We hope you are having a good productive start to 2023.
We have had a number of queries and issues relating to employees moving overseas but they continue to work for their Irish employer.
Take for instance, Anita.
Anita is a director of a software company and also has an executive role as a software developer. She has the ability to deal with client issues and to agree contracts with clients. During the pandemic, she worked from home and found that it suited her role better than working in the office as her clients are happy to communicate by email and Zoom.
Anita has an apartment in Marbella and she talked to her fellow directors about the possibility of her exercising her role while living in Spain. It was agreed that she could proceed to work from Spain on a trial basis. Anita left Ireland on 1 June 2022 to live in Marbella. She continues to be paid through the Irish payroll system and therefore pays PAYE, PRS I, and USC. The current contract that she has with her employer does not discriminate between her role as a director and her executive role as a software developer.
There are a number of issues relating to her remote working which need to be addressed.
1. Anita did not apply for split year relief before she left Ireland, therefore she will be taxable on her Irish earnings after she left Ireland. Split year relief must be applied for in writing before the individual leaves the country.
2. As her employment is exercised in Spain the company must register in Spain as an employer and pay the relevant employment taxes. They will most likely have to engage a Spanish payroll provider to do this, increasing administration costs.
As split year relief was not applied for before she left Ireland, her employment earnings from June to December are taxable in both Ireland and Spain.
3. Her company can request an exclusion order from revenue to avoid having to operate Irish payroll taxes whilst Anita is living in Spain. However, this would only apply to her salary, which is paid for her executive duties i.e. software developer. Her fees for acting as a director would not be covered under the exclusion order and would remain taxable in Ireland.
Separate contracts should be prepared for the respective functions. Revenue will not grant an exclusion order for a combined role including a directorship. The company would potentially have to operate under two payroll systems.
4. Her employment would be subject to Spanish national insurance and would contribute towards Spanish social welfare and state pension. There is an option to stay for five years in the Irish system, but this only applies where the employee has been “posted” ie: sent by the employer.
However, under EU provisions she may use her Spanish national insurance contributions for Irish PRSI purposes. The reverse is also true, she can use her Irish contributions for Spanish purposes.
5. The company must also look at whether Anita’s base in Spain constitutes a permanent establishment. This is a serious matter as it may expose the company to Spanish Corporation Tax. At best, it will involve interaction with the Spanish Tax authorities to resolve this issue.
As Anita is performing a role that is an integral part of the company including management of a core process and conclusion of agreements with clients, there is a real risk that her presence in Spain could constitute a Spanish permanent establishment.
This would mean that Spanish CT returns would need to be filed and any legal requirements satisfied. This would also increase the admin burden and costs. Also, Spanish CT rates are higher than in Ireland. This will therefore increase the company tax cost due to irrecoverable Spanish Tax. Spanish penalties for default can be quite harsh. Reputational damage must also be considered.
6. Anita may have other Spanish tax obligations, for instance, she may have rental income in Ireland which would need to be declared in Spain. Any default by Anna also risks exposing the company to scrutiny in Spain.
It is clear that a carefully managed and structured approach needs to be taken if an Irish employee is going to work abroad remotely in the EU. Otherwise unplanned expenses and time may be incurred.
Clients will often be keen to accommodate a valued employee. But the above example illustrates that, without careful planning, unforeseen expense, time and even reputational risk may be encountered.
We hope you find this information useful. Please reach out if you have any queries regarding this blog, or indeed, if you require any tax advice.