Both companies sending their employees short term to various locations, and individuals travelling to various projects mostly believe that they will not have a tax obligation in the host country because they spend only a couple of days, weeks, months there and they are protected by the provisions of the relevant double-tax treaty. If they are going to a country that uses the “economic employer” concept, depending on the characteristics of the employment, taxation might arise in the host country as of day one.

For many years double tax treaties gave protection to employees working on a short-term basis in countries other than their home countries, provided they were paid by their home location and their stay in the host location did not exceed 183 days in the relevant period. Under this rule, employers and employees did not have to count with additional administration and tax cost resulting from their activities in that other state.

This rule of thumb —the “183-day rule” – is derived from three basic rules set forth in Article 15 of the OECD Model Tax Convention, which is used as the basis for most bilateral tax treaties. Paragraph 2 of Article 15 provides exemption to the general rule, and employment income may be taxable in the country of residency if at the same time:

  • the employee is present in the other State for a period or periods not exceeding in the aggregate the 183 days in the relevant treaty period (e.g. calendar year, fiscal year, any twelve month period), and
  • the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
  • the remuneration is not borne by a permanent establishment which the employer has in the other State.

Based on the OECD Commentary, substance should prevail over form, which means that the term employer should be considered in a broader sense and the whole context of the employment should be reviewed to determine which entity is the “economic employer” of the employee under the provisions of the treaty and to be able to decide whether exemption under Article 15 can be granted to avoid host country taxation.

For this purpose, the key consideration is which entity bears the responsibility or risk for the results produced by the individual’s work. If the risk and responsibility does not lie with the formal employer, additional factors may be relevant to determine which entity will qualify as “economic employer” under the treaty. The OECD Commentary proposes only guidelines to determine which company should be considered the economic employer, however countries might have different interpretation of the “economic employer” principle, or some of the countries might not even use this approach but stay with the formal employer concept.

Both companies sending their employees short term to various locations, and individuals travelling to various projects mostly believe that they will not have a tax obligation in the host country because they spend only a couple of days, weeks, months there and they are protected by the provisions of the relevant double-tax treaty. If they are going to a country that uses the “economic employer” concept, depending on the characteristics of the employment, taxation might arise in the host country as of day one.

For many years double tax treaties gave protection to employees working on a short-term basis in countries other than their home countries, provided they were paid by their home location and their stay in the host location did not exceed 183 days in the relevant period. Under this rule, employers and employees did not have to count with additional administration and tax cost resulting from their activities in that other state.

This rule of thumb —the “183-day rule” – is derived from three basic rules set forth in Article 15 of the OECD Model Tax Convention, which is used as the basis for most bilateral tax treaties. Paragraph 2 of Article 15 provides exemption to the general rule, and employment income may be taxable in the country of residency if at the same time:

  • the employee is present in the other State for a period or periods not exceeding in the aggregate the 183 days in the relevant treaty period (e.g. calendar year, fiscal year, any twelve month period), and
  • the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
  • the remuneration is not borne by a permanent establishment which the employer has in the other State.

Based on the OECD Commentary, substance should prevail over form, which means that the term employer should be considered in a broader sense and the whole context of the employment should be reviewed to determine which entity is the “economic employer” of the employee under the provisions of the treaty and to be able to decide whether exemption under Article 15 can be granted to avoid host country taxation.

For this purpose, the key consideration is which entity bears the responsibility or risk for the results produced by the individual’s work. If the risk and responsibility does not lie with the formal employer, additional factors may be relevant to determine which entity will qualify as “economic employer” under the treaty. The OECD Commentary proposes only guidelines to determine which company should be considered the economic employer, however countries might have different interpretation of the “economic employer” principle, or some of the countries might not even use this approach but stay with the formal employer concept.