With many people fleeing Ukraine in recent weeks, a sizable number of them are displaced and working remotely. Firstly, the scope and depth of the humanitarian impact grow, employers in the United States may actively encourage employees to relocate and work remotely in the coming weeks and months.
Following this, the tax implications for both the company and its employees are an unanticipated consideration of this unplanned migration out of Ukraine.
Tax Issues to consider
Secondly, in order to effectively support employees, U.S. businesses should consider the following tax issues to consider in neighboring countries as part of their exercise to accommodate employees who have relocated.
- Corporate tax – Ukrainian employees working remotely in another country could create a corporate taxable presence (or a “permanent establishment” (PE) in countries where a double tax treaty exists) bringing corporate income tax and compliance obligations.
- Employer taxes – These may involve an obligation to register with the tax authorities, operate a payroll, and calculate and remit taxes in a foreign country where the employee resides. Additionally, exposure may arise to overseas employment taxes and social security contributions.
- Employee tax – An employee’s tax arrangements may become more complex if the employee becomes a tax resident in another country and/or subject to income tax on employment income. Similarly, additional reporting burdens and tax payment obligations could arise.
Double-tax consideration
In mitigating tax exposure, consideration is given to the following agreements and regulations that may mitigate double taxation:
- Double-tax treaty for corporate tax – Where treaty benefits are available, a company will not have a corporate taxable presence as a result of an employee working in another country if their work is “preparatory or ancillary” to the business’s operations, they are not habitually conducting business in that other country, or their employees are not providing services in that country, in some cases for a specified period of time.
- Double-tax treaty for individual tax – Most double-tax treaties include an article that allows for an employee to work temporarily in another country without being subject to taxation if they meet the following criteria: 1) the employee is physically present in the other country for no more than 183 days in a specified 12-month period, 2) the employee is paid by or on behalf of an employer that is not a resident of the other country, and their remuneration costs are not borne by an entity or PE the employer has in the other country.
- “Totalization” agreement – A bilateral social security (“totalization”) agreement may provide for coverage in the Ukraine only and no liability to employer and employee social security in the host country. These typically address employees being posted to work overseas by their employer, but it may be possible to leverage to mitigate exposure to contributions and compliance complexity.
- New local regulations – Countries may introduce new regulations or adapt existing ones to mitigate unexpected and unintended tax consequences of employees working while displaced.
Moreover, for U.S. companies supporting employees relocating to friendly countries neighboring Ukraine, the following agreements are in place that may mitigate additional complexity and compliance.
Czech Republic
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – yes, applicable to citizens
- Specific tax provisions to address migration – none currently
Germany
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – no (an agreement has been negotiated but not yet ratified in law)
- Specific tax provisions to address migration – none currently
Hungary
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – yes
- Specific tax provisions to address migration – none currently
Lithuania
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – yes
- Specific tax provisions to address migration – none currently
Moldova
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – yes
- Specific tax provisions to address migration – none currently
Poland
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – yes
- Specific tax provisions to address migration – none currently
Romania
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – no
- Specific tax provisions to address migration – none currently
Slovakia
- Double tax treaty – yes, includes provisions for PE and individual employee taxation
- Totalization agreement – no
- Specific tax provisions to address migration – none currently
Lastly, while taxes represent a small part of the challenges faced by employees relocating as a result of the conflict in Ukraine, employers can work to address potential exposure through networks of bilateral agreements or by implementing compliance requirements.
Source: grantthornton.com
