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.
Overview of COVID-19 tax emergency measures
See here for an overview of the most important announced COVID-19 tax emergency measures adopted by the European Commission as well as within our home countries Luxembourg, Belgium, Switzerland and the Netherlands.
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.
In Belgium, specific agreements have been made regarding employees commuting between Belgium on the one hand, and Luxembourg, respectively France on the other hand. Employees commuting between Belgium and Luxembourg are taxable on their professional income in the work state if any professional activity physically carried on outside this work state is limited to a period of maximum 24 days, unless force majeure can be shown. In light of the current limitations on travel, the Belgian and Luxembourg authorities have expressed their intention to qualify the present situation as such force majeure: the period spent by the employee in his home state for the purpose of teleworking, will not be considered for the calculation of the aforementioned 24-day limitation. A similar agreement has been reached between France and Belgium on the 30-day rule under the Belgium-France tax treaty. For both tax treaties, this measure is effective as of 14 March 2020 and applies until further notice.
Furthermore, Belgium and the Netherlands are currently negotiating that, by way of derogation from the treaty, the choice can be made for the income received during the days an employee works at home, to be considered taxable in the country of employment. It is expected that a condition will be that, normally, this would have been the case. Additionally, we expect this special rule only to apply if the other country actually levies tax. Lastly, the employee most likely must be able to provide a statement from his employer.
Residence status of individuals
An individual who is a tax resident in Belgium is taxed on its worldwide income in Belgium and is entitled to invoke the double tax treaties concluded by Belgium.
An individual is a Belgian tax resident if he/she has established his/her domicile in Belgium or, if not domiciled in Belgium, has located its seat of wealth in Belgium. Tax residence is independent of civil domicile and nationality.
The domicile of an individual is the centre of interest (familial, social, professional, etc.), the place where the individual mainly and permanently resides and where his family lives. Due to the evolution of society and the economy, it is more and more common that an individual does not perform his professional activities in the same country in which his family is living and where he maintains vital relations with other individuals. In this case, the different constitutive elements of the domicile have to be weighed against each other, with, in general, more importance being attached to the centre of domestic and vital relations than to the place of professional activities.
Individuals registered in the National Register of Individuals are refutably presumed to have their domicile in Belgium. Spouses are (irrefutably) presumed to have their domicile at the place where their family is established. In spite of the introduction of these two presumptions, the determination of the domicile remains highly depend on the various factual circumstances. A certain permanence and continuity is required. A temporary absence does not imply a change of domicile. Besides the factual circumstances, the courts also take into consideration the intentions of the individual.
The seat of wealth of an individual is the place from where the assets of the individual are managed, regardless of the location of the assets.
Due to the measures taken by the Belgian government and governments in other countries pursuant to the coronavirus, an individual may unintentionally need to stay outside its home country. The question arises whether this situation changes the tax residency of this individual. The Belgian tax authorities did not adopt any specific position in this regard. However, and in line with the OECD guidance, if a non-resident individual needs to temporarily stay in Belgium for a few months due to these exceptional quarantine and travel restrictions, this person will likely not become a Belgian tax resident given that the determination of the domicile and the seat of wealth of an individual in Belgium requires a certain permanence and continuity. Conversely, a Belgian resident individual temporarily staying abroad due to the COVID-19 measures will likely not lose its Belgian residence status.
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.
Residence status of individuals
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.
Due to the corona crisis many people are currently working from home. An agreement has been concluded with Germany for cross-border workers who work from home in their state of residence. The Netherlands and Germany have agreed that, by way of derogation from the treaty, the choice can be made for the income received during the days an employee works at home, to be considered taxable in the country of employment. The condition is that, normally, this would have been the case. This special rule only applies if the other country actually levies tax. Moreover, the employee must be able to provide a statement from his employer.
As referred to above, negotiations to reach a similar agreement with Belgium are pending.
For working days on which the employee is forced to stay at home, is being paid regularly, but does not work, the Dutch and German tax authorities have confirmed that this income shall be allocated to both countries according to the ratio of days worked in the work-state / total working days as when the employee would have continued working in his normal pattern in both states. This interpretation of the tax treaty applies irrespective of the current COVID-19 period and is not limited in time.
According to the State Secretary, this interpretation also applies in relation to Belgium.
Residence status of individuals
An individual who is resident in the Netherlands for tax purposes is subject to Dutch personal income tax for his worldwide income, including a deemed annual return on his or her net wealth position.
In practice, registration in the Dutch Personal Records Database is the starting point of the presumed residency of an individual. If someone intends to stay for at least four months in the Netherlands, he or she has to register himself or herself in this database within five days upon arrival in the Netherlands. When moving abroad, one needs to register as a non-resident of the Netherlands.
Apart from a number of fictions applicable in specific situations, the principal legal rule for determining residency of an individual is an assessment based on all relevant facts and circumstances. The Dutch Supreme Court has concluded that decisive is whether an individual has a durable relationship of a personal nature in the Netherlands. The place of home, where the family lives and where the individual has social contacts, are examples of indications that such durable relationship with the Netherlands exists.
It should be noted that an individual may have multiple durable relationships with different countries. From a Dutch perspective, a stronger durable relationship is not decisive for residency in the Netherlands. Furthermore, in many tax treaties the tie-breaker rule for residency of individuals is often someone's 'centre of vital interest'. Please be aware that if this centre of vital interest lies in another country, this does not rule out the possibility of having a durable relationship of a personal nature with the Netherlands.
A question that may arise is whether the COVID-19 crisis impacts the residence of an individual. Given the numerous travel restrictions, an individual may, for instance, not be able to return back home. Generally speaking, it is not likely that an existing durable relationship of a personal nature with the Netherlands easily changes due to the COVID-19 crisis (and vice versa). However, the country where someone is forced to remain may apply different rules for determining residency (e.g., an individual may become a resident of that country once he or she exceeds a minimum threshold of days that he or she is present in that country).
Unfortunately, to date neither the Dutch Ministry of Finance nor the Dutch Tax Administration has provided any guidance on tax residency concerns of individuals during this COVID-19 crisis - save for some specific rules on cross-border commuters relevant to wage tax and social security contributions. Hence, it would be helpful if the authorities published their policy in this respect.
Due to the COVID-19 measures some individuals are performing their regular work at home which may be in another canton compared to their usual place of work at the premises their employer. Similarly, employees may work in Switzerland as there are unable to travel to another country or vice versa.
Already based on domestic rules it is questionable whether the temporary restrictions put in place under the COVID-19 measures suffice to impact the tax residency of Swiss individuals. In an inter-cantonal context this is not an issue as employees are already working from their canton of residence. For individuals performing a self-employed activity (e.g., through a partnership) are also not expected to be impacted by COVID-19 measures.
From an international tax perspective, the right of taxation under tax residency in favour of Switzerland may be superseded by the taxation right in another state as such secondary residence may take precedence over the tax liability in Switzerland in accordance with an applicable double tax treaty concluded between this other state and Switzerland. In case of dual tax residency, almost all of Switzerland’s tax treaties contain the standard tie-breaker in favour of the centre of main interests. As such it is difficult to see that COVID-19 measures would in fact have an impact on the tax residency of individuals. This is in line with the OECD guidance which, as stated above, suggests that measures enacted by governments should not impact the tax residency of individuals under the tie-breaker of the OECD Model Convention. As treaty rules take precedence over domestic rules, this would even apply if an individual would breach some of the time limits or thresholds provided for under domestic law.
Residence status of individuals
With respect to individuals which may not work abroad or vice versa, Swiss tax authorities are yet to take a position on whether this can impact the allocation rights under double tax treaties. Obviously, the allocation of tax revenues may change especially for regular employment performed in Switzerland or another country under the 183-day-rule if for instance Switzerland would take the position, that work performed in Switzerland during a lockdown would attract taxation right under these rules. The fact that a non-resident needs to temporarily stay in Switzerland for a few months due to COVID-19 measures should not result in a change allocation rights, as the individual typically will involuntarily be in this position. Again this is supported by the OECD approach which asks countries to consider the unnecessary compliance burden which may fall on individuals due to COVID-19 measures especially given that such burden would likely relate to a one-time event.
It would be welcome if the Swiss tax authorities issue guidance on their position in this matter. However, based on the above considerations, change of work environment solely due to COVID-19 measures should not have a substantial impact on tax residency from a Swiss law perspective. Finally, where Switzerland or other jurisdictions would claim tax residency because, for instance, an individual already worked remotely before the enactment of COVID-19 measures, such position would in our view not be connected with COVID-19 measures but with the fact that tax residency of such individual should have been assessed differently already beforehand.