Workation in the 21st century: an overview of the legal ramifications.
Introduction:
Nowadays the possibility to work remote or in hybrid setting has become increasingly popular. Everybody has seen the social media images of the digital nomad doing his work from the laptop on the beach in Thailand. In a world of cubicles and the repetition that comes along with coming to the same physical office on a daily basis, it is hard to argue that this not a tempting image for just about everyone currently in an office job.
However this form of digital work or constant “workation”, is tied still tied to a variety of legal parameters that need to be adhered to properly to on the one hand fully enjoy the freedom that comes along with the flexible working arrangement and on the other hand not be confronted with unpleasant surprises after the fact. Primarily, what employees need to address before packing the laptop on the way to the beach, are the factors of Income Tax (respectively Payroll Tax) and Social Insurance (Health- and Pension Insurance). This article aims to summarize the general points to be aware of, but still recommends getting in contact with a tax professional, before starting a hybrid cross-border working arrangement.
Income/Payroll Tax:
In most tax jurisdictions, the Income Tax for employment income is withheld directly at source through the payroll. However, this system of taxation bases itself on the principle that the actual work is performed within the physical jurisdiction of the country. This concept however becomes rather messy in the light of modern working arrangements. For example: Where exactly does the chef on a cruise ship through the Caribbean actually perform the work?
As much as the devil lies here in the details, there are general guidelines to apply which stem from Double Tax Treaties. Those are bilateral contracts regulating where a form of income that is touching two countries is subject to tax. It would go beyond the scope of this article to analyze any Double Tax Treaty in detail, however there are still some valuable points to extrapolate from them. I.e. the Double Tax Treaty between USA and Austria gives either country the right to tax, if the taxable person spent more than 183 days (half a year) within the particular tax jurisdiction. Hence, it is generally to be remembered that if the “workation” should extend for more than half a year, clarification with the tax advisor is unavoidable.
Social Insurance:
As much as the view with the laptop and the non-alcoholic cocktail from the beach, is enticing, the view of not having valid health insurance at a hospital visit, a void in the pension contributions and no valid accident insurance, while slipping with the laptop and injuring yourself, can be quite the opposite.
The Social Insurance generally works very similarly to the Income Tax. Nonetheless, there are some important differences in the details that need to be accounted for. Within the European Union there is a legal framework concerning Social Security Coordination that provides some guidance through the jungle of said details.
For a shorter “workation” it is definitely recommendable to apply for an A1 certificate. This paper certifies that you as an employee are validly health insured in your home country. The certificate can be applied for directly from the employer or from your Social Security Institution in charge. For a longer stay, there is an EU regulation (883/2004) for the coordination of Social Security within the union. According to this directive, the right to receive contributions for Social Insurance goes to the country where a significant portion of the work is performed. Significant in the light of this directive would everything over 25% of the total work.
For 3rd countries, there is unfortunately no overreaching legal framework to rely on. Notwithstanding, similar to the income tax, there have been bilateral Social Security agreements concluded to over guidance. As – speaking as an Austrian – the number of those agreements is still rather limited, it seems absolutely essential to clarify if such an agreement between your home country and the 3rd country destination for the “workation” exists.
Conclusion:
Overall it needs mentioning that the benefits of a “workation” definitely outweigh the potential pitfalls. It allows people a change of scenery, break out from a routine and experience another country in the process. However, the tax and social security implications bring a certain level of risk with it. But this risk is manageable and best mitigated in advance than retrospectively. After all, nobody wants to have their peace – on the beach or wherever else – disturbed while fighting with Tax or Social Security Authorities from a foreign country. However, if those points are properly mitigated with a Tax professional or the in-house payroll department, there should be smooth sailing for the “workation” ahead.
Sources:
Double Tax Treaty Austria-USA: https://www.irs.gov/pub/irs-trty/austria.pdf
A1 Certificate: https://oevkg.at/en/a1_certificate
EU-Regulation 883/2004: https://eur-lex.europa.eu/legal-content/DE/ALL/?uri=CELEX%3A32004R0883
Information by Austrian Ministry for European and Social Affairs: https://www.bmeia.gv.at/en/travel-stay/living-abroad/social-affairs-health/agreements-on-social-security