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Employees seconded to an economic employer

The concept of ‘economic employer’ may be particularly relevant for those using posted employees. Whether sending or receiving, it is crucial to take this concept into account in the context of the tax treatment of their salaries. The attribution of the qualification of ‘economic employer’ to an entity, under certain conditions, means that its employees will be subject to taxation in the country in which the employer has its registered office or head office. Moreover, having such status in the country of secondment excludes the application of the 183-day clause and conditions taxation in the foreign country. Therefore there is a recognition of the risk of double taxation here.

The concept of an ‘economic employer’ was introduced by the OECD Model Convention and bilateral agreements on cross-border income are modelled on its rules. When interpreting it in practice, reference is also made to the Commentary to the Model Convention, which, while not being a binding source of law, is generally recognised by the tax authorities of the Member States and has a subsidiary character only.

Definition of an economic employer in international regulations

According to the Commentary to the OECD Model Convention, the concept of ‘employer’ should be understood in a material (factual) rather than a formal way. This means that the employer does not always have to be the entity with which the employee has signed an employment contract. More significant are the factual circumstances that determine which entity actually acts as the employer.

On the other hand, the Commentary refers to the concept of ‘economic employer’, and indicates the criteria to be followed when assessing which entity (the sending or the receiving one) will actually perform such a role. It mentions here such premises as:

  • taking responsibility and risk for the results of the work performed,
  • the authority to instruct the employee on how the work should be completed,
  • providing the equipment (tools and materials) needed by the employee to perform the work,
  • having control over and being responsible for the place where the work is performed,
  • the way in which remuneration is calculated for the seconding entity,
  • the right to decide on the number and qualifications of the seconded workers,
  • determining holidays and working hours.

The actual qualification of an entity as an ‘economic employer’ also depends on the interest and initiative of the assignment carried out by the seconded employees takes place. If the individual employees are organisationally integrated into the course of work of the host company and are subject to its instructions, the host company should be considered as the economic employer in the light of the interpretation above. Thus, for instance, employees of a Polish company delegated to perform assembly work for a German company, for which they will provide support services as demanded by the German company, the economic employer should be recognised on the German side. In the event that the posted employees are subject to control and supervision by the German company during the performance of their work and, in addition, the German company is responsible for issuing instructions and orders, this may be a necessary condition to consider that the economic employer should be recognised in Germany. Consequently, the employer runs the risk of registration, advance tax and social security payments in that country.

Referring to examples of the application of the concept of ‘economic employer’ to the legal order in the countries concerned, it should be pointed out that not every country has implemented this concept directly in its regulations (incl. double taxation treaties). As an example of the use of such a concept in the legal system, consider the example of Germany, which has effectively implemented the concept since 2004 on the basis of the provisions of the German Income Tax Act. In a letter from the Federal Ministry of Finance, we can find a definition according to which an economic employer is considered to be a natural or legal person ‘who economically incrus the remuneration for a dependent activity performed for it’ (Schreiben des Bundesfinanzministeriums (BMF) vom 12.11.2014, IV B 2 – S 1300/08/10027 Rz. 98 ff.)

Taxation of a seconded employee and recognition of the economic concept of the employer

According to the common rule, income earned by an employee from paid employment is taxed in the country where the work is performed. This rule is modified by the relevant provisions of double taxation treaties. For instance, according to Article 15 (2) of the treaty between Poland and Germany for the avoidance of double taxation with respect to taxes on income and on property (hereinafter: ‘PL-DE DTT’), remuneration that a resident of a contracting state receives from paid employment performed in the other contracting state is taxable only in the first state if:

  1. the recipient resides in the other country for a period or periods not exceeding 183 days in total during the twelve-month period beginning or ending in the tax year in question, and
  2. the salary is paid by or on behalf of an employer who is not resident in the other state, and
  3. the salary is not incurred by a PE or fixed establishment which the employer has in the other country.

However, according to paragraph 3 of the aforementioned Article, the conditions of paragraph 2 do not apply to remuneration received by a person who is resident in a Contracting State, called in that paragraph ‘employee’, and who is paid by or on behalf of an employer who is not resident in the other Contracting State, if the work is performed in the other Contracting State and if:

  1. the employee also performs, as part of his employment, services for a person, other than his employer, who controls, directly or indirectly, the manner in which those services are performed, and
  2. the employer does not take responsibility or risk for the consequences of the work carried out by the employee.

The ‘person other than the employer’ in the point 1), indicated in the provision above, corresponds to the concept being discussed in this article, the so-called ‘economic employer’. This term, although not found in every DTT, is important in determining the exact place of taxation of employees.

When the concept of ‘economic employer’ exists in the country of work, which is not the residence of the employee for tax purposes, the second condition of the aforementioned Article 15 (2) of the PL-DE DTT, is not fulfilled. As a result, even a stay of less than 183 days in that country will result in a right to taxation by the country where the work will be performed.

When considering the concept, it is important to analyse the premises indicated in the OECD Commentary, as well as to take into account the practices of tax authorities and case law. The recognition of who is actually the economic employer will also depend on the interest and initiative of whom the assignment will take place. If the seconded employees are even organisationally integrated into the course of work of the foreign company and are subject to its instructions, the host company could be considered the economic employer in principle in the light of the generally accepted practice.

The interpretations of the Polish tax authorities prove that the definition of economic employer in the Polish legal order is still not uniform. Polish companies using posted employees should therefore evaluate in detail the criteria stipulated in international agreements in each case, incl. a confirmation based on a tax ruling. We encourage you to contact us for the purposes of confirming the employer status, as well as to analyse the tax consequences in the context of seconded employees.