Managing Corporate Tax Risks in the Remote Work Era

According to our 2023 Commuter Benchmark Survey, nearly one-third of companies still require full-time commuting arrangements (100% in the host location), yet most continue to operate on a home-based salary scale with tax equalisation policies.

While in the past, commuter policies were straightforward and employees would work full-time in their host country and travel home on weekends, the rise of remote work and the need for flexible work arrangements has drastically changed this traditional setup. This brings new challenges for businesses, particularly when it comes to managing corporate tax risk. Companies deduct payroll taxes based on where the employee works or resides, which may not align with where they are paid.

Understanding the Corporate Tax Risk of Remote Work

With remote work gaining popularity, tax departments across industries are paying close attention to how globally mobile employees could impact corporate tax obligations. One key area of concern is the risk of triggering Permanent Establishment (PE). PE refers to a situation where a company is considered to have sufficient business presence in a specific jurisdiction, thus becoming subject to local corporate tax. This has become a hot topic in international tax, as countries increasingly scrutinize cross-border work arrangements.

For many companies, the concern is that employees working remotely in their home country may create unintended corporate tax exposure for the company— especially if those employees hold high-level executive roles or have significant decision-making authority. Such scenarios raise the stakes, as the actions of these employees could be interpreted as establishing a PE for the business in that country.

Potential Solutions to Mitigate Corporate Tax Risk

Given these complexities, companies need to consider a variety of strategies to mitigate the risk of triggering corporate tax obligations. Here are some potential approaches:

1. Registering the Host Company for Business in the Employee's Home Country - One of the most straightforward solutions is for the host company to officially register as doing business in the employee's home country. While this may lead to some corporate tax liability, it could provide a clear and compliant path for the company to continue its operations.
2. Transferring Employees to a Lower-Risk Entity - In cases where the corporate tax risk is particularly high, companies may consider transferring the employee to another entity within the corporate group that is located in a jurisdiction with a more favorable tax environment. This could reduce exposure while still allowing the employee to continue their role remotely.
3. Exploring Frontier Worker Rules and EU Social Security Framework - Depending on the countries involved, companies may benefit from examining specific cross-border regulations like the frontier worker rules. These rules often offer guidance on how commuters between two countries are treated for tax purposes. Additionally, the European Union’s framework for handling social security obligations provides a roadmap for ensuring compliance with tax and social security regulations across borders.

The Evolving Role of Tax Departments

Ultimately, any decision regarding commuter or remote worker policies must align with a company’s overall corporate tax strategy. As remote work continues to blur the lines between home and host countries, tax departments are playing an increasingly critical role in navigating these challenges. Their insights into how different jurisdictions define and enforce PE rules are essential for minimizing tax risks while supporting flexible work arrangements.

In a rapidly changing global landscape, companies must be proactive in developing policies that address the realities of remote work, balancing employee preferences with the need to manage corporate tax exposure. While the solutions vary, one thing is certain: remote work is here to stay, and companies must adapt their tax strategies accordingly.

Need a Commuter Policy?

As you can see, commuter assignments can become complex from a tax perspective. It is important to consider all options. If you need more information on commuter arrangements and structuring your global mobility policies, we are more than happy to help you.