Working from Home Abroad – Employers’ Considerations
With the recent shift in the work environment forced upon the globe under the COVID pandemic, we have seen a vast and swift change in the status quo as people were compelled to work remotely from home. In this historic shift, with both employees and employers realizing that working from home has its own benefits and is no longer considered as “anathema” for employers, a new set of challenges emerges. here we are focusing on the potential effects of having employees not just working from home as a norm, but working from home or a vacation place abroad for a prolonged period of time.
To this effect, it becomes crucial for Employers to review and consider a plethora of matters which might not immediately spring to mind including but not limited to oversight of the employees, taxation and social insurance payments, such being issues of employment law in general, potential establishment, citizenship and tax domicile issues, as well as matters of review, notices and habitual contact with their employees.
Tax and Social Insurance Payments
If an employee is only working overseas temporarily, the employer should continue to deduct income tax under the PAYE system. The main question then becomes what does temporarily mean; albeit this question does not have a clear-cut answer to fit all cases, a key number to have in mind are the 183 days in a single country in a 12-month period – this is generally the accepted threshold in most countries by which the tax residency status of an individual changes. Should the employee’s tax residency change, this would most likely also affect the obligation imposed on the Employer to withhold tax on the salary payment.
A matter which is often overlooked when calculating the period of stay in the 12-month period, is that the employee should also calculate the days spent in that country for other purposes (vacation days, visiting friends and family, etc.), and not just only the days spent for work purposes.
Another key consideration is to enquire into whether, regardless of the duration of the stay of the employee in the other country, such stay and work would create social insurance liability in the new country and whether by having employees work in this new country, an Employer can potentially be deemed to have created “permanent establishment” in this country – which in turn will factor in as to possible Corporate Tax on the Employer. Such matters require scrutiny of the laws and regulations of the country in which the employee is to be situated at.
Income TaxAs a general note, the country hosting the employee has the primary right to tax his salary earnings, given that the employee is physically located in (and working from) the host country. At this point, the Employer should check whether any Double Tax Treaties exist and are operational between Cyprus and the host country, as the employee may be exempt from income tax and the Cyprus Company being the Employer exempt from corporate tax there if certain conditions are satisfied. It is noted that Cyprus currently has 66 Double Tax Treaties in operation.
It is crucial that the host country’s rules and regulations be reviewed, as even if a Double Tax Treaty is in operation, both the Employer and the Employee may have to adhere to various reporting requirements or registration requirements – an example being that the Employer might still need to obtain relevant registration and number of employer in the host country, and report the income of the employee, even though no tax or social insurance payment arises in the host country.
If the employee does become subject to tax in the host country but remains tax-resident in Cyprus, they will remain subject to income tax in Cyprus on their worldwide income but should be able to obtain credit for some or all the tax they pay in the host country, subject always to filing the appropriate forms, declarations and income tax returns.
Social Insurance payments are more often than not, paid in the country in which the employee is physically located and works from.
A point to note for cross-border employment within the European Economic Area (EEA) – which includes Switzerland – is that the matter of social insurance payments is regulated by the EU Regulations 883/2004 and 987/2009, which provide for clarity in these matters and assist in the EU integration, including the freedom of movement and freedom of work. These Regulations provide that a person normally employed in Cyprus, who is sent by their employer to another member state of the EEA, can continue to be subject to the social insurance provisions of Cyprus provided that the anticipated duration of that work does not exceed 24 months. Such employees are often referred to as “posted workers“. This means that a posted worker remains covered under the Cyprus social insurance scheme and both him and his Employer will continue to make social insurance contribution payments in Cyprus.
For employees who are working from outside the EEA, the position will depend on whether there is a reciprocal agreement between the host country and Cyprus and should be discussed with experts from both Cyprus and the host country.
In the event that no Double Tax Treaty or other reciprocal agreement is in place with the host country, the Employer may be liable to pay social security contributions in the host country and, again, local advice should be sought. It is also important to keep in mind that the arrangement which will be put in place should be reviewed regularly with the local experts, as such rules and regulations tend to be amended from time to time and both Employer and Employee should remain current with their obligations.
Risk of creating permanent establishment
A factor to be considered by the Employer is whether, due to the employee’s relocation and physical location in another country from which they are operating from, this potentially creates any issues of “permanent establishment” for the Employer within this new country. Such matters invariably depend on the rules of the local country, but some key determining factors usually are the level of authority that such an employee has (such as, representation powers for concluding agreements or onboarding new clients in the new country) and the period of time for which such work is ongoing (generally, short-term periods will be more acceptable in not establishing permanent establishment for the Employer).
In the event that Permanent Establishment is concluded under the laws and regulations of the new country, then there is the potential than any profits deriving from the activities of this employee in the host country could be subject to corporate tax in the host country instead of the Employer’s tax domicile country.
Once again, there is no “one-rule-fits-all” when it comes to Immigration considerations, as this heavily depends on the target host country. For example, a Cypriot employee would have an automatic right to work within the EEA and Switzerland (although care must now be taken relating to the UK after the Brexit), whereas restrictions would apply if he was to work from other 3rd countries like Israel or the USA.
Immigration permission may not be required for short business visits, although this will sometimes depend on the employee’s nationality and the immigration regime of the host country. Depending on the employee’s activities, it may be possible to characterize their stay as a business visit – for example, if their activities are limited to those typically undertaken during business trips (meetings, training, attending a conference). Again, this will all depend on the actual activities of the employee and the duration of such stay, as it could be unreasonable to, for example, claim that you are on an eight-month training business trip.
Intellectual Property and Confidential Information
Under Cyprus Law, any intellectual property (IP) which is created during the course of the employee’s work for the Employer is owned only by the Employer. This is a “blanket” provision and is not affected by location of work, so it would cover work-from-home and working abroad employees. However, it is always highly recommended that a relevant clause be inserted in the Employment Contract, as an added safety net for the Employer.
If no Employment Contract is in place, or it does not contain the relevant clauses, an issue might arise relating to an employee who is working abroad, in the sense of which law is applicable at the time of creation of the IP. At such time, this would also depend on the host country’s laws and which law / jurisdiction would obtain precedent over the other.
In light of the above, it is strongly advisable that a written Employment Contract is always in place, with the necessary IP clauses, to safeguard the Employer.
As to Confidential Information, this would need to be covered by the Employment Contract as to what each Employer deems to be confidential information, and how access to and dissemination of such information is regulated and controlled. With the new work-from-home culture after the COVID-19 pandemic, Employers should ensure that access to their servers and data is strongly encrypted and secured; however, another matter which should be considered is the safety and privacy of any physical data such as files, papers, USBs and external hard-drives, which the employee might be in possession of whilst working remotely.
Employment Law and Data Privacy
There are various employment law and data privacy considerations.
Mandatory employment protections
Under Cyprus Law, items such as work hours, work days, annual leave, sick leave and bereavement leave, redundancy and protection from termination of employment are (amongst others) covered and secured for both the Employer and the Employee. As such, we once again turn to the question of whether, by allowing an employee to work from abroad, such employee could potentially be covered by local laws which might be considerably different than the laws of Cyprus.
Employers should, especially in cases of known prolonged time periods of working from abroad, obtain suitable legal advice from local experts and consider such matters, including whether they should amend their Employment Contract to be under the host country’s laws and jurisdiction, as well as to ensure compliance with obligations in the host country, such as social insurance benefits and other contributions.
Clients’ Data Protection
Cyprus conforms and fall under the General Data Protection Regulation (“GDPR”) which sets out the rules as to data collection and handling of them, as well as offering protection and redress to the data owner, being typically the client, supplier or other 3rd party connected to the Employer. An Employee who is working from abroad, might inadvertently breach these regulations, and by association the Employer as well, during such transfer of personal data between Employer and Employee.
Generally, GDPR prohibits the transfer of such personal data outside of the EEA, unless the target country outside of the EEA conforms to similar standards of protection as per the GDPR requirements. This will be important to note in cases that the host country of the employee is outside of the EEA, as the Employer will then need to review the Data Protection laws of that host country and ensure conformity to the GDPR standards, as well as to add additional safeguards during the transfer and communication of such data between the two countries, such as ensure encrypted data channels, backup mechanisms on-side and off-side, and so forth.
Health & Safety Matters
Cyprus Law obligates Employers to provide for the Employees’ health and safety at the work environment. Once employees start working from home, or indeed from abroad, the “work environment” extends to their house, whether in Cyprus or abroad. The question faced at such point, is whether the Employer has a positive obligation to ensure that the employee’s house does not pose any health and safety risks – imagine for example, if the house is plagued by mold and mildew, is there an obligation on the Employer to arrange for a cleanup crew? For all intends and purposes, the answer would be negative in such an event, however, any equipment which is provided by the Employer in order for the employee to perform his duties should be fit, appropriate and safe for the task at hand.
In the event that the Employer is offering as part of the employment package any additional benefits to the employee – most commonly being pension fund or private health insurance, or anything else which is considered as an additional benefit – such benefits should be reviewed in the light of the change of country of the employee. For example, it has been a common phenomenon that private group health insurance offered locally in Cyprus would cover only locally-based employees and would not cover anything claimed for treatment abroad. As such, the Employer would be required to look into extending the health insurance to cover cases abroad, or re-caliber the expectations of the employee accordingly.
In case the Employer is operating under a license for any regulated activities, such as a Law Firm or a FOREX business for example, there might be additional requirements and considerations before allowing an employee to work from abroad, as such matters could potentially be in breach of their licensing obligations, depending also on the kind of activities performed by the employee under the course of their employment. As such, Employers are strongly advised to enquire with both their local Regulator, but also to check as to any required licensing obligations in the proposed host country prior to allowing the employee to proceed with working from the host country.
With the ongoing shift in the work environment broad forward by the seismic changes under the COVID-19 pandemic, an increasing number of employees are now working from home, whether from Cyprus or from abroad, and Employers are more willing to accept such arrangements.
Such arrangements need to be carefully considered as to the element of being abroad, in order to avoid potential pitfalls of employment laws and employee rights, social insurance matters and taxation matters amongst other things. Steps to be taken during such considerations should be to address the concerns with appropriate legal and tax advisors, review of internal proceedings of the Employer and the employment contracts in place, as well as liaising with any Regulators if need be for licensing matters.
For any further guidance regarding this procedure or if you require an initial consultation, please do not hesitate to contact our Law Firm at [email protected], +357 22 251 777 or +357 25 261 777 or please visit our office in Nicosia or Limassol.