Cross-border workers are now working from home due to the pandemic, and this can lead to undesirable income tax consequences. Indeed, the taxation would take place in their home country while instead of in the country where they work.

According to the agreements, remuneration derived from home working days due to COVID-19 travel restrictions may be deemed to be sourced in the contracting state in which the employee would normally have exercised their professional duties had the restrictions not been in place.

Consequently, for example, a Belgian employee who works in the Netherlands but temporarily works from home, will remain taxable in the Netherlands.

These agreements temporarily derogate from the provisions of article 15 (dependent personal services) in the relevant double tax treaties on the allocation of taxing rights in case employees, unable to travel to their usual country of employment, have been required to work from home as a consequence of the pandemic.

Employees aiming to benefit from the tolerance foreseen in these mutual agreements must obtain an employer’s certificate, confirming the number of days (tele)worked from home owing to COVID-19 measures.

If no one terminate the Mutual Agreement at least one week before 31 March 2022, the Agreement will be tacitly extended through 30 June 2022.

It is important to underline that, in all cross-border cases where the place of work has changed due to the Covid-19 measures, the tax and social security consequences in both the state of residence and the work state need to be assessed, also considering the potential withholding obligations of the employers.

The Confederation of German Employers' Associations (BDA) welcomes the decision to extend the agreement, ensuring legal certainty about the tax consequences of the Covid-19 pandemic for cross-border workers.

In its position paper “Avoiding the unintended creation of permanent establishments and income tax-related problems due to cross-border remote working”, BDA highlights that cross-border remote work raises various taxation issues and employers may face the issue of an “unintended creation of a permanent establishment (PE)”, causing a potential extensive registration and declaration obligations abroad for employers, as well as requirements for profit delimitation.

The paper also reports that, in order to avoid the unintended creation of PEs during the pandemic, the Organisation for Economic Co-operation and Development (OECD) published a legally not binding recommendation ("Updated guidance on tax treaties and the impact of the COVID-19 pandemic," 21 January 2021). This recommendation, explaining that temporary remote work due to the Corona pandemic should not create a PE abroad, was already implemented in the bilateral consultation agreements between Germany and Austria on 15 January 15 2021 and Germany and Switzerland on 27 April 2021.

BDA, considering that cross-border remote work will be more and more important in the future, asked to OECD and the European Commission to promote an internationally coordinated approach on the matter and a permanent regulation with clear criteria for employers.