IT has been a rule in income tax treaties that employees sent on temporary assignments abroad, staying in the host country for less than 183 days, generally are not subject to income tax in the host country.
However, the application and interpretation of this rule now requires a deeper examination of the actual arrangement between the employee and the host country entity.
Under Article 15 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, salaries, wages and similar remuneration are generally taxable in the country where the employment is exercised, that is, the place where the employee is physically present when performing the activities for which the employment income is paid.
Article 15(2), commonly known as the “183-day rule,” provides an exception, making such salaries or wages not taxable in the host country, if three conditions are met, namely: (1) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned; (2) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (3) the remuneration is not borne by a permanent establishment, which the employer has in the other State.
Should all the three conditions be satisfied, the remuneration is taxable only in the employee’s country of residence. The 183-day rule, however, is not an absolute safe harbor. Tax authorities in various jurisdictions have moved beyond simply counting the days an employee spends abroad. Even if an employee stays in the host country for less than 183 days, the income may still be subject to tax there, under certain conditions.
The crucial question is no longer how long the employee stays, but, as previously mentioned, who the employee is actually working for since one of the conditions for the exception is that the employer must not be a resident of the state of assignment.
In this regard, the OECD recognizes the so called “substance-over-form” tests to distinguish between services rendered by an individual in an employment relationship with the enterprise receiving them, and services provided under a contract between the two separate enterprises.
This shifts the focus from what the contracts say to what actually happens on the ground. It also requires an examination as to which entity actually directs and supervises the employee’s work, as well as whether the services performed are integral to the business of the enterprise receiving them.
Other relevant considerations include which entity provides the tools and materials, selects the employee, determines the work schedule, and has the authority to impose disciplinary measures or terminate the arrangement. The allocation of salary and other employment costs is also taken into account. No single factor is conclusive; rather, the circumstances must be assessed as a whole to determine who, in substance, is the employer.
The OECD offers several practical examples of how the economic employer concept applies in different working arrangements. For instance, an employee sent by a software training company abroad for training at a foreign client does not automatically become the employee of the foreign training company.
Providing software training is needed for business of the sending company, and the employee undergoes the training on its behalf under a service agreement. Thus, the employee remains engaged in the sending company’s business, and the 183-day exemption may still apply if the other conditions are met.
However, an employee of a hotel subsidiary temporarily assigned to work at another subsidiary’s hotel abroad, which pays the employee’s travel expenses and reimburses the employment-related costs through a management fee, may be viewed differently. In this case, the employee can be considered to perform duties that are integral to the receiving hotel’s operations.
If the host country’s domestic law recognizes an employment relationship between the employee and the receiving hotel, the latter may be treated as the employer for purposes of Article 15. As a result, the 183-day exemption would then be unavailable, even if the employee’s stay falls below 183 days.
Interestingly, this approach of examining the actual working relationship is not entirely unfamiliar. In determining whether an employer-employee relationship exists, our jurisdiction applies the four-fold test, which examines the selection and engagement of the employee, payment of wages, power of dismissal, and, most importantly, the power of control over the employee’s work.
The Labor Code also considers whether the services performed are necessary or desirable to the usual business or trade of the employer in question. This echoes the OECD’s emphasis on whether the employee’s work forms an integral part of the receiving enterprise’s business.
While these tests serve different legal purposes, they share an important principle that the true nature of the working relationship cannot be determined by the terms of a contract alone.
In summary, sending an employee abroad for less than 183 days may not be enough to secure the benefit of the treaty exemption. Companies must also consider who actually directs the employee’s work and how closely the employee’s functions are tied to the host company’s business, among other factors.
The lesson is clear: in cross-border employment, counting days is only part of the equation. What may ultimately determine the tax treatment is the substance of the arrangement and, more importantly, the enterprise for which the employee is truly working.
Euney Marie Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel).
