Under many tax treaties mirrored after the OECD Model Treaty, the 183-day period implicates a significant threshold: individuals temporarily present in the treaty-party country (the Host Country) may be taxed by that country on income for personal services performed there if the individual resides in the Host Country for over 183 days in a given tax year. This is called the 183-Day Rule.
Few European countries have issued guidance on how they intend to apply the 183-Day Rule to Ukrainian refugees. Although one can hope that European governments will not aggressively pursue refugees as tax residents– at least for tax year 2022 – the absence of guidance in many countries leaves uncertainty for employee-refugees and their employers.
State-specific guidance in response to Ukraine war
Below we highlight the material guidance that has been issued to date.
Ireland announced concessionary treatment solely for tax year 2022. Ireland will waive the requirement for Ukrainian employers to levy Irish payroll taxes on Ukrainian refugees who would otherwise meet the 183-Day Rule and who have relocated to Ireland because of the war. Importantly, this treatment will apply only in relation to Ukrainian employment income for the tax year 2022 if the employee remains subject to Ukrainian income tax on his or her employment income for that year. Ireland has similarly relaxed its rules for permanent establishments for Ukrainian companies that have employees in Ireland.
Lithuania has also announced that it will not treat refugees as tax-resident in Lithuania. Further, Lithuania will not tax wages earned by Ukraine refugees who are working remotely for Ukrainian employers.
In Poland, a new regulation allows Ukrainian refugees to claim Polish tax residence. Invoking tax residence under this regulation would make a narrow category of refugees eligible to take advantage of certain favorable tax positions available only to Polish tax residents. The majority of Ukrainian refugees may not see any practical advantage from invoking Polish tax residence. For refugees who do not claim Polish tax residence, the Polish Ministry of Finance has committed to employ a flexible approach for determining tax residence.
Estonia will also allow Ukraine refugees to claim tax residence in Estonia. Doing so would make Ukraine refugees eligible for tax exemptions available only to Estonia tax residents.
Considerations for employer/employee liability and double taxation under existing law
In other European countries, no significant guidance has been issued. This means that the ordinary residence and treaty rules should apply to Ukrainian refugees who have been forced to relocate.
We have seen Ukrainian employers address relocation of their Ukrainian employees in three ways:
- Keep the Ukrainian employee-refugee on Ukrainian payroll (Option A);
- “Localize” the Ukrainian employee-refugee by formally transferring him or her to a group affiliate in the Host Country and putting the employee-refugee on local payroll (Option B); or
- Adopt a hybrid approach whereby the Ukrainian employee-refugee remains employed by the Ukrainian employer but is temporarily seconded to a group affiliate in the Host Country (Option C).
Each of the above options has its own benefits and shortcomings, meaning that it will be up to the employer and employee-refugee to decide which option to pursue.
Option A: Maintain the status quo
Under Option A, and assuming that the employee-refugee’s wages would be taxable in the Host Country, the employee-refugee may be personally responsible for periodically remitting taxes to the Host Country throughout the year and for filing and settling with the Host Country tax authorities at year-end.
Meanwhile, existing Ukrainian rules will require the Ukrainian employer to continue withholding for Ukrainian 18 percent personal income tax and a Ukrainian 1.5 percent military levy. The Ukrainian employer will also continue to make social security contributions on behalf of the employee.
This has the potential to result in significant double taxation for the refugee-employee. According to the existing position of Ukrainian tax authorities, the Ukrainian tax authorities will treat salaries paid by a Ukrainian employer as Ukrainian source, and, therefore, the Ukraine will not provide a refund or tax credit for foreign income taxes paid on that income. If the employee-refugee claims tax residence in the Host Country, some Host Countries may allow the employee-refugee to credit Ukrainian taxes in the Host Country; however, the mechanism for doing so will vary by country and may not be feasible in some cases. As such, under Option A, resolving double taxation could be difficult in practice. Although the parties could, in theory, initiate a mutual agreement procedure (MAP) (ie, a dispute resolution process between competent authorities from the Ukraine and the Host Country), doing so may be prohibitively time consuming and costly.
From the Ukrainian employer’s perspective, Option A raises the risks of permanent establishment or even tax residence in the Host Country. There is a corresponding risk that the Host Country will assert penalties for not withholding on employee-refugee wages. In our experience, some companies are willing to bear this risk and hope that Host Countries will not strictly enforce existing rules given wartime circumstances.
Option B: Localize the employee-refugee
Under Option B, the refugee-employee is put on the local employer’s payroll, and the local employer is responsible for withholding income taxes due the Host Country. The employee-refugee’s wages would also be subject to compulsory social security contributions in the Host Country.
The Ukraine is also likely to assert taxing rights on the employee’s income as the Ukraine will probably treat the refugee as Ukraine tax resident unless and until the refugee proves otherwise. Importantly, the Ukraine will allow a tax credit against foreign tax if there is double tax treaty between the Ukraine and the Host Country. To credit taxes paid outside of the Ukraine, the taxpayer must receive from the Host Country a certificate stating the foreign tax base and taxes paid. This certificate must be legalized and translated into Ukrainian. Thus, as compared to Option A, Option B should reduce to the risk of double taxation for employee-refugees.
Option B does not raise the complications that the Ukrainian employer would face under Option A.
Option B may not be viable in many instances especially if the Ukrainian employer does not have a group affiliate in a given Host Country. Also, some Ukrainian refugees might resist Option B if they want to retain flexibility to easily return to their original Ukrainian employment.
Option C: Second the employee-refugee to a group affiliate in the Host Country
The considerations under Option C will generally align with those described under Option A. That said, in a formal secondment, there is usually a Host Country payroll (so-called shadow payroll) set up to ensure proper withholding of income tax and social charges in the Host Country.
Ukraine also has social security treaties with various EU member states. Under these agreements, it may be possible to obtain a certificate of coverage from the Ukraine social security authorities to ensure ongoing coverage in the Ukrainian social security system while avoiding Host Country social coverage.
As none of the above options offers a perfect solution, employers and their employees should weigh the potential risks and advantages of each to best manage their positions through Europe.
By Lyudmyla Dzhurylyuk, Senior Associate, Kinstellar