A permanent establishment is defined in the tax treaty between the Netherlands and Belgium as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This definition corresponds to that in the OECD Model Convention and forms the basis for the assessment of whether a home workplace can be considered a permanent establishment. For a detailed analysis of the definition under the treaty between the Netherlands and Belgium, see the previously published article.
The new agreement distinguishes between different remote working situations, including:
In the case of occasional remote working, where employees work from home irregularly or only occasionally, the home workplace is not considered to be a workplace at the disposal of the employer. In this situation there is therefore no permanent establishment.
In the case of systematic remote working, where employees regularly work from home but also have the option of working at the employer’s premises, the home workplace is usually not considered to be at the employer’s disposal. However, this changes if the employer explicitly requires the employee to work from home and the home workplace is indeed used for business activities. In this case, the home workplace can be considered to be a permanent establishment.
If employees are systematically required to work remotely, the home workplace may be regarded as a location at the employer’s disposal. This may also lead to it being considered a permanent establishment.
Whether there is actually a permanent establishment is a de facto question that will depend on the whether the employer has the actual power to use the workplace, whether it can actually determine the extent to which the company is present at that location, and whether it can determine the activities that can be carried out there.
In addition to the above scenarios, the agreement also provides practical guidelines. For example, it is stated that if an employee works for 50% or less of his or her working time from the home workplace in any given year, it is not a permanent establishment.
In addition, it is clarified that if the activities carried out at the home workplace are of a preparatory or supportive nature, this does not give rise to a permanent establishment. Possible examples here are secretarial, IT or HR support for business activities.
It is also worth pointing out that the agreement only relates to classification as a ‘material’ permanent establishment – not as a so-called ‘personal’ permanent establishment. As explained in our previous contribution to this series of articles, in the case of a representative who has the authority to negotiate (and/or conclude) contracts, a taxable permanent establishment may still exist even though the representative works remotely less than 50% of the time.
The agreement between the Netherlands and Belgium has direct consequences for employers and employees involved in cross-border remote working. If a home office is considered to be permanent establishment, this may result in a tax liability for the employer in the country where the permanent establishment is located, so it is crucial for employers and employees to be aware of the possible tax implications of cross-border remote working.
It is therefore a pity that the agreement only relates to classification as a permanent establishment. In principle, the agreement has no impact on the taxability of the employees themselves: they are (and remain) taxable in their home country if they work from home for an employer in the other country.
In view of the surge in popularity of home working, including cross-border home working, there was a general expectation that the new double tax treaty would introduce a home working arrangement that would allow employees to work from home for a number of days per year without any consequences for taxing rights. In reality, it has done no such thing. And yet such arrangements do exist, for example between Belgium and Luxembourg, allowing employees to work from home for up to 34 days without any tax consequences. For the time being, then, we will have to wait for such an arrangement between Belgium and the Netherlands.
In addition to the new double tax treaty between the Netherlands and Belgium, a new EU framework agreement has been introduced that applies to social security for cross-border workers who regularly work from home. This agreement, which entered into force on 1 July 2023, is designed to address the social security challenges presented by hybrid working models. It offers both employers and employees more clarity about which country’s social security legislation applies.
Under the agreement, employees who regularly work from home may spend up to 50% of their working time at home, in their country of residence, without this affecting the social security legislation that applies to them. In addition, at least 50% of their working time must be physically spent in the employer’s country. Employers and employees can jointly submit a request to the authorities of the country where the employer is based in order to make use of this arrangement.
In this context, it is worth drawing attention to a recently published report called "Thuiswerkregelingen voor grensarbeiders” (‘Home working arrangements for cross-border workers’) which analyses the income-related and other effects of possible home working arrangements in the tax treaties that the Netherlands has concluded with Belgium and Germany. The report shows that in many cases, home working arrangements do not have a favourable impact on the net income of cross-border workers who work in a hybrid manner. The report also stresses that the applicable social security system can have a significant impact on net income, depending on whether the social security legislation of the country of residence or country of work applies.
In addition, it shows that taxation takes place in accordance with the current agreements in the tax treaties. Where there is no home working arrangement, the taxation right is divided proportionately between two countries (in a so-called ‘salary split’), which usually has a favourable impact on the cross-border worker’s net income because of the possible operation of the progression reservation. Specifically, there is no benefit from a salary split if a threshold rule applies that means that taxation remains with the employer’s country.
Thus a salary split can be advantageous in many cases, but it also entails extra administrative hassles for the employer and/or employee. These include the need to set up a payroll administration in the different countries for the deduction and transfer of employee and employer contributions, the need to complete separate tax returns for each country, and so on.
Due to the increase in home working, the Netherlands and Belgium have agreed on the circumstances in which home workplaces can be counted as ‘permanent establishments’ under their tax treaty. This agreement thus provides clarity about the tax status of various remote working situations and their consequences. In addition, a new EU framework agreement contains rules on social security for cross-border workers who regularly work from home. Employers and employees are encouraged to seek professional advice to ensure proper compliance with tax obligations in the two countries.
