax residents who are currently abroad and cannot return to Luxembourg due to crossing border restrictions – they should continue to be considered as having their tax residence (only) in Luxembourg. Unfortunately, as per today, the Luxembourg tax authorities have not issued any guidance in this respect.