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.
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.