Working from home has become more popular recently, with opportunities to move to countries like Spain, which can offer a better climate and quality of life. This triggers tax consequences, for example, the individual must know in which country their earned income will be taxed.
There are some basic rules in double taxation agreements:
The individual will always be taxed on their earned income in the country where they are a resident.
In some circumstances, they might be taxed on earned income in the country where they carry out their professional activity on a shared basis with their country of residence. In this case, the employee is subject to unlimited tax liability in the place of work and the obligation to remedy or eliminate the double taxation falls on the employee’s place of residence.
So that the place of work can impose unlimited tax liability, although on a shared basis with the place of residence, the following criteria must be met:
- The employee physically moves to the place of work
- If the employee stays in that country for more than 183 días in the tax year, they can be taxed on their earned income regardless of who pays the income.
- There is a link between the income tax paid and the place of work, even if the employee does not stay in the place of work for more than 183 days. Income will be considered to be earned in the place of work in cases when:
- the wages are paid by an employer resident in the place of work or
- the wages are paid by a permanent establishment that the employer owns in that country
Only one of the three criteria needs to be met for the place of work to be able to share taxation of the earned income with the place of residence. If none of these criteria are met, the income will be taxed exclusively in the place of residence. This ensures that the employee’s earnings from work carried out from their place of residence but the result of which is used in another contracting country cannot be taxed by that other country.
Moving to the place of work and the 183-day rule:
The place of work can only impose tax liability on the income of an employee who is a resident of another country if the individual physically moves to the country to provide services there.
Although the time period used is the same number of days, i.e. 183, as the one generally used for an individual to become a resident in one of the contracting states, both situations must not be confused. Even if the employee stays for the required 183 days, it could be the case that they have not become a resident in the place of work.
The following days must be included in the calculation: “part of the day, day of arrival, day of departure and other days spent in the place of work, including Saturdays, Sundays, national holidays, holiday leave taken before, during or after the professional activity; short-term breaks (training periods, strikes, shutdowns, delayed arrival of supplies); sick leave and due to death or illness of a family member. However, any days spent travelling in the place of work as part of a journey from two points outside that country should be excluded from the calculation”. Also, in a broad sense, any “days not worked” when the employee’s presence in the place of work is linked to the professional activity are included in the calculation. Any days on which the individual is not physically in the place of work are not calculated, unlike for residence in Spain, for example, sporadic absences, regardless of the reason for departure, such as working in another country.