Triangular cases : tax obstacles to labour mobility in the European Union and tax avoidance : final report.
Date: 2015-09-10
Institutions: Directorate-General for Taxation and Customs Union
Subjects: European Union, bilateral agreement, crew, double taxation, frontier worker, labour mobility, simplification of formalities, tax avoidance, tax on income

Triangular Cases –
Tax obstacles to labour mobility
in the European Union and tax
avoidance

Specific Contract No1 TAXUD/2013/DE/303
Based on Framework Contract No
TAXUD/2012/CC/117

Final report
EY – April 2014

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Abstract
Labour mobility creates many issues in the treatment of income for tax purposes.
Cross-border workers may suffer, or appear to suffer, unfair treatment with potential
double taxation. Equally, certain fact patterns can appear to give the opportunity to
avoid taxation altogether. This study analyses the legislative background to cross-
border employee mobility from a tax perspective, and looks at how existing bilateral
tax agreements can be made more effective, and how certain specialised cases such
as Frontier Workers and Aircrew are addressed in the appropriate legislation and
bilateral agreements. Finally, it looks at how the administrative complexities of
claiming double tax relief might be simplified.

Résumé
La mobilité professionnelle crée nombre de problèmes dans le traitement fiscal des
revenus. Les professionnels transfrontaliers subissent, ou paraissent subir, un
traitement injuste en souffrant potentiellement d’une double imposition. À l’inverse,
certains scénarios semblent offrir la possibilité d’éviter complètement toute taxation.
Cette étude examine d’une part le cadre législatif de la mobilité professionnelle
transfrontalière d’un point de vue fiscal et d’autre part la façon dont les accords
fiscaux bilatéraux existants pourraient être améliorés. L’étude se penche en outre sur
certains cas spécifiques, notamment le traitement des travailleurs frontaliers et les
membres d’équipage tant dans la législation nationale que dans les accords bilatéraux.
Finalement, l’étude examine des voies de simplification des procédures complexes
d’élimination des doubles impositions.

Disclaimer

The information and views set out in this report are those of the author(s), and do not
necessarily reflect the official opinion of the Commission. The Commission does not
guarantee the accuracy of the data included in this study. Neither the Commission nor
any person acting on the Commission’s behalf may be held responsible for the use
which may be made of the information contained therein.

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3.1
3.2
3.3
3.4
3.5
3.6
3.7

2.1
2.2
2.3
2.4
2.5
2.6
2.7

 Table of Contents
Abstract .......................................................................................................... 2
Résumé........................................................................................................... 2
Table of Contents ............................................................................................ 3
List of tables ................................................................................................... 6
Glossary of terms ........................................................................................... 6
1 Mandate .................................................................................................... 7
2 Executive Summary................................................................................... 9
Bilateral tax agreements ........................................................................ 9
Problematic types of income ................................................................... 9
Tax treatment of Frontier Workers ........................................................... 9
Consistent treatment of Triangular cases .................................................. 9
Special rules for Aircrew ......................................................................... 9
Special rules for Students, Business Apprentices and Academics ................. 9
Procedures for claiming Double Tax Relief ...............................................10
3 General principles of taxation for cross-border workers ......................... 11
Source and residency ............................................................................11
Cross-border workers and posted workers ...............................................11
EU taxation of cross-border workers and posted workers ...........................12
Bilateral tax agreements .......................................................................12
Frontier workers ...................................................................................13
Specific Triangular cases identified in the OECD Model Convention ..............13
Relevant EU Legislation affecting these matters........................................14
4 Structure of bilateral tax agreements ..................................................... 16
Article 1: Personal Scope .......................................................................16
Article 2: Taxes Covered .......................................................................16
Article 3: General Definitions .................................................................16
Article 4: Residence ..............................................................................16
Article 5: Permanent Establishment ........................................................17
Article 7: Business Profits ......................................................................17
Article 14: Independent Personal Services ...............................................17
Article 15: Income from Employment ......................................................17
Article 15(1) ..................................................................................17
Article 15(2) ..................................................................................18
Article 15(3) ..................................................................................18
4.9
Article 16: Directors Fees ......................................................................19
4.10 Article 18: Pensions ..............................................................................19
4.11 Article 20: Students, Business Apprentices and Academics ........................19
4.12 Article 21: Other Income .......................................................................20
4.13 Article 23A: Exemption method of relief for double taxation .......................20
4.14 Article 23B: Credit method of relief for double taxation .............................20
4.15 Article 24: Non-Discrimination ...............................................................20
4.16 Article 25: Mutual Agreement ................................................................21
4.17 Article 26: Exchange of information ........................................................21
4.18 Article 30: Entry into force.....................................................................21
5 Member  State  Country  Surveys  of  how  Bilateral  Tax  Treaties  are  applied
in practice..................................................................................................... 22
5.1 Which version of the Commentary is applied? ..........................................22
Residence ............................................................................................23
5.2
Self-Employed Individuals .....................................................................24
5.3
Employed Individuals ............................................................................24
5.4
Article 15(1) ..................................................................................24
Article 15(2) – counting the 183 days ...............................................25

4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

4.8.1
4.8.2
4.8.3

5.4.1
5.4.2

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7.3

7.3.1

5.5
5.6

7.1
7.2

5.4.3
5.4.4

7.6.1
7.6.2
7.6.3

5.6.1
5.6.2
5.6.3

6.1
6.2
6.3
6.4
6.5

Article 15(2) – determining the ‘employer’.........................................25
Article 15(3) ..................................................................................26
Students, Business Apprentices and Academics ........................................27
Double Taxation Relief ..........................................................................27
Exemption Method ..........................................................................27
Credit Method ................................................................................28
Requirements to claim Double Tax Relief ...........................................28
6 Problematic categories of income ........................................................... 29
Assignment allowances .........................................................................29
Equity awards ......................................................................................29
Employer Pension contributions ..............................................................30
Social security contributions ..................................................................31
Recommendations ................................................................................31
7 Making bilateral tax agreements more effective ..................................... 32
Residence and Sourcing ........................................................................32
Employment or self-employment ............................................................33
7.2.1
Differences between being employed and self-employed in a cross-border
working situation ........................................................................................33
Tax benefits available to the self-employed .......................................35
7.2.2
Treatment of directors and statutory office holders ...................................37
Multi-country responsibilities ...........................................................38
7.4
Shadow director agreements .................................................................39
7.5
Treatment of various categories of Investment Income for non-Residents ...41
Preliminary  recommendations  required  to  make  bilateral  agreements  more
7.6
effective .......................................................................................................41
Residence......................................................................................41
Employment or self-employment ......................................................41
Directors and shadow directors ........................................................42
8 Tax treatment of Frontier Workers .......................................................... 43
9 Triangulation Cases................................................................................. 48
Specific Triangular cases identified in the OECD Model Convention ..............48
Simple Triangulation .............................................................................48
Case 1 ..........................................................................................48
Case 2 ..........................................................................................49
Case 3 ..........................................................................................50
Practical application of triangulation issues ..............................................51
10 Special rules in Article 15(3) for Aircrew ................................................ 53
10.1 History of the special rules ....................................................................53
10.2 Issues arising.......................................................................................54
 Operational overview .....................................................................54
 Basis for taxation ..........................................................................54
 Payroll issues ................................................................................55
How the special rules work .................................................................56
Country issues ..................................................................................57
Case examples ..................................................................................58
 Case 1 .........................................................................................58
 Case 2 .........................................................................................59
Proposed solutions to address the issue ...............................................60
10.6
10.7 Proposed changes in the OECD Model Tax Convention – Discussion Draft ....60
11 Students, Business Apprentices and Academics ...................................... 62
Issues identified ................................................................................62
Recommendations to address this issue ...............................................62
12 Elimination of tax obstacles with respect to procedures, interpretations or
legal instruments .......................................................................................... 64
Procedures for claiming Double Tax Relief ............................................64

10.2.1
10.2.2
10.2.3

9.2.1
9.2.2
9.2.3

10.3
10.4
10.5

10.5.1
10.5.2

11.1
11.2

9.1
9.2

12.1

9.3

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12.2
12.3

Documentation Requirements for Claiming of Double Tax Relief ..............65
Recommendations to simplify Double Tax Relief claims ..........................69
13 Final Recommendations of this Report .................................................... 70
13.1 Bilateral tax agreements .......................................................................70
13.2 Frontier Workers ..................................................................................70
13.3 “Subject to tax” clauses ........................................................................70
13.4 Tax withholding for non-residents ...........................................................70
13.5 Triangulation .......................................................................................71
13.6 Aircrew ...............................................................................................71
13.7 Procedures for claiming Double Tax Relief ...............................................71
13.8 Single  Tax  Office  to  deal  with  workers  from  other  Member  States  working  in
Host Country .................................................................................................71
Appendices ................................................................................................... 72
Appendix 1: Tax treaties between the EU Member States ....................................73
Appendix  2:  Variation  in  bilateral  tax  treaty  measurement  periods  for  the  183  day
rule ..............................................................................................................74
Appendix 3: Method of application of Double Tax relief .......................................75
Appendix 4: ..................................................................................................76
Appendix 5: Summary of Directors’ fees treatment ............................................77

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List of tables

1
2
3
4
5

EU Member State tax treaties with a Frontier Worker provision
Extract from Cross-Border Workers Report
Frontier Workers provision – country of taxation
Documentation required to support claim for Double Tax Relief
Documentation  available  to  Other  State  to  support  claim  for  Double  Tax
Relief

Glossary of terms

Double Tax Relief

Credit method

Exemption method

Home Country

Host Country

The  process  whereby  a  Member  State  permits  the
taxpayer  to  avoid  being  taxed  twice  on  the  income,  by
taking into account that another country may have already
taxed it under one of the available methods.
Method  of  Double  Tax  Relief  where  the  Home Country
taxes  worldwide  income,  but  gives  relief  for  income  taxed
elsewhere by deducting the taxes paid elsewhere from the
overall tax bill.
Method  of  Double  Tax  Relief  where  the  Home Country
taxes  worldwide  income,  but  gives  relief  for  income  taxed
elsewhere  by  exempting  the  income  already  taxed  from
being taxed again.
Country  in  which  cross-border  worker  normally  resides
prior to commencing cross-border activity.
Country  in  which  cross-border  worker  exercises  the
majority of his employment, and is ‘based’ for the duration
of the activity.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

1  Mandate

Worker  mobility  has  been  identified  as  one  of  the  key  areas  for  increasing  economic
growth and employment in the EU.1

The European Commission is concerned that differences between the 28 national tax
systems combined with different interpretation of laws are resulting in tax obstacles to
worker mobility2,3.

The  Commission  undertook  a  consultation  on  tax  treaties and the Internal  Market  to
elicit  factual  examples  of  cross-border  double  taxation  cases  from  all  taxpayers,  to
obtain a picture of the real size of the problem and its financial effect.4 Following the
consultation,  the  Commission  issued  a  Communication  to  the  European  Parliament,
the  Council  and  the  European  Economic  and  Social  Committee  setting  out  the
Commission’s proposals for possible solutions to double taxation in the Single Market.5
The Communication  also outlined the need to take  measures to remove double non-
taxation and consider ways of addressing triangular situations.

The purpose of this study is to build on the previous consultation and consider in more
detail  the  personal  income  tax  situation  for  cross-border  workers  as  well  as  posted
workers  and  whether  the  general  perception,  as  understood  by  the  European
Commission,  that  individuals working in  different  Member  States risk  being taxed by
more than one Member State as soon as they cross an internal border while in some
cases they may escape all taxation, is supported by facts. The study is designed to:
§ Provide  an  overview  of  national  tax  legislation  and  practices  in  cross-border
situations,  identify  the  existence  and  underlying  causes  of  double  taxation  and/or
non-taxation, highlight whether these are sizeable and whether or not these have
been addressed by EU legislation and/or ECJ decisions.
Identify  the  typical  practices  that  companies  and/or  individuals  have  developed  to
overcome tax problems relating to the recruitment of workers across borders within
the Member States.
Identify  the  most  important  problems  with  triangular  situations  that  may  arise  as
well  as  the  causes  and  implications  (the  European  Commission  has  a  particular
interest in triangular cases and their underlying causes).

§

§

1

“Employment  and  Social  Developments  in  Europe  2011,  intra-EU  labour  mobility  and  the  impact  of

enlargement, p. 247: http://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=6176
2

On  3  July  2013  the  Committee  of  the  Regions  adopted  their  own  initiative  opinion  entitled  “Frontier
workers: Assessment of the situation after twenty years of the internal market: problems and perspectives”.
This opinion included recommendations of which one was a suggestion “to elaborate a compendium of most
urgent  mobility  obstacles  and  problems  with  possible  ways  of  solution  that  should  be  regularly  updated”
(2013/C 280/03).
3

The Commission  considers that  frontier workers deserve particular  attention in view  of the  fact that they
do  not  reside  in  the  Member  State  of  their  employment  and  therefore  they  face  specific  problems.
Communication from the Commission to the Council, The European Parliament, The European Economic and
Social  Committee  of  the  Regions;  Reaffirming  the  free  movement  of  workers:  rights  and  major
developments of workers: rights and major developments (COM/2010/0373 final):
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0373:EN:NOT
4  “Commission’s  consultation  on  double  taxation  conventions  and  the  internal  market:  factual  examples  of
double taxation cases”, January 2011:
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/summary_report_c
onsultation_double_tax_conventions_en.pdf
5  European  Commission,  Communication  to  the  European  Parliament,  The  Council  and  The  European
Economic and  Social  Committee:  Double  Taxation  in  the  Single  Market,  European  Commission  COM(2011)
712 final (11 Nov 2011):
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0712:FIN:EN:PDF

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Although  Switzerland  is  not  a  member  of  the  EU  it  has  been  referred  to  at  various
points in our study given that it is one of the main countries of destination.6

6

“Scientific  Report  on  the  Mobility  of  Cross-Border  Workers  within  the  EU-27/EEA/EFTA  Countries” MKW

Wirtschaftsforschung GmbH, Munich, and Empirica Kft., Sopron, January 2009:
ec.europa.eu/social/BlobServlet?docId=3459&langId=en

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2 

Executive Summary

2.1  Bilateral tax agreements
Double taxation agreements exist between the majority of member states. These are
on  a  bilateral  basis,  and  cover  most  of  the  situations  envisaged.  However,  there  are
practical  differences in interpretations which  render the treaties less useful than they
could  be.  In  addition,  taxpayers  are  not  always  aware  of  the  existence  of  the  treaty,
plus they can be complex to understand, even for tax professionals.

Most  cross  border  workers  are  employees  and  whether  a  Host  Country  should  or
should not tax the worker will be dictated by the Income from Employment Article in
the  bilateral  tax  treaty  that  applies.  It  is  evident  from  this  study  that  there  are
numerous  different  interpretations  used  in  applying  that  Article.  These  include
different interpretations of “employer”, the counting of days for both income allocation
purposes  and  the  183  days  for  potential  exemption  purposes.  This  represents  an
obstacle to worker mobility as it may give rise to double taxation which can result in
additional compliance costs to resolve.

2.2    Problematic types of income
Certain  types  of  assignment–related  allowance  create  additional  complexity,  which
could be simplified both by in-country publication of further guidance, and cooperation
between Member States in harmonising definitions and treatments.

2.3    Tax treatment of Frontier Workers
Existing Frontier Workers provisions cover only a minority of Member States. However,
newer  Member  States  with  newly  opened  borders  are  not  rushing  to  incorporate
provisions that would cede taxing rights to another Member State.

2.4    Consistent treatment of Triangular cases
The  rules  for  Triangular  cases  are  complex,  with  that  complexity  being  further
increased by the different rules available to Member States. That complexity could be
reduced  if  it  were  easier  to  determine  which  country  was  the  main  country  of
residence, and that could be easily documented up front, to enable the other affected
countries to rely on the treaty.

2.5    Special rules for Aircrew
Article  15  (3)  of  the  OECD  Model  Tax  treaty,  as  incorporated  into  the  majority  of
bilateral  agreements  in  the  EU,  includes  rules  for  the treatment  of Aircrew. However
the tax rules have not kept pace with aviation deregulation, and changes to individual
country withholding rules and an increased exchange of information will be required to
ensure that the correct country receives its share of taxation revenue.

2.6   Special rules for Students, Business Apprentices and Academics
Some  changes  to  interpretation  and  instruction  would  help  to  improve  consistency,
especially  in  cases  where  cross-border  workers  perform  several  duties,  some  within
the  meaning  of  the  Students,  Business  Apprentices  and  Academics  article  and  some
outside of it.

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2.7    Procedures for claiming Double Tax Relief
Based on the information obtained for the purposes of the study the application of the
appropriate  bilateral  tax treaty should  avoid incidences  of  double taxation. However,
for  the  unrepresented  individual  the  time  and effort  involved  in  navigating  the  rules
and  dealing  with  tax  authorities  can  represent  an  insurmountable  challenge.  The
individual  will  either  decide  not  to  work  outside  their  country  of  residence,  suffer
double taxation or, adopt a practice which is incorrect such that Member States do not
receive a proper share of tax revenue.

The alternative is for the individual to obtain professional advice at a cost which may
discourage labour mobility.

As  such,  a  simplification  of  the  procedures  for  Double  Tax  Relief  claims  should  help
taxpayers  to  take  advantage  of  their  legal  rights  to  avoid  double  taxation  and
encourage labour mobility.

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3  General  principles  of  taxation  for  cross-border
workers

3.1  Source and residency
The general principle of taxation of employment income is that income would usually
be  taxed  either  where  the  work  is  performed  (the  so-called  source  basis),  or  in  the
country in which the individual is a tax resident (the residency basis).

The  country  where  the  person  resides  is  typically  referred  to  as  their  Home  Country,
and  the  country  where  they  work,  if  different,  is  typically  referred  to  as  the  Host
Country.

In  many  cases,  the  taxation  of  an  individual  working  cross-border  is  a  matter  of
determining the place of residency and source of income, and applying the tax rules of
each country to determine the order of taxation, and the interaction between the two.

In  many  simple  cases,  this  will  result  in  the  Host  Country  initially  taxing  the  income
that  arises  in  that  country  on  a  source  basis,  with  the  Home  Country  taxing  the
individual on a residency basis on their worldwide income, giving double tax relief for
income already taxed in the Host Country on a source basis.

In  determining  the  allocation  of  income  between  the  Source  and  Residence  country,
the  starting  point  is  typically  the  number  of  working  days,  and  allocation  made
proportionate to the number of days worked in each country. So, at its simplest level,
someone working 26 working days in a 260 day year (52 weeks of 5 working days) in
a specific location, would source 10% of their employment income to that location.

However,  there  are  many  individual  rules  that  prevent  this  working  as  smoothly  as
intended. These include:
§ different sourcing rules for different types of income;
§ different definitions of residency;
§ both countries believing they are the country of residence;
§ different ways of calculating working days, including whether to include only whole
days or also part days, whether to exclude public holidays or personal holidays and
vacation period.

These rules will be addressed in more detail throughout this report.

3.2  Cross-border workers and posted workers
For the purpose of this study:
§ a cross-border worker is a worker, employee or self-employed, who undertakes his
work  within  the  territory  of  one  Member  State,  resides  in  another  Member  State
and returns to their main place of residence abroad at least once a week.

§ a posted worker is a worker, employee or self-employed, who remains resident in a
Member State but is seconded or assigned to work for a person in another Member
State.

§ a  triangular  case  is  either  (1)  a  case  where  two  Member  States  cannot  resolve
double taxation on income when applying a tax treaty between two Member States
as  a  result  of  a  legal  link  with  a  third  Member  State  or  (2)  a  case  where  income
escapes taxation as a result of the application of a tax treaty combined with a legal
link with a third state.

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3.3  EU taxation of cross-border workers and posted workers
In  contrast  to  social  security  contributions  where  there  is  EU  legislation  in  place  to
ensure that workers are only liable in one Member State,7 states have a right to apply
their own tax system provided that it complies with Community law.8 Member States
then adopt  measures  to  relieve  double  taxation,  primarily  through  unilateral  and
bilateral measures and, in some limited instances, by multilateral arrangements.

The European Court of Justice has ruled that double taxation is not contrary to the EU
treaties  provided  that  it  is  a  result  of  the  parallel  exercise  of  tax  sovereignty  by  the
Member States concerned.9

The following circumstances can result in Double Taxation:
§ The worker is a resident (simultaneously) of two or more Member States;
§ The worker is a resident in one Member State, but earns income in another that is

subject to tax in that State;

§ Two  (or  more)  Member  States  treat  the  income  of  the  worker  as  sourced  in  their

state;

§ Two  (or  more)  Member  States  seek  to  tax  the  income  of  the  worker,  one  on  a
source  basis  and  one  on  a  residence  basis,  leading  to  a  need  to  claim  Double  Tax
Relief.

In  such  cases,  it  is  then  necessary  to  review  whether  there  is  a  Bilateral  tax
agreement in place that can avoid double taxation occurring.

3.4  Bilateral tax agreements
In the absence of EU legislation to ensure that workers are only liable in one Member
State,  a  cross-border  worker  is  reliant  on  a  bilateral  tax  treaty  to  provide  protection
against  double  taxation.  The  vast  majority  of  double  taxation  conventions  are
concluded on a bilateral basis and the OECD Model Tax Convention on Income and on
Capital  (“OECD  Model”)  is  used  as  a  basis  for  such  conventions.  The  EC  Member
States and Switzerland have a wide network of bilateral tax treaties. The 28 Member
States have a theoretical 378 country pairs that could result in a bilateral tax treaty.

Of that 378, there are only 12 country pairs that do NOT have a bilateral tax treaty in
place.

Eight  Member  States  do  not  have  an  agreement  in  place  with Cyprus.  These  are
Croatia, Estonia, Latvia, Lithuania, Luxembourg, Netherlands, Portugal and Spain.

Three Member States do not have an agreement in place with new member Croatia.
These are Cyprus, Luxembourg and Portugal.

Denmark cancelled  its  treaties  with  France  and  Spain  effective  1  January  2009
because it was of the view that Denmark was disadvantaged as a result of the state of
residence  having  the  exclusive  right  to  tax  pension  income  meaning  that  Danish
retirees  to  France  and  Spain  escaped  taxation  in  Denmark  on  their  Danish  pension
which was viewed as unfair to those that remain.

Therefore to  analyse  the  bilateral  relationship within the EU  requires  analysis  of 366
individual treaty pairs.

7 Article 12 of EC Regulation 883/2004
8 ECJ, 12 February 2009 C-67/08 (Block v Finanzamt Kaufbeuren)
9 ECJ, 14 November 2006 C-513/04 (Kerckhaert and Morres v Belgische Staat)

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The table in Appendix 1 provides a summary of tax treaties between Member States.

Table 2 in Section 8 identifies the borders where high volumes of border crossing may
take place. The country pairs referred to above that do not have a bilateral tax treaty
in place do not have a common frontier hence they are not included in Table 2 which
means that the absence of a bilateral tax treaty is of less importance in the context of
labour mobility.

3.5  Frontier workers
Historically  the  term  ‘frontier  worker’  applies  to  workers  who  live  near,  and  perform
their work on the other side of, a country frontier which they must cross regularly.

Many bilateral tax treaties which include a rule for taxation of frontier workers require
the  worker  to  commute  from  his  state  of  residence  to  his  place  of  work  in  the  other
state on a daily basis.

Currently  11  of  the  366  treaties  include  a  frontier  workers  clause.  The  table  below
provides  a  summary  of  states  that  have  a  tax  treaty  which  includes  a  special  rule
regarding the taxation of frontier workers.

Table 1: EU Member State tax treaties with a Frontier Worker provision

COUNTRY OF RESIDENCE
Austria
Belgium
Denmark
Finland
France
Germany
Italy
Portugal
Spain
Sweden

TREATY PARTNER
Germany, Italy
France, Germany
Finland, Sweden
Denmark, Sweden
Belgium, Germany, Italy, Spain
Austria, Belgium, France
Austria, France
Spain
France, Portugal
Denmark, Finland

Section  8  provides  information  regarding  the  tax  treatment  of  frontier  workers  and
identifies  (in  Table  2)  the  borders  where  high  volumes  of  border  crossing  take  place.
Other than Luxembourg which receives a significant number of commuters from other
Member  States  that  border  Luxembourg  most  of  the  Member  States  that  have  high
volumes of border crossing have a frontier workers provision.

identified 

3.6  Specific  Triangular  cases 
Convention
Certain circumstances lead to regular recurring triangulation cases, and so the OECD
Model  Convention  has  included  specific  wording  to  address  those  issues.  These
circumstances include (Art. 15(3) OECD Model):
§ Ships or aircraft operated in international traffic;
§

in  the  OECD  Model

Inland waterways.

This  occurs  because  by  definition  international  traffic  will  always  include  at  least  two
states, plus will often cross other states as well.

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As  discussed  in  Section  4.8.3  below,  the  preferred  method  of  the  OECD  Model
Convention  has,  to  date,  preferred  to  allocate  taxing  rights  to  the  country  of
management of the enterprise in the majority of cases.

The  rationale  for  the  inclusion  of  Article  15(3)  in  the  OECD  Model  Convention  is  that
where  ships  or  aircraft  are  operated  in  international  traffic  it  is  impossible  or  very
difficult  to  determine  where  the  work  activities  are  performed  such  that  the  right  to
allocate  remuneration  by  reference  to  the  criteria  in  Article  15(1)  is  unsuitable.  As
business  profits  from  operating  aircraft  in  international  traffic  (Article  8)  are  taxable
exclusively in the state in which the enterprise has its effective place of management
and that enterprise may reduce its profits by the remuneration paid to pilots and crew
members it made sense to offer compensation by including the provision within Article
15(3) to permit that state to tax the crew.

However, Article 15(3) may differ in a number of bilateral tax treaties and a common
problem is that the enterprise may be located in a third state. Additional interpretation
problems occur where aircrew provide their services through a third party entity rather
than  as  an  employee  of  the  enterprise  operating  the  airline  or  sister  entity  of  the
enterprise.

At issue is the possibility for certain aviation operators to arbitrage multiple treaties to
potentially avoid withholding of tax altogether in certain cases. This may look like tax
is not being paid; however, it should ultimately remain due in all cases in the ultimate
country  of  residence,  but  with  ambiguity  or  uncertainty  as  to  who  the  payer  or
remitter of the relevant income tax should be.

No  other  Triangulation  case  is  deemed  significant  or  recurring  enough  to  warrant  a
special  provision  in  Article  15  to  address  the  technical  specifics  thereof.  However,
directors  and  office  holders  in  multinational  organisations  or  with  multijurisdictional
roles will also have Triangular issues, which are discussed in Section 9 below.

These  could  also include  interaction  between  employment  and  self-employment,  and
whether  a  role  that  is  categorized  as  a  Director  role  in  one  country  is  viewed  in  the
same  way  in  the  other  country  for  the  purposes  of  applying  the  Double  Taxation
Agreement.

3.7  Relevant EU Legislation affecting these matters
As  a  general  principle,  EU  law  devolves  taxation  matters  to  Member  States  to
determine. However, in the context of cross-border workers the tax treatment applied
by  Member  States  is  capable  of  being  challenged  under  the  following  articles  of  the
Treaty on the Functioning of the European Union (TFEU):
§ Article 18 prohibits any discrimination on grounds of nationality10.
§ Article  21(1)  grants  every  citizen  of  the  EU  the  right  to  move  and  reside  freely
within the territory of the Member States, subject to the limitations and conditions
laid down in the EC Treaty and by the measures adopted to give it effect11.

§ Article 45 provides for freedom of movement for workers such that there must be
no discrimination based on nationality in respect of employment, remuneration and
other employment conditions. It also includes the right to move freely within the EU
and to stay in a Member State during and after employment12.

10  ECJ,  10  September  2009  C-269/07  (Commission  of  the  European  Communities  v  Federal  Republic  of
Germany)
11 ECJ, 23 April 2009 C-544/07 Ruffler
12  ECJ,  29  March  2007  C-182/06  Lakebrink;  ECJ,  16  October  2008  C-527/06  Renneberg  and  ECJ,  12  May
1998 C-336/96 Gilly.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

§ Article  49  prohibits  restrictions  on  the  freedom  of  establishment  of  nationals  of  a
Member State in the territory of another Member State including the right of self-
employed persons to take up and pursue business activities13.

§ Article 56 prohibits restrictions on freedom of nationals of Member States who are

established in a Member State to provide services within the EU.

In terms of recent judgements in the Courts regarding the above freedoms, the courts
will consider which EU freedom applies, whether there is a restriction on the freedom
concerned,  whether  the  restriction  is  justified  and  if  it  is  justified,  whether  it  is
proportionate. Tax treaties will feature in all stages of these considerations.

13 ECJ, 11 August 1995 C-80/94 Wielockx

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4 

Structure of bilateral tax agreements

In broad terms, the Articles of a bilateral tax treaty that are relevant to cross-border
and posted workers are as follows:

4.1    Article 1: Personal Scope
This  provides  that  the  tax  treaty  shall  apply  to  persons  who  are  residents  of  one  or
both of the contracting states.

As such, the benefits of the tax treaty can generally only be enjoyed by (a) a person
who is (b) a resident of one or both states.

4.2  Article 2: Taxes Covered
This  defines  the  taxes  which  are  covered  by  the  tax  treaty  and  this  should  cover  the
taxes on income and capital that are likely to apply to a cross-border worker or posted
worker.

4.3  Article 3: General Definitions
This Article contains the definition of a number of terms used in a tax treaty that may
be relevant to a cross-border worker or posted worker:
§
§

“Person” includes an individual.
“International  traffic”  means  any  transport  by  a  ship  or  aircraft  operated  by  an
enterprise that has its place of effective management in a Contracting State, except
when the ship or aircraft is operated solely between places in the other Contracting
State.
“national”  in  relation  to  a  Contracting  State  means  any  individual  possessing  the
nationality or citizenship of that Contracting State.
“business”  includes  the  performance  of  professional  services  and  of  other  services
of an independent character.

§

§

4.4  Article 4: Residence
This Article is fundamental to the application of a tax treaty in the context of a cross-
border worker or posted worker. Article 4(1) sets out the criteria under which a person
is  regarded  as  a  “resident  of  a  Contracting  State”  and  in  broad  terms  this  will  be
established under the domestic tax rules of the particular Member State.

Article  4(2)  is  commonly  referred  to  as  the  “tiebreaker”  and  is  used  where  an
individual  is  resident  in  both  contracting  states  under  their  domestic  rules  to
determine the state of residence for applying the tax treaty. Under the so called “tie-
breaker” test in Article 4 it is necessary to look in sequence at a series of tests:
1. where he has a permanent home available to him and if he has a permanent home
available to him in  both  countries, where  his  personal  and economic  relations  are
closer (centre of vital interests);
2. where he has his habitual abode;
3. where he is a national.

If,  on  the  first  test,  it  is  clear  that  the  individual  is  a  resident  of  one  country  or  the
other, the determination concludes there. If that test is not clear, or if the condition is
satisfied equally as regards the two countries, the determination proceeds to the next
test, and so on until a conclusive result is reached. If none of the above tests (taken in
sequence)  are  conclusive,  the  two  countries  must  decide  between  them,  a  process
known as mutual agreement.

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4.5  Article 5: Permanent Establishment
The term “permanent establishment” is of primary importance in the context of Article
7 which covers business profits. It also features in Article 15 which covers employment
income.  There  are  two  types  of  permanent  establishment,  firstly  an  establishment
which is part of the same enterprise and under common ownership and control (office,
branch  etc.)  and  secondly  a  dependent  agent  who  is  legally  separate  from  the
enterprise  but  his  dependency  on  the  enterprise  points  to  the  formation  of  a
permanent establishment.

In  other  words  there  are  two  types  –  the  “fixed  place  of  business”  type  and  the
“dependent agent” type. A third type could be a construction or installation site.

4.6  Article 7: Business Profits
This  Article  applies  to  the  business  profits  of  an  individual.  A  self-employed  cross
border worker who is resident in a Member State will generally have to undertake his
activities  in  another  Member  State  through  a  fixed  place  of  business  (this  is  widely
defined) or as a dependent agent in the other Member State to trigger a tax liability in
that other state.

4.7  Article 14: Independent Personal Services
Before 2000, income from professional services and other activities of an independent
nature  were  dealt  with  under  this  Article  but  the  effect  of  the  deletion  of  Article  14
from the OECD Model is that income from professional services or other activities of an
independent  nature  is  now  dealt  with  under  Article  7  as  business  profits.  However,
there are some bilateral tax treaties that were negotiated or entered into before 2000
where this Article will still apply.

Where  Article  14  applies,  income  from  professional  services  or  other  activities  of  an
independent  character  which  is  derived  by  a  resident  of  a  state  is  not  taxable  in  the
source  state  unless  the  individual  has  a  fixed  base  in  the  source  state.  If  there  is  a
fixed  base  in  the  source  state,  only  the  income  attributable  to  the  fixed  base  is
taxable.

4.8  Article 15: Income from Employment
Subject  to  Member  States  having  a  similar  interpretation  of  this  Article,  this  should
provide protection from double taxation for employees.

Article 15 of the OECD Model does not include a special rule regarding the taxation of
frontier  workers  or  of  employees  working  on  trucks  and  trains  travelling  between
states.  According  to  paragraph  10  of  the  Commentary  on  Article  15  the  taxation  of
income  of  such  workers  should  be  solved  directly  between  the  States  concerned  by
reference to the particular local conditions.

4.8.1  Article 15(1)
The first rule, in Article 15(1), reads as:
“subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar
remuneration  derived  by  a  resident  of  a  Contracting  State  in  respect  of  an
employment, shall be taxable only in that State unless the employment is exercised in
the other Contracting State. If the employment is so exercised, such remuneration as
is derived therefrom may be taxed in that other State”

This  rule  provides  that  the  employee’s  state  of  residence  has  exclusive  taxing  rights
unless the employment is exercised in the other state.

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4.8.2  Article 15(2)
The  second  rule,  in  Article  15(2),  overrides  Article  15(1)  such  that  exclusive  taxing
rights remain with the state of residence provided that three conditions are satisfied.
These are:
a) the  recipient  is  present  in  the  other  State  for  a  period  or  periods  not  exceeding  in
the aggregate 183 days in any twelve month period commencing or ending in the
fiscal year concerned, and

b) the remuneration is paid by, or on behalf of, an employer who is not a resident of

the other State, and

c) the  remuneration  is  not  borne  by  a  permanent  establishment  which  the  employer

has in the other State.

A tax treaty may refer to the 183 days as measured in “any 12 month period”, in the
“tax year concerned” or “in the calendar year”.

The Commentary provides guidance on how to count the 183 days. The Commentary
indicates  that  in  counting  days  any  part  of  a  day  spent  in  a  state  and  for  whatever
purpose should be included.

The  OECD  (2010)  Commentary  includes  detailed  guidance  on  the  criteria  to  be
considered  in  determining  the  “employer” for  the  purposes  of  applying  Article  15(2).
The  starting  point  is  whether  under  the  domestic  laws  of  the  State  of  Source  the
services  rendered  in  that  State  are  provided  in  an  employment  relationship  and  that
will  determine  how  that  State  applies  the  tax  treaty,  i.e.,  whether  the  services  are
provided  under  a  contract  of  service  or  under  a  contract  for  services.  Where  an
employee  resident  in  one  state  works  in  the  business  of  a  Company  in  another  state
and  that  Company  obtains  the  benefits  and  bears  any  risks  in  relation  to  the  work
undertaken by the employee then that Company is likely to be treated as his de-facto
employer (economic employer). In other words the relevant domestic law may ignore
the  legal  employer  and  instead  apply  Article  15(2)  by  reference  to  the  de-facto
employer  (economic  employer).  Some  Member  States  may  not  apply  the  2010
Commentary or it may not be interpreted in a consistent manner.

4.8.3  Article 15(3)

The  third  rule,  in  Article  15(3),  deals  with  remuneration  derived  in  respect  of
employment  exercised  aboard  a  ship  or  aircraft  operated  in  international  traffic,  or
aboard  a  ship  engaged  in  inland  waterways  transport.  It  provides  that  such
remuneration  may  be  taxed  in  the  Contracting  State  in  which  the  place  of  effective
management of the enterprise may be situated.

The  right  of  the  State  in  which  the  enterprise  is  situated  is  a  permissive  right  and  it
assumes  that  the  State  will  impose  tax.  For  example,  in  a  case  where  the  place  of
effective management of an airline operated in international traffic is in Portugal, tax
would be imposed by Portugal. In contrast, if the place of effective management of an
airline operated in international traffic is in the UK there would be no tax imposed on
non-residents unless there were UK duties.

Some  bilateral  treaties  (for  example,  the  UK/Netherlands  tax  treaty)  provide  that
remuneration that is derived by a resident of one of the Contracting States in respect
of  an  employment  as  a  member  of  the  crew  of  a  ship  or  aircraft  operated  in
international traffic shall be taxable only in that State.

Other bilateral treaties (for example, the Belgium/Netherlands tax treaty) provide that
remuneration  that  is  derived  in  respect  of  an  employment  exercised  aboard  a  ship,

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boat  used  for  inland  waterways  transport  or  aircraft  operated  in  international  traffic
shall  be  taxable  only  in  the  Contracting  State  in  which  the  place  of  effective
management of the enterprise operating this ship, boat or aircraft is situated.

4.9  Article 16: Directors Fees
This  Article  provides  that  Director’s  Fees  and  other  similar  payments  derived  by  a
resident of a Member State in his capacity as a member of the board of directors of a
company which is a resident of the other Member State may be taxed in the Member
State  in  which  the  company  is  resident.  The  rational  for  this  is  that  the  duties  are
linked  to  the  statutory  obligations  exercised  in  respect  to  the  company  under  the
Company laws in that country. Payment as a director is linked to the responsibility of
holding office, and is not linked to the hours worked nor the place of performance of
the duties. It is therefore not always appropriate to link the duties solely to the place
where they are performed.

4.10  Article 18: Pensions
This Article may have application to cross border workers as it provides that pensions
and  other  similar  remuneration  paid  to  a  resident  of  a  contracting  state  in
consideration  of  past  employment  shall  be  taxable  only  in  the  state.  Paragraph  4  of
the  Commentary  on  Article  18  indicates  that  “various  payments  may  be  made  to
employees  following  cessation  of  employment.  Whether  or  not  such  payments  fall
under the Article will be determined by the nature of the payments, having regard to
the facts and circumstances in which they are made, as explained in the following two
paragraphs”.  Paragraphs  5  and  6  of  the  same  Commentary  discuss  the  extent  to
which such payments constitute “pensions or other similar remuneration”.

In  a  Discussion  Draft14 it  is  acknowledged  that  these  paragraphs  do  not  address  how
other  provisions,  such  as  Article  15,  apply  to  a  variety  of  payments  following  the
termination of employment. The Discussion Draft is silent on the application of Article
21 but it does highlight the fact that inconsistent treaty characterisation of payments
received following the termination of employment creates risks of double taxation and
non-taxation.  The  Discussion  Draft  highlights  proposals  with  a  view  to  these  being
included in  the OECD  Model. In  essence, the  proposed  changes  should make it  clear
that  most  payments  made  as  a  result  of  the  cessation  of  employment  should  be
covered by Article 15.

4.11  Article 20: Students, Business Apprentices and Academics
This  Article  may  have  application  to  cross  border  workers.  The  OECD  Model
Convention only covers students and business apprentices and is designed to ensure
that  payments  received  for  support  of  education,  training  or  maintenance  when
residing  in  the  host  state  are  not  taxable  in  the  host  state.  This  is  subject  to  the
condition  that  immediately  prior  to  the  move  to  the  host  state  the  individual  was
resident  in  the  other  state  and  that  the  payments  arise  from  sources  outside  of  the
host state.

The purpose of this rule is to foster exchanges between contracting states in the field
of education and training and ensure that payments for support of education, training
or  maintenance  are  not  curtailed  by  taxation  in  the  state  where  the  education  and
training take place.

14  Discussion  Draft  on  “Tax  Treaty  Treatment  of  Termination  Payments”  issued  on  25  June  2013  by  the
OECD Committee on Fiscal Affairs

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Although not in the OECD Model Convention a number of bilateral tax treaties include
a  provision  in  Article  20  that  exempts  income  derived  by  visiting  academics  from
taxation  in  the  host  state  where  they  are  working  (to  teach  or  engage  in  scientific
research)  insofar  as  their  income  arises  from  their  teaching  or  research  in  the  host
state.  Exemption  will  generally  only  be  given  for  a  maximum  of  2  years  and  will  be
dependent on the individual remaining resident in the residence state.

4.12  Article 21: Other Income
This Article may have application to cross border workers. For example, a source state
may  seek  to  impose  tax  on  a  termination  payment  by  treating  it  as  employment
income  within  Article  15  whereas  the  state  of  residence  may  seek  exclusive  taxing
rights on the basis that it is “other income”, particularly if it falls outside that country’s
expectation  of  what  a  ‘normal’  termination  payment  would  be  under  that  country’s
labour  laws.  As  noted  above  in  the  comments  on  Article  18  it  is  likely  that  the
Commentary will make it clear that Article 15 is applicable.

4.13  Article 23A: Exemption method of relief for double taxation
Where  income  has  been  taxed  in  the  country  of  source,  the  country  of  residence  will
need to relieve the taxpayer from double taxation. There are two ways to do this.
§ Some  tax  treaties  may  require  the  state  of  residence  to  exempt  from  tax  income
which ‘may be taxed’ in the state of source (the source state). What this means is
that even if no tax is imposed in the source state the state of residence is required
to exempt the income.

§ Alternatively,  the  residence  state  may  give  relief  by  “exemption  through
progression” whereby the income taxed in the work state is not taxed by the state
of residence but is taken into account in determining the rate of tax that is applied
to  income  that  is  taxable  in  the  state  of  residence. In  other  words, the  exempted
income  is  included  in  the  taxpayer’s  gross  income  when  determining  the  overall
effective tax rate, but excluded when that rate is applied to non-exempt income.

Some bilateral tax treaties specify that if the income ‘has been taxed’ or ‘is taxed’ in
the  source  state,  it  will  be  exempt  from  taxation  in  the  state  of  residence.  There  are
countries,  for  example  Germany,  that  have  a  domestic  law  provision  whereby  the
exemption method will only apply if the income is actually taxed in the source state.

4.14  Article 23B: Credit method of relief for double taxation
Other tax treaties will include all income into the tax base in the individual’s country of
residence  and  that  country  will  then  allow,  as  a  deduction  from  its  own  tax  on  the
income  of  its  resident  individual,  an  amount  equal  to  the  tax  paid  in  the  other  state
(the  source  state)  on  the  income  derived  from  work  in  that  state.  This  would  mean
that the country of residence may continue to receive tax if the country of source has
a lower effective tax rate.

4.15  Article 24: Non-Discrimination
In  broad  terms  the  application  of  this  Article  to  cross  border  workers  and  posted
workers should prevent nationals and stateless persons resident in one Member State
from  being  subjected  to  any  taxation  (or  any  requirements  connected  therewith)
which  is  other  or  more  burdensome  than  that  imposed  on  nationals  of  the  other
Member State in the same circumstances.

However,  the  European  Community  Treaty  contains  a  general  prohibition  of
discrimination on grounds of nationality within the Community.

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4.16  Article 25: Mutual Agreement
This Article would allow an individual or their employer to invoke a review procedure
by the tax authorities of the respective states where it is considered that the taxation
is not in accordance with the provisions of the particular bilateral tax treaty.

Where the competent  authorities  of the states concerned are not able to resolve the
issue  within  two  years  from  the  case  being  presented  to  the  competent  authority  of
the other state, unresolved issues may be submitted to arbitration.

4.17  Article 26: Exchange of information
This Article allows tax authorities of the two countries to tackle tax avoidance by the
exchange of information between them. It broadly provides for:
§ Exchange of information;
§ Recovery of outstanding taxes; and
§ Mutual agreement procedures.

4.18  Article 30: Entry into force
The effect of this Article is to distinguish between the date when the treaty enters into
force and the date from which it takes effect.

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5   Member  State  Country  Surveys  of  how  Bilateral
Tax Treaties are applied in practice

Most of the Member States have entered into bilateral tax treaties and double taxation
should,  at  least  in  theory,  be  avoided  by  the  application  of  the  particular  tax  treaty.
However,  double  taxation  may  occur  where  Member  States  apply  a  different
interpretation to a particular treaty Article or where tax is imposed which may be too
difficult to recover or obtain a credit for, if the procedures for obtaining relief are too
onerous.

We have obtained input from the Ernst & Young (“EY”) offices in the various states to
determine the extent to which there may be incidences of double taxation as a result
of the above.

Countries  were  asked  to  complete  a  questionnaire  to  review  their  domestic  position
and identify issues in the day to day interpretation. This section summarises the key
findings.

Before commenting on the input it is important to note that bilateral tax treaties are
international  agreements  entered 
into  between  states.  The  conclusion  and
interpretation of such treaties is governed by public international law and specifically
by the Vienna Convention on the Law of Treaties of 23 May 1969.15

As  the  Commentary  on  the  OECD  Model  is  not  part  of  a  bilateral  tax  treaty  it  is  not
binding  upon  courts  in  the  respective  states  and  so  it  can  only  act  as  an  aid  to
interpretation of a bilateral tax treaty. However, the introduction to the Commentary
indicates  that  “Member  countries,  when  concluding  or  revising  bilateral  conventions,
should conform to the Model Convention as interpreted by the Commentaries thereon
and  having  regard  to  the  reservations  contained  therein  and  their  tax  authorities
should follow these Commentaries, as modified from time to time and subject to their
observations thereon, when applying and interpreting the provisions of their bilateral
tax conventions that are based on the Model Convention”.

5.1  Which version of the Commentary is applied?
The OECD Model and its Commentary are not legally binding, in contrast to the Double
Taxation Treaties entered by Member States which are legally binding. When Member
States apply a different interpretation to the application of a tax treaty this can result
in  double  taxation  which  may  only  be  resolved  by  applying  the  Mutual  Agreement
procedure.

Amendments  are  made  to  the  Commentary  and  according  to  the  OECD  these
amendments  have  a  retrospective  as  well  as  a  prospective  effect  i.e.,  a  dynamic
interpretation. However, some states may take the position that when basing their tax
treaty on the OECD Model, the Commentary in force at that time is relevant.

There  are  seven  Member  States  (Bulgaria, Croatia, Cyprus,  Latvia, Lithuania,
Malta  and Romania)  that  are  not  members  of  the  OECD  but  the  influence  of  the
OECD Model and its Commentary extends to these countries.

We  asked  the  EY  offices  in  each  Member  State  whether  the  interpretation  of  a  tax
treaty  by  their  Member  State  takes  account  of  any  amendments  to  the  Commentary

15 The Vienna Convention on the Law of Treaties entered into force on 27 January 1980

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retrospectively  (for  example,  by  interpreting  a  tax  treaty  by  reference  to  the  2010
Commentary) or, whether the interpretation is based on the Commentary that applied
when the tax treaty was completed between the two Member States.

All  states, other than Austria  and Malta  confirmed that  the interpretation  would  be
based on the most recent Commentary, subject to the treaty Article being consistent
with the Article in the OECD Model when the treaty was signed. In Austria there is no
automatic interpretation  of  a tax treaty based on  the  Commentary  and Malta  would
expect  the  Courts  to  refer  to  the  Commentary  in  place  at  the  time  when  the  treaty
was signed.

5.2  Residence
As  outlined  in  Section  4,  Article  1  of  the  OECD  Model  provides  that  a  tax  treaty  will
generally  only  apply  to  persons  who  are  residents  of  one  or  both  of  the  contracting
states.

Where  dual  residence  arises  under  domestic  tax  law  and  the  tiebreaker  rules  in  the
relevant  treaty  do  not  resolve  the  conflicting  claims,  Article  4(2)  (d)  of  the  OECD
Model provides that the tax authorities of the two states “shall settle the question by
mutual agreement”. This mutual agreement procedure can typically take a number of
years and leaves the taxpayer exposed to double taxation until agreement is reached.

The EY offices in the Member States were asked whether there are any Member States
with  which  their  state  has  a  tax  treaty  where  specific  difficulties  arise  in  the
interpretation  of  the  Article  4(2)  “tiebreaker”  test  referred  to  in  Appendix  A.  For
example, the states concerned may interpret “centre of vital interests” differently.

Based  on  the  responses  it  is  apparent  that  most  states  will  generally  regard  the
individual’s  centre  of  vital  interests  as  being  in  the  state  in  which  any  spouse  and
minor  dependents  reside.  However,  if  the  individual  has  no  children  or  is  single  it  is
apparent that the centre of vital interests is more likely to be in the state in which the
employer is resident.

None of the EY offices are aware of any specific difficulties arising from the application
of  Article  4(2)  and  which  have  resulted  in  either  double  taxation  or  double  non-
taxation occurring due to different views being taken. In our experience an individual’s
“centre of vital interests” is often undecided or unclear, in which case most tiebreaker
tests will be determined by where the worker has his habitual abode. Even if that test
is inconclusive the treaty residence state will typically be the state of which the worker
is a national. As such, we would not expect many cases that would need to be decided
under the mutual  agreement  procedure  and this  is borne out  by the  responses  from
the EY offices in the Member States.

The  EY  office  in France has highlighted the fact that the France/Ireland tax treaty
does  not  include  a  “tiebreaker”  clause  as  in  Article  4(2)  and  this  may  result  in  a
potential conflict of the state of residency.

However, the EY  office in Bulgaria has highlighted the fact that its tax treaties with
Italy,  Sweden  and  Belgium,  among  others,  limit  the  ability  of  a non-Bulgarian
citizen to Bulgarian tax residency. They have indicated that this feature seems to be
prevalent in treaties concluded in the eighties and nineties and could  be viewed as a
discriminatory obstacle to the movement of workers.

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5.3  Self-Employed Individuals
In  cases  where  a  self-employed  individual  is  working  in  a  state  (the  source  state)
other than the state in which he is resident, the extent to which taxation may arise in
the source state will be dictated by whether a tax treaty applies and the application of
it to self-employed individuals.

Before 2000, income from professional services and other activities of an independent
nature  were  dealt  with  under  a  separate  Article  (Article  14)  but  the  effect  of  the
deletion of Article 14 from the OECD Model is that such activities should be regarded
as  being  within  the  business  profits  Article  (Article  7)  where  the  bilateral  tax  treaty
has been entered into since then. However, EY Bulgaria and Portugal have advised
that  their  states  continue  to  enter  into  bilateral  tax  treaties  which  include  Article  14
which, in some cases will allow the source state to impose tax based on the physical
presence of the self-employed worker and regardless of whether there is a permanent
establishment  in  the  source  state.  This  will  also  apply  to  older  bilateral  tax  treaties
which will typically include Article 14.

As mentioned in Section 4, a self-employed individual will generally have to undertake
their activities in another Member State through a fixed place of business to trigger a
tax  liability  under  Article  7.  The  EY  offices  have  confirmed  that  if  their  state  is  the
“source  state”  a  non-resident  should  only  be  taxable  if  the  worker  has  a  permanent
establishment  in  that  state  and  the  income  is  attributable  to  that  permanent
establishment.

In  terms  of  income  tax  withholding  on  self-employment  income  a  number  of  the  EY
offices  indicated that  this  will  apply. Bulgaria  advised  that  the  payer  is  required  to
apply  quarterly  tax  withholding  (10%)  and  reporting. Hungary  advised  that  if  the
individual  does  not  hold  an  entrepreneur’s  licence  there  is  generally  a  withholding
requirement. Malta advised that where a person pays a non-resident person there is
in most cases a requirement to deduct tax at 25% unless the Maltese tax authorities
authorise  a  lower  amount. Portugal  imposes  a  25%  withholding  which  can  be
reduced  to  zero  if  proof  of  exemption  under  a  bilateral  tax  treaty  is  provided.  In
Finland  the  payer  would  generally  be  required  to  withhold  income  tax  unless  the
individual  is  operating  under  a  trade  name  registered  with  the  Finnish  Prepayment
Register.  Spanish  withholding  tax  at  a  rate  of  24.75%  would  apply  to  payments  to
non-residents  unless  not  related  to  a  permanent  establishment  in Spain  and  a
certificate of tax residence is provided under a bilateral tax treaty with Spain.

The  other  country  responses  indicated  that  provided  the  worker  is  genuinely  self-
employed (and not deemed to be an employee or covered by the hiring out of labour
concept)  there  is  no  withholding  requirement.  However,  where  it  is  subsequently
established  that  the  worker  should  be  regarded  as  an  employee  of  the  company  for
which  the  worker  is  providing  services,  the  company  could  be  liable  to  account  for
arrears of income tax as well as interest and penalties.

5.4  Employed Individuals

5.4.1  Article 15(1)

As noted in Section 4, the source state should, unless Article 15(2) exemption apples,
only  tax  remuneration  derived  from  work  attributable  to  the  employment  duties
undertaken  in  that  state.  The  EY  offices  were  asked  whether  their  state  has  specific
rules  to  determine  the  proportion  of  employment  income,  for  example  based  on
workdays  divided  by  total  workdays.  The  general  response  was  that  there  is  no

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

specific  basis  for  determining  the  proportion  of  employment  income  and  most  states
will base this on workdays divided by total workdays.

Sweden would count part of a day as a full day and this may result in double taxation
if the other state is not in agreement.

Germany  does  have  a  rule  whereby  the  allocation  should  be  based  on  workdays
divided by total workdays contractually agreed (ignoring vacation days) but some tax
offices accept total actual workdays.

Slovakia  will  generally  allocate  assignment  related  allowances  and  regard  as  fully
taxable.

Slovenia  will  generally  determine  the  allocation  by  reference  to  actual  days  of
physical presence in Slovenia divided by total calendar days in the month as for 183
day purposes.

Spain  does  the  allocation  based  on  total  calendar  days  in Spain  divided  by  total
calendar days.

5.4.2  Article 15(2) – counting the 183 days
In  terms  of  counting  the  183  days  referred  to  in  Article  15(2),  with  the  exception  of
Cyprus, Estonia, Hungary, Poland  and Slovakia,  all  EY  offices  in  the  Member
States confirmed that any part of a day spent in their state and for whatever purpose
should be included. This basis corresponds to that recommended in the Commentary.

Cyprus will generally not count the day of departure, Estonia will generally not count
days spent on holiday once the work has ended, Hungary and Poland will not count
days in transit between two countries and Poland will generally not count the day of
arrival. Poland indicated that double taxation might arise as a result of other Member
States (for example Germany) following the OECD Commentary for counting days.

As  outlined  in  the  comments  regarding  Article  15  at  section  4.8.2,  a  tax  treaty  may
refer  to  the  183  days  as  measured  in  “any  12  month  period”,  in  the  “tax  year
concerned”  or  “in  the  calendar  year”.  Appendix  2  provides  a  summary  of  the
measurement period for each bilateral tax treaty.

5.4.3  Article 15(2) – determining the ‘employer’

As  noted  in  Section  4,  the  Commentary  provides  detailed  guidance  on  the  criteria  to
be considered in determining the “employer” for the purposes of Article 15(2). Based
on the responses from the EY offices  in the  Member States it is evident that there is
not a uniform interpretation of “employer”.

Austria, Cyprus, Estonia, Finland, France, Malta  and Sweden  still  interpret  the
“legal employer” (i.e. the legal entity with whom the employment contract is formally
entered into) as the “employer”.

Other Member States will generally apply the detailed guidance in the Commentary to
determine the “employer”. However, based on the responses it is possible that states
could reach a different conclusion as a result of placing a different emphasis to some
of the criteria set out in the Commentary. For example, some states (for example the
Netherlands)  may  require  a  recharge  of  costs  from  the  legal  employer.  We  would
expect that problems resulting from this aspect should not be too difficult to resolve.

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Where  there  may  be  problematical  issues  of  double  taxation  is  in  the  context  of
branches.  A  branch  is  a  legally  dependent  segment  of  an  enterprise.  It  has,  from  an
economic and commercial point of view, a certain degree of independence in carrying
on  the  business  of  the  enterprise  and  its  activities.16  As  a  branch  is  not  a  separate
legal entity it should not be regarded as an “employer”. From the context of Article 15
(2)  (a)  to  (c)  it  may  be  derived  that  neither  a  permanent  establishment  nor  a  fixed
place of business may be an employer.17 In a German Court case the Court noted that
although  the  branch  of  a  US  Company  was  considered  to  be  the  employer  for  the
purposes of German wage tax withholding the US Company should be regarded as the
employer for Article 15 purposes.18

Based on the responses it is evident that problems may arise where an employee who
is resident in a state and is employed by a branch in that state spends time working in
another  state  in  which  the  Company  is  resident.  Most  states  should  not  regard  the
branch  as  an  “employer”  hence  the  source  state  should  be  able  to  impose  tax  under
Article  15(1)  on  the  basis  that  the  Company  in  that  state  is  the  employer.  However,
Cyprus, Greece  and Switzerland  would  regard  a  branch  as  a  separate  legal  entity
and  identifiable  as  an  employer  and  the Czech  Republic, Estonia, France, Latvia,
Poland, Slovenia and Spain would generally regard the branch as the “employer” if
the employee has a contract of employment with the branch.

The  text  of  Article  15(2)  (c)  points  to  “the”  employer,  whereas  Article  15(2)  (b)
mentions “an” employer. This means that for the  purposes  of Article 15(2) (c), there
exists  only  one  employer  who  maintains  the  permanent  establishment  in  the source
State, whereas more than one employer may be available under Article 15(2) (b).19

As regards incidences of double non taxation, the Netherlands has advised that if an
assignee is working for less than 60 days during a 12 month period (regardless of the
period specified in Article 15(2) of the tax treaty) the Netherlands would regard the
“employer” as the legal employer but if this results in double taxation/non taxation the
Ministry  of  Finance  will  determine  whether  consultation  with  the  other  state  is
required.

5.4.4  Article 15(3)
In the context of transportation workers the EY offices were asked whether there was
any  evidence  of  pilots  employed  by  a  company  in  state  A  (where  no  work  is
undertaken),  resident  in  state  B  which  does  not  tax  foreign  source  income  and  who
work  for  a  an  airline  which  has  its  effective  place  of  management  in  state  C  which
applies either zero or very little tax. Based on the responses there is a low incidence of
these cases.

Malta has no experience of a case involving pilots but has indicated that this situation
does apply to crew members of cruise ships.

A more detailed discussion of this specific issue takes place in Section 10 below.

16 Klaus Vogel on Double Taxation Conventions, third edition, page 297, 52
17 Klaus Vogel on Double Taxation Conventions, third edition, page 899, 27b.
18 Case IV 212/95 decision of Finanzgericht Berlin, 16 March 1999
19 Frank Potgens: Income from International Private Employment, page 767

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5.5  Students, Business Apprentices and Academics
As noted in Section 4, tax treaties may include a provision within Article 20 to exempt
the remuneration of professors or teachers from tax in the Host Country provided that
they  remain  resident  in  the  other  state.  However,  such  exemption  is  limited  to  2
years. In the absence of such exemption the remuneration of professors and teachers
would be taxable under the terms of Article 15. The OECD Commentary on Article 15
(paragraph  11),  notes  that  no  special  provision  has  been  made  regarding
remuneration  derived  by  visiting  professors  and  that  many  treaties  contain  rules  of
some  kind  or  other  concerning  such  cases,  the  main  purpose  of  which  is  to  facilitate
cultural relations by providing for a limited tax exemption.

In terms of business apprentices, there is a need to distinguish between a payment for
services  and  a  payment  for  their  maintenance  or  training.  What  this  means  is  that
business apprentices who spend time in the Host Country will be subject to the rules
of Article 15 for determining whether or not their remuneration is taxable in the Host
Country  whereas  payments  purely  for  their  maintenance  or  training  will  be  exempt
from tax in the Host Country.

This is covered in more detail in Section 11.

5.6  Double Taxation Relief

5.6.1  Exemption Method
The  EY  offices  were  asked  whether  their  state  has  a  “subject  to  tax”  requirement
where  their  state  is  required under a  bilateral tax  treaty  to  exempt  income  from tax
which  ‘may  be  taxed’  in  the  Host  Country. Germany, Latvia, Lithuania  and
Romania require  income  to  be  taxed  in  the  other  state.  The Netherlands  indicated
that the practice of local tax authorities is to ask for proof of income taxed in the other
state. However, based on our analysis of the bilateral treaties it is apparent that most
of the recent tax treaties will have such a requirement.

Where an employee is resident in a state applying the exemption method is subject to
income  tax  withholding  in  the  Host  Country  it  is  possible  and  indeed  a  practical
approach to apply the exemption by reducing the withholding by the employer in the
resident state. However, Austria, Lithuania, Slovenia and Spain advised that this is
either  not  possible  or  not  a  practical  approach.  Where  the  residence  state  does  not
permit  a  reduced  income  tax  withholding  this  will  result  in  adverse  cash-flow  from
double withholding if there is also a withholding requirement in the source state. This
will only be resolved when tax returns are filed and refunds made.

Ultimately, the application of the exemption method by the state of residence will, in
most  cases,  require  the  individual  to  provide  proof  of  income  taxed  in  the  source
state. Typically this will be in the form of all or any of the following documentation:
§ copy of tax return;
tax assessment;
§
§ evidence of income taxed; and
§

the tax withheld.

Even where there is no requirement to provide evidence with the tax return submitted
to the tax authorities in the residence state, a refund will often trigger an audit and at
this  stage  evidence  of  tax  paid  in  the  Host  Country  will  be  required.  Therefore
significant  delays  can  occur  in  repayments  being  made,  particularly  in Romania.  In
Austria  and Portugal  it  is  common  for  the  tax  authorities  to  dispute  the  type  of
documentation as it needs to be in a prescribed format.

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Where a worker is resident in a Member State and is working in an another state (the
Host Country) there will generally be an income tax withholding on the full amount of
remuneration  by  the  Host  Country  unless  the  worker  is  exempt  under  a  bilateral  tax
treaty.  A  number  of  Member  States  confirmed  that  it  is  possible  to  limit  the
withholding  to  the  proportion  of  remuneration  attributable  to  work  in  the  Host
Country.

However, Czech  Republic, Estonia, Greece, Latvia, Lithuania, Portugal,
Romania, Slovakia  and Slovenia  advised  that  such  an  approach  is  either  not
possible or too difficult. As in the case of the residence state referred to above there
may be “double withholding” and the resultant cash flow problem can only be resolved
by filing a tax return in the source country and awaiting a refund.

Difficulties also result from the requirement in many cases for a resident of a Member
State to file a tax return in the Host Country to claim a refund of tax. There will often
be  a  need  to  provide  a  tax  residence  certificate  (this  may  need  to  be  in  a  specified
format/language)  and  in  some  states  there  may  be  a  need  to  provide  calendar
reports,  travel  expense  reports  and  copies  of  travel  tickets.  There  can  be  lengthy
delays  in  obtaining  refunds  of  which  examples  are Austria, Cyprus, Portugal  and
Spain. In Germany the wage tax withholding should represent the final liability of a
non-resident but where this has not been done correctly it is possible for a worker to
elect to be a deemed resident under domestic tax rules and file a tax return to claim a
refund.

5.6.2  Credit Method
In broad terms a claim in the residence state for a credit in respect of tax suffered in
the source state has the same implications as for the exemption method, in terms of
providing evidence of tax paid.

As  for  the  exemption  method,  there  can  be  significant  cash  flow  problems  where  a
double withholding is required.

For example, Greece and Malta, as the state of residence, will not allow a reduction
of  income  tax  withholding  to  take  account  of  tax  being  withheld  in  the  source  state
and  although  it  is  possible  in Slovenia  the  practical  approach  is  to  suffer  the  dual
withholding  and  for  the  employee  to  claim  a  repayment  by  claiming  a  foreign  tax
credit in his tax return.
The Czech  Republic  and Lithuania  as  source  states  will  require  a  full  income  tax
withholding and it will be necessary to file a tax return and claim a refund.

The  table  in  Appendix  3  provides  a  summary  of  the  states  that  apply  the  exemption
and credit methods for the purpose of providing double taxation relief.

5.6.3  Requirements to claim Double Tax Relief
The claiming of Double Tax Relief in the Home Country tax return will typically require
proof that income has been taxed (in the case of an Exemption system), or that tax
has  been  paid  (in  the  case  of  a  Credit  system).  However,  as  noted  at  section  12,
Member States require different types of information.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

6 

Problematic categories of income

There  are  certain  types  of  cross-border  employment  that  can  give  rise  to  specific
categories  of  income  that  may  not  always  be  addressed  in  individual  country
legislations.  This  may  then  represent  an  additional  category  of  tax  uncertainty,  and
potentially higher taxation levels, which would act as a barrier to labour mobility.

These items included the following.

6.1  Assignment allowances
Payment of a specific allowance referenced to an assignment may mean that the Host
Country  would  consider  that  the  whole  amount  would  be  sourced  to  that  country,
rather than being allocated to that country on a work-days basis.

The provision of housing to someone on assignment could fall into this category. If the
housing is located in the Host Country, then some countries would argue that 100% of
the  amount  payable  is  sourced  and  allocable  to  that  country,  as  the  house  remains
available to the assignee throughout their working period, regardless of whether they
are on business travel or not.

Payment of a top-up to salary in lieu of additional housing cost would remain treated
as salary, so may be subject to pro-rata allocation for a non-resident.

There are differences between
§ whether the top-up is general or specific for housing;
§ whether  it  is  then  described  as  a  housing  allowance  (including  whether  it  is

precisely the amount due, or partial or approximate);
§ whether the housing is paid directly by the employer.

In general, the more similar the payment is to salary, the more likely the sourcing is
to  be  pro-rated  in  the  way  salary  would,  and  the  more  an  amount  is  dedicated  to  a
specific item that is clearly item-specific in country, the more likely the sourcing could
be argued to be 100% in-country, even if the work days fraction were different.

Some countries such as Romania and Bulgaria allow ‘per diem’ payments to be tax
exempt,  and  so  re-categorisation  of  an  allowance  as  a  ‘per  diem’  might  at  first  sight
enable  it  to  be  exempted.  This  appears  to  be  an  issue  for  Member  States  to
determine.  There  is  clearly  a  difference  between  a  simplified  system  to  cover
reimbursement of incidental expenses for a short business trip, and the payment of an
additional  supplement  to  salary  for  the  duration  of  an  assignment.  Normally,  the
differentiation  point  would  be  that  for  an  Assignment  an  individual  would  move  his
normal  regular  place  of  work,  and  potentially  relocate  his  normal  place  of  living,
whereas for a Business Trip he does not. However, individual Member States will have
their own practical rules as to what they consider acceptable in terms of duration of an
Assignment  and  a  Business  Trip,  but  it  is  helpful  to  ensure  that  this  is  published
openly, to ensure consistent treatment across tax offices in the country.

6.2  Equity awards
Many  equity  awards,  including  Stock  Option  plans,  restricted  stock  grants  and  other
types  of  employee  deferred  income,  are  often  paid  over  a  multi-year  basis.  For  a
traditional  stock  option  plan,  the  periods  between  grant  of  an  option,  its  vesting,
exercise of the option, and final sale of shares will usually straddle several tax years.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Therefore if an employee moves country during that period, they may be exposed to
double  taxation  where  one  country  taxes  on  one  of  those  dates.  The  Commentary  to
the  OECD  Model  Convention  now  includes  a  provision  that  the  sourcing  of  equity
income should be allocable on a work day basis typically between the period of grant
and vest of an equity option (paragraph 12 of Article 15 of the Commentary), although
some countries may prefer the  period between grant  and exercise. Therefore  conflict
between countries that always sourced on that basis and those that previously sought
to  allocate  across  the  period  between  grant  and  exercise  are  less  common  than  they
were.

However, there are still differences between countries that might treat equity income
as  salary  or  employment  income  (most),  and  those  that  treat  gains  on  equity  as
capital gains, and hence preferentially treated.

6.3  Employer Pension contributions
Most  employer  retirement  arrangements  are  designed  around  the  tax  legislation
applicable in the Home Country. Where an employee works in another Member State
with  a  different  type  of  pension  system,  contributions  that  are  originally  designed  to
qualify  for  the  tax  exemption  in  the  Home  Country  may  not  qualify  for  exemption  in
the Host Country.

However, for certain types of plans (mainly ‘final salary’ or ‘defined benefit’ plans), the
taxable income attributable to that specific employee in that tax year may be difficult
to quantify, and may not be identified separately to report for income tax purposes in
the Host Country.

Final  salary  pension  schemes  are  becoming  less  and  less  popular  for  employers  to
operate,  as 
financial  commitment  becomes  onerous  and
unpredictable, so many companies that have previously operated final salary schemes
have switched to offering their employees contributions to a money purchase scheme.

the  open-ended 

This  amount  so  contributed  can  more  easily  be  quantified,  and  related  back  to  the
individual employee. However, where an individual is in receipt of a contribution made
to a scheme in his Home Country, that is tax effective under the rules of that country,
it is still difficult to ensure that corresponding relief is available in the Home Country.

Example:

Jane  is  on  assignment  from  the  UK  to  the  Czech  Republic.  She  and  her  UK
employer each make a pension contribution of 5% of her £30,000 salary to the UK
pension scheme.

The  £1,500  employer  contribution  is  tax  free  in  the  UK,  and  the  employee
contribution would be tax deductible. Under Czech rules, the employer contribution
would be taxable as a benefit in kind, and the employee contribution exceeds the
maximum Kc30, 000 that can be made into a pension scheme under local income
tax rules, so the excess is taxable to Jane.

When  she  returns  to  the  UK,  and  later  receives  the  pension  on  retirement,  the
income  received  will  be  taxed  under  UK  rules,  with  no  credit  received  for  the
additional Czech tax paid on the contributions.

If  she  is  assigned  on  a  ‘tax  equalised’  basis,  her  employer  will  have  borne  that
cost. If not, she will have suffered the cost herself.

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6.4  Social security contributions
Under EU social security rules dating back to 1958 (currently applied by Regulation No
883/2004  from  1  May  2010)  there  is  a  mechanism  for  the  coordination,  but  not  the
harmonisation of social security systems. The principle is that an individual should only
be subject to the legislation of a single member state.

Social  security  contributions  in  most  countries  are  split  into  two  parts,  those  paid  by
the  employer  and  those  borne  by  the  employee.  Typically,  most  countries  exclude
employer  contributions  from  the  tax  base  (with  the  current  exception  of  the  Czech
Republic), and some will permit a deduction of the employee contribution from the tax
base (for example, Belgium and France), while others will not (for example, Germany
and the UK).

Typically this interaction of overall burden will be considered in the setting of overall
tax  and  social  security  rates  in  any  given  state,  and  a  higher  social  security
contribution may be tolerated because the contribution is tax deductible, making the
net real cost lower.

Where social contributions are paid in one country (where the cross-border worker has
an A1 issued under reg. 883/2004), but tax is paid in another, this integration will not
always  be  as  intended,  and  so  the  overall  combined  tax  and  social  security  burden
would be higher than expected, (for example, workers remaining subject to Belgian or
French social security but paying UK income tax), or in some cases lower.

The Netherlands publishes an officially recognised table identifying which payments in
which country qualify for corresponding treatment to the local contributions base.

As  noted  in  section  3.3,  Member  States  have  a  right  to  apply  their  own  tax  system
provided  that  it  complies  with  Community  law.  Whilst  it  may  be  considered  desirable
from  the  standpoint  of  having  a  simpler  system,  we  think  that  aligning  the  tax  rules
with the social security rules would prove impractical.

If  aligned  with  social  security  contributions  the  tax  might  not  be  paid  to  the  Member
State in which an individual is resident and there would be a philosophical argument
that  the  Member  State  in  which  the  individual  is  resident  should  have  a  share  of  tax
revenue  to  pay  for  infrastructure  and  other  governmental  costs  paid  for  from  tax
revenues. There would be ‘winners and losers’ and the likelihood of artificial efforts to
pay tax and contributions to the Member State in which the combined bill is lower.

It  would  also  involve  removing  Member  States  own  sovereignty  in  tax  matters  which
would be an extremely difficult barrier to overcome. Member States would likely take
the view that the distributive effect of a bilateral tax treaty ensures that the Member
States receive an appropriate share of tax revenues and so there is no justification for
alignment.

6.5  Recommendations
Member  States  should  continue  to look  out for  specific  categories  of income that  are
not  addressed  in  their  legislation  and  where  necessary  ensure  that  their  internal
guidance is up to date to identify such categories of income to ensure that a consistent
approach is applied. In particular where there is OECD Commentary on how an income
item should be taxed that should be reflected in their internal guidance.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

7  Making bilateral tax agreements more effective

Sections  4  and  5  identified  that  the  existing  framework  of  bilateral  tax  agreements
appeared  at  first  review  to  cover  the  majority  of  possible  issues;  however,  the
interpretations between countries were not always consistent, despite the widespread
use of the OECD Model Treaty commentary as a tool for interpretation.

Increased tax cost, or uncertainty of tax treatment, thus represents a major barrier to
the  free  movement  of  labour.  This  applies  because  of  the  potential  for  higher  taxes
that the employee may suffer than in his Home Country, but also additionally because
of  the  potential  costs  of  compliance,  and  the  uncertainty  as  to  whether  e.g.  tax
refunds from one country would be paid to a resident in the other country.

Thus,  a  better  understanding  of  bilateral  tax  agreements,  plus  a  simpler  and  clearer
way  for  standard  taxpayers  without  employer-funded  tax  representation  to  take
advantage  of  the  provisions  of  these  agreements,  will  reduce  that  barrier  to  labour
mobility.

Additionally, taxpayers with limited  experience in dealing with  the authorities in non-
standard situations are often concerned that asking for the treatment they are entitled
to may in some way generate an investigation. Whilst they may not have anything to
hide,  the  concerns  of  the  time  this  might  take,  and  what  else  might  be  discovered,
acts  as  a  further  barrier.  This  section  identifies  the  key  areas  and  provides  more
detailed  analysis  of  the  issues.  Recommendations  to  address  these  concerns  are
provided later in Section 7.6.

The key areas requiring increased clarity are as follows:

7.1  Residence and Sourcing
In  many  cases,  two  countries  both  believe  that  the  taxpayer  is  a  resident  of  their
territory,  typically  because  their  prima  facie  residency  test  is  based  on  differing  or
inconsistent criteria.

For example, Country A deems a National to be tax resident because he lived there
all  of  his  life  prior  to  beginning  working  abroad.  Country  B  where  he  now  works
deems  him  a  resident  as  he  has  a  home  rented  for  a  two  year  assignment  period
there  where  his  family  lives  while  he  works  there.  However,  Country  A  does  not
view that he has severed his ties with the country enough to cease being resident.

Where  income  is  taxed  first  in  the  country  of  source,  and  then  in  the  country  of
residence (with double tax relief available), this may not impact the final position too
much. In the simplest of cases where someone is resident of Country A and earns all
of  their  income  as  employment  income  in  Country  B,  Country  B  will  tax  all  of  the
employment  income  and  Country  A  will  either  then  exempt  it  from  taxation  if  the
treaty provides for double tax relief by way of exemption, or give a credit for the tax
paid if there is a credit treaty, and the total tax liability may be similar.
This  position  can  often  continue  for  several  years,  as  there  is  no  inherent  conflict  in
the tax filing position in the tax returns. Both countries see a taxpayer that looks like a
resident, although from Country B’s perspective it’s actually a non-resident with 100%
of income sourced to that country.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

However, when the taxpayer starts to spend some time in Country C, even when it is
not enough in the way of presence or substance of duties to trouble the tax authorities
in Country C, the situation becomes more complex.
Where  Country  C  will  not  tax  the  income,  then  that  income  should  be  taxed  in  the
country  of  residence.  In  the  above  example  this  should  be  Country  A.  However,
Country B may also be interested in that income, as it views him as a resident there,
or  if  he  is  on  the  payroll  in  Country  B,  and  so  the  Triangulation  position  starts  to
become an issue.
Every country has its own test of Residence, and these are based on different criteria.
In  cases  of  apparent  residence  in  both  countries,  each  Double  Tax  Agreement  has  a
‘tie break’ article to resolve the conflicts.
To  enable  a  taxpayer  to  take  advantage  of  a  Treaty,  it  is  often  common  practice  to
require the taxpayer to obtain a Certificate of Tax Residence in the Home Country, to
enable treaty benefits to be obtained in the host country.
This can be problematic for the following reasons:
§ A country may decline to issue certification for a specific taxpayer especially whilst

the facts or future plans are unclear;

§ Some countries (France and the UK are examples) will only issue certification once
the  tax  year  is  complete  and  the  tax  return  filed,  on  the  basis  that  they  will  not
know until the end of the year if the person is resident or not.

This  can  lead  to  taxpayers  being  subjected  to  withholding  at  resident  rates  in  both
countries during the year, and needing to request a refund at the year end, which may
take  time  to  obtain,  or  require  time  consuming  representation  to  negotiate  with  the
tax authority in certain Member States.

RECOMMENDATIONS:

§ Simpler  and  timelier  certification  of  residence  in  the  home  Member  State  will
facilitate  clearer  correction  of  the  withholding  position  in  the  host  Member  State.
There  would  be  a  need  for  Member  States  to  establish  a  common  approach  for
providing  a  standard  type  of  certification  of  residence  and  the  time  limit  for  this.
Further details are included in Sections 12 and 13.

§ A  Certification  of  Residence  is  often  required  to  enable  payroll  to  be  operated
correctly in the Host Country. As in many cases Host Country payrolls are operated
monthly  (where  an  inbound  employee  is  required  to  be  taxed  through  payroll),
therefore in an ideal world, that Certification should be issued within the first month
of working to ensure that double withholding is not required.

7.2  Employment or self-employment

7.2.1  Differences  between  being  employed  and  self-employed  in  a  cross-
border working situation
In most treaty situations, the initial point of taxation is in the country of source of that
category of income.

For employment income, the country of source is usually where the work is physically
performed, unless the employee qualifies for treaty relief under the ‘183 day rule’ in
Article 15. The OECD Model Treaty adds the following definition of country of source:
Paragraph  1  establishes  the  general  rule  as  to  the  taxation  of  income  from
employment (other than pensions), namely, that such income is taxable in the State
where  the  employment  is  actually  exercised.  Employment  is  exercised  in  the  place

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

where the employee is physically present when performing the activities for which the
employment income is paid.20

For  self-employed  individuals,  their  income  is  only  taxable  on  a  source  basis  where
they have a fixed base under Article 7 (the Business Profits article of the current OECD
model) or Article 14 (the Independent Personal Services article, which was included in
the OECD Model until the 2000 model)21 (see also Sections 4.6, 4.7 and 5.3).

This  offers  the  possibility  to  shift  the  country  of  taxation  from  one  to  another  if  the
person is self-employed rather than employed.

A  resident  of  Country  A  working  in  Country  B  as  an  employee  would  be  subject  to
tax  in  Country  B  on  that  employment  income,  as  the  source  of  the  income  is
Country B. Country A would then tax their worldwide income, and give Double Tax
Relief for the income taxed in Country B.

However, if the individual were self-employed, that income would only be taxable in
Country A, unless there was a Fixed Base in Country B under Article 7.

Thus  if  the assignee  became  self-employed,  Country B  may  lose  its  ability  to  levy
tax on the individual.

Most  countries  have  internal  rules  to  determine  whether  someone  is  truly  self-
employed  or  not,  which  typically  include  looking  at  form-based  issues  such  as  the
need to register as self-employed and issue invoices.

But  increasingly,  tax  authorities  are  looking  at  the  underlying  substance  of  self-
employed and contractor relationships to review whether the individual:
§ has other customers;
§
§
§ can make a profit or loss from the work undertaken;
§ can decide what work is done and when, where, or how it is done;
§ can  substitute  someone  else  to  do  the  work  that  has  been  taken  on,  or  take  on

is committed to specific working hours;
is paid for holidays and vacations;

helpers at their own expense;

§ has to provide materials or whether those are provided by the company.

A number of tax authorities are starting to look at these arrangements and challenge
more  obvious  abuses.  These  include  the  tax  authorities  in  Denmark,  Germany,
Greece, Lithuania, Netherlands, Poland, Portugal, Romania, Slovakia and the UK

However, there remain certain professions that are regulated, and individuals working
in that profession may be required for professional purposes to be self-employed and
lawyers,  doctors,  notaries,  architects,
not  employed.  This  typically 
accountants and other similar professions.

involves 

20

Commentary on Article 15 concerning the taxation of income from employment, Paragraph 1.

21

Per  the  Commentary  to  the  OECD  model  convention:  [Article  14  was  deleted  from  the  Model  Tax
Convention  on  29  April  2000  on  the  basis  of  the  report  entitled  "Issues  Related  to  Article  14  of  the  OECD
Model Tax Convention" (adopted by the Committee on Fiscal Affairs on 27 January 2000 and reproduced in
Volume  II  at  page  R(16)-1).  That  decision  reflected  the  fact  that  there  were  no  intended  differences
between  the  concepts  of  permanent  establishment,  as  used  in  Article  7,  and  fixed  base,  as  used  in  Article
14,  or  between  how  profits  were  computed  and  tax  was  calculated  according  to  which  of  Article  7  or  14
applied. In addition, it was not always clear which activities fell within Article 14 as opposed to Article 7. The
effect of the deletion of Article 14 is that income derived from professional services or other activities of an
independent character is now dealt with under Article 7 as business profits.]

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Therefore,  it  is  likely  that  existing  tools  to  re-categorise  self-employment  as
employment  would  often  be  sufficient  to  address  this,  however,  this  would  require
coordination in cross-border treatment.

Example:
A self-employed IT consultant in Country A takes a position as a contractor working
for a company based in Country B for 12 months (straddling two tax years).
He works on-site in Country B at the company’s Head Office, and then at a variety
of regional offices as the project implementation progresses.

As he is self-employed, and has no Fixed base, on paper he is likely to be taxable in
Country A only, and he may typically assume that when accepting the contract.

However,  Country  B  could  argue  that  as  he  is  100%  devoted  to  this  one  client
company,  and  working  under  their  direction  and  control,  he  would  then  be  taxable
as an employee, and so taxable in Country B as he is paid from there, and the costs
are borne there.

To avoid double taxation, he would therefore be required to claim Double Tax Relief
in Country A for the taxes paid in Country B.

Under  existing  practice,  he  would  be  personally  required  to  explain  to  the
authorities  in  Country  A  the  basis  on  which  Country  B  taxed  him,  to  obtain  the
Double Tax Relief that he claims.

If  Country  A  denies  the  treaty  claim  on  the  basis  that  Country  B  should  not  have
taxed  him,  he  would  then  be  taxed  twice  on  the  same  income,  and  would  then  be
required  to  take  the  issue  up  with  the  authorities  in  Country  B  –  who  would  likely
retain their original position.

He  would then  need  to  invoke the  Mutual  Agreement  procedure  (Article  25  of  the
OECD Model) by presenting his case to the tax authorities in Country A, to reach a
compromise.

7.2.2  Tax benefits available to the self-employed
In  addition  to  this,  many  countries  may  tax  self-employment  more  generously  than
employment,  for  example  in  allowing  higher  deductions  for  materials  and  expenses
than  would  be  available  to  employees,  or  in  certain  cases  permitting  a  flat  deduction
for ‘costs’, that may apply even if there is little or no actual cost incurred.

For example (this list is not exhaustive, and only provides a snapshot):
§ Bulgaria permits a 25% flat22 deduction against income;
§ The Czech Republic permits different rate deductions depending on the category of
income,  from  30%  for  Rental  property,  through  40%  for  other  business  income,
60% for trade licence income, or 80% for Agriculture, forestry, fishing, farming and
craft 23;

§ Lithuania permits taxpayers to decide whether to deduct actual expenses, or a flat

30% of income24.

22

23

24

Art.29 of the Bulgarian Personal Income Tax Act
 Section 7/7 of Income Taxes Act No.586/1992 Coll – Czech Republic
 Article 18 of the Lithuanian Law on Personal Income Tax

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

As the intention is often to simplify matters for small business,
§ Portugal limits the amount of income that these flat rate deductions can be taken

against;

§ Slovakia caps the amount of the deduction.

Often  these  provisions  are  most  beneficial  where  taxpayers  do  not  have  a  materials
cost  of  items  to  be  sold,  although  some  countries  do  extend  that  to  traders.  For
example  France  allows  a  standard  deduction  whereby  the  individual’s  tax  deductible
costs are an assumed percentage of the income earned. Thus the tax base is a fixed
percentage  of  revenues  rather  than  the  total  revenues  less  deductible  costs.  The
figures are as follows:

Sector

Turnover limit

Standard
deduction

€81,500

71%

Tax base –
percentage of
revenue earned
29%

Sales of
merchandise,
goods, supplies of
food to take away
or eat in,
provision of
accommodation
Other industrial
services, and
those taxed under
commercial
services
Professionals
taxed under non-
commercial
profits

€32,600

50%

50%

€32,600

34%

66%

Example:
Jacques earns €50,000 from the sale of food from his market stall.
His deemed deduction is €35,500 (71% of €50,000)
His tax base is therefore €14,500

The  further  analysis  of  self-employment  is  outside  the  scope  of  this  report,  however
this  section  demonstrates  that  in  certain  countries,  the  additional  question  of
employment  or  self-employment  can  both  complicate  the  treaty  position,  and  lead  to
very different overall tax situations.

The EU Social Security Regulation (Article 12, Regulation (EC) No 883/2004) includes
some provisions where an individual is employed in one country and self-employed in
another.  Where  the  employment  is  performed  in  only  one  state  he  will  be  liable  to
social security in the state where the employment is performed. If the employment is
performed in more than one Member State he will be subject to social security in the
state of residence if at least 25% of his employment activities are undertaken there. If
less than 25% of the employment activities are undertaken in the state of residence,
social security contributions will be payable in the state in which his employer has its
place of business or registered office.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

RECOMMENDATIONS:

§ Countries should adopt a consistent and symmetrical treatment of employment vs.

self-employment in cross-border situations.

§ The  country  where  the  work  is  being  performed  is  likely  to  be  the  best  placed  to
judge  whether  the  arrangement  is  an  employment  or  self-employment  situation
under the rules in that country.

7.3  Treatment of directors and statutory office holders
Countries have different rules for the treatment of the office holders in limited liability
and  joint  stock  companies.  This  section  identifies  the  issues  that  this  creates  in  the
treatment of individuals performing those functions in group companies.

As  many  office  holders  in  multinational  or  international  companies  will  be  resident  in
one country but with duties in another, the tax treatment in the different jurisdictions,
and  in  particular  the  higher  risk  of  different  categorisation  of  these  types  of  income,
leads to an increased level of tax obstacle to mobility.

In more extreme cases, possible double taxation could impair a company’s willingness
to invest where its key officeholders were exposed to excessive tax risks.

Additionally,  director-type  arrangements  can  lead  to  tax  avoidance  in  certain  cases,
(see Section 7.4 - Shadow director arrangements - below).

The OECD Commentary on Article 16 identifies the fact that a member of the board of
directors  of  a  company  often  also  has  other  functions  with  the  company, e.g.  as
ordinary employee, adviser, consultant, etc., and notes that it is clear that the Article
does  not  apply  to  remuneration  paid  to  such  a  person  on  account  of  such  other
functions.  The  Commentary  also  notes  that  in  some  countries  organs  of  companies
exist which are similar in function to the board of directors and countries entering into
a  bilateral  tax  treaty  are  free  to  include  in  the  tax  treaty  such  organs  of  companies
under a provision corresponding to Article 16.

Director type arrangements are also used as a form of ‘planning’ by the self-employed
or  directors  –  these  are  addressed  in  the  following  section  to  ensure  that  the
legitimate  issues  and  concerns  of  multinational  groups  are  not  mixed  up  with  the
concerns where similar arrangements are used for tax-driven purposes.

Office holders may be called any of the following; board members, directors, statutory
representatives,  procurists,  company  secretaries,  or  even  just  managers  in  certain
countries.

In a two-tier board structure such as in a German AG, a Dutch NV or similar, there will
be a Management Board, reporting to a Supervisory Board. Typically the Management
Board are full time and the Supervisory Board may be part time. In a French SA, the
company can choose whether to have a one tier or a two tier board structure.

In  an  Irish  or  UK  PLC,  by  contrast,  the  split  is  between  executive  directors,  who  are
typically  substantially  full  time,  and  non-executive  directors,  who  are  typically  part
time.

For simplicity for this section we will refer to them all as Directors, to distinguish from
line employees.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

For company law purposes, Directors may be

Employed
Self-employed
Contractors

Appointed

Most typical for executive or Management Board members
More typical for non-executive or Supervisory Board members
More  usual  for  those  that  hold  multiple  non-executive  and
consulting  roles,  who  administrate  all  of  their  varying  income
sources through one vehicle
In  certain  countries,  Statutory  Representatives  may  be
appointed  by  shareholder  resolution,  and  may  not  have  any
other contractual arrangement with the company

7.3.1  Multi-country responsibilities
In a large multinational group, it is typical for the Directors of a foreign subsidiary to
include  in  whole  or  in  part  employees  of  the  parent  entity  or  ultimate  shareholder  to
ensure governance, control, and adherence to group policies.

Certain  key  individuals  (often  CFOs  or  General  Counsel)  may  be  Directors  of  many
entities in many countries, as they exercise oversight on the group’s behalf.

The  issue  of  whether  a  director  must  be  paid  or  not  varies  by  country.  In  some
countries,  there  is  an  expectation  that  a  Director  should  get  paid.  In  others,  there  is
an  understanding that  those that  hold  multiple directorships  may  be  remunerated  in
bulk  for  this,  and  that  for  example  in  a  dormant  company,  it  is  unrealistic  to  require
the  company  to  start  accounting  solely  for  the  purposes  of  paying  a  director  whose
time commitment may be minimal.

For  a  typical  multinational  group,  the  general  preference  is  usually  not  to  separate
director  fees  for  each  office  held  from  the  usual  employment  income  paid  to  the
employee. The holding of office in individual subsidiaries is viewed as being a normal
part  of  the  duties  for  a  high  level  employee  in  the  CFO’s  office  or  General  Counsel
office, so adding a small amount for each appointment made, then keeping track and
removing with each change, is burdensome, and does not add value.

Example
A  regional  CFO  is  appointed  to  the  boards  of  group  companies  in  ten  countries
across the EU, in addition to his main role which is performed in the Home Country.

If his total  salary is €240,000 (i.e. €20,000 per month) and he spends 25% of his
time  on  those  board  duties,  in  theory  €5,000  per  month  should  be  allocated  to
those 10 countries.

However, if the cost were to be charged down to those country entities, some may
argue that costs of a shareholder in exercising their governance and control is not a
deductible  cost  for  the  company,  so  in  practice  many  companies  have  historically
kept these costs at Head Office level.

Normally, under Article 15 (2), this would then escape taxation for the CFO as long
as he is less than 183 days in the country, as the costs are not paid in country, and
not borne by an entity or PE in that country.

However, if the country taxes other resident Directors on their Director fee and the
company  law  responsibilities  of  those  directors  are  all  the  same,  there  is  a
legitimate question as to whether that CFO should also be taxed on something.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

§ Should  each  country  tax  €500  per  month?  €6,000  per  year  remains  a
significant income level in some poorer Member States, and the tax on that
may be considered significant in the eyes of the local tax authority.

§ How could payroll withholding be managed effectively if he is not present in
that  country,  and  the  local  company  has  no  visibility  on  his  overall
remuneration level?

§ Should they look at his duties in that particular month, and tax more in the
countries where he was busy and less in those where nothing happened?

§ How does his country of residence give double tax relief?
§ And, if the country of residence believes Article 15 (2) applies, can it (or will

it?) give credit for income taxed under a different article?

In practice, the main concerns that need addressing are:
§ Whether the categorization of Director payments between the Country of Residence
and Country of Source taxation are consistent or not. In some cases, countries will
have  a  differing  view  as  to  whether  the  Director  payment  is  a  Director  Fee  or
employment income;

§ Whether there is dispute in the claiming of Double Tax Relief in such cases, as the
differing views of the authorities mean that they have a different view of whether a
Double Tax Relief claim is possible or not;
In  cases  that  are  disputed,  whether  the  burden  of  proof  is  disproportionate  in
reference to the amounts at issue, as the amount of time spent claiming the Double
Tax Relief may be uneconomic for the taxpayer to pursue.

§

Appendix  5  provides  a  summary  of  the  treatment  of  Directors’  fees  and  it  is  evident
from  this  that  there  are  inconsistences  in  the  tax  treatment  which  may  result  in
potential double taxation.

RECOMMENDATIONS:

§ Better publication of which arrangements are considered to be within the meaning
of a Director’s Fees paragraph of a treaty and which are not, should be considered
by individual Member States.

7.4  Shadow director agreements
In  certain  cases,  director  type  arrangements  are  used  at  an  individual  level  to
recategorise income. There are varying degrees of legitimacy here.

Example

The  sole  shareholder  /  director  of  a  consulting  company  based  in  Country  A
undertakes a contract in Country B for an unrelated customer. He receives the legal
minimum salary for performing that task.

At the end of the year, as the company is highly profitable, it pays a large director
bonus to its sole director. This is treated as a board fee, which was taxable only in
Country  A  under  the  Directors  Fees  article  of  the  bilateral  Tax  Agreement  between
the two states.

The questions that this example immediately brings to mind are:
§ What is the ‘correct’ amount for the salary part?
§ How much is it reasonable for the Director to be paid for his Director duties?

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

§

Is the split reasonable based on the time spent performing each role, and the value
added in each part of the role?

Clearly  this  is  only  a  planning  point  if  the  tax  rates  for  director  fees  and  salary  are
different,  or  if  there  is  a  difference  in  the  calculation,  such  as  the  deductibility  of
expenses.

Such ‘Personal Service Company’ structures are often used in Triangulation situations,
(for  example  the  taxation  of  Aircrew  which  is  considered  specifically  in  Section  10
below).

Existing  powers  to  review  such  arrangements  do  exist  in  the  majority  of  Member
States.  However,  the  multi-country  nature  of  the  arrangements  means  that  it  is  not
always clear who is the best Member State to challenge the arrangements, and often
the state with the broadest view has little to gain from challenging the arrangements,
if  the  country  of  ultimate  residence  would  in  any  event  be  exempting  such  income
from taxation under the relevant Double Tax Treaty.

This  example  of  a  ‘form  over  substance’  approach  to  tax  planning  is  typically
challenged on the following grounds:

§

§

§

as  the  employee  and  shareholder  /  director  are  the  same  person,  they  are
related parties for transfer pricing purposes
the  employment  income  is  not  set  at  an  ‘arm’s  length’  price,  and  under
transfer pricing rules an arm’s length price could be substituted
the director’s fee is excessive

However,  the  issue  then  exists  as  to  which  tax  authority  is  the  ‘right’  one  to
challenge the arrangement:

§

§

§

§

§

the  unrelated  customer  has  paid  an  arm’s  length  price  in  good  faith  and  is
not  party  to the  downstream  arrangements  of  what  happens  to  the money
after he pays for the service related, so it would be inequitable to make him
liable for the outcome
the  consulting  company  may  not  be  registered  in  Country  B,  so  it  may  be
difficult to obtain information from it
the  ultimate  country  of  residence  (unspecified  in  this  case)  will  lack  the
ability to review the overall arrangements.
For  a  country  of  residence  with  a  credit  system,  that  country  may  benefit
from  higher  tax  receipts  if  foreign  tax  payments,  and  hence  credits,  are
lower
For  a  country  with  an  exemption  system,  the  income  would  be  potentially
exempt  in  either  case,  so  they  lack  the  incentive  to  challenge  such
arrangements.

In  such  cases,  abuses  go  unchecked  because  there  is  a  lack  of  oversight  for  the
arrangement as a whole. Ultimately, it is the country of residence that should have
oversight  of  the  taxpayer’s  overall  position,  and  it  is  up  to  them  to  ensure  that
worldwide income is correctly reported, and that income subjected to tax in Country
A and / or B has in fact been taxed. However, in practice, they require Information
Exchange from the source countries to be able to do this effectively.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

RECOMMENDATIONS:

§ Shadow  director  arrangements  that  are  a  cover  for  an  employment  or  self-
employment situation should be dealt with by Member States under their domestic
legislation and should not require pan-European action.

§ However,  the  interaction  between  this  and  the  recommendation  that  the  Host
Country is the best placed to judge the nature of the relationship as per section 7.2
above, needs to be carefully considered.

7.5  Treatment  of various  categories of Investment  Income for non-
Residents
In most  bilateral tax agreements, certain types of  income may be taxed ONLY in the
country of residence so it would be necessary for the country of source to understand
that it has given up its right to tax.

Some examples include:

Interest

Dividends

Capital Gains

Capital Gains on
immoveable property and
business assets of a
Permanent Establishment

Most treaties  allocate the taxing  right  solely  to  the
country of residence
A  number  of  other  treaties  (these  include  many  of
the  tax  treaties  entered  into  by  Czech  Republic,
Estonia,  Latvia,  Portugal  and  Romania)  allocate  the
right  to  the  country  of  source  and  the  country  of
residence also taxes but allows credit for the tax paid
in the source country. In these types of cases the tax
that  may  be  imposed  by  the  source  state  is  usually
limited  to  a  low  percentage  (typically  10%)  of  the
total interest(e.g. Czech-Belgium, Czech-Poland)
The  OECD  Model  treaty  permits  states  to  withhold
tax  on  dividends  in  the  country  of  source,  but
typically at a reduced rate.
Gains  on  the  sale  of  shares  and  other  investments
will  typically  be  taxed  in  the  country  of  residence,
unless special rules apply (see below).
Different  rules  will  often  apply  for  immoveable
property, where  the income will  often be deemed to
arise in the country where the property is located

7.6  Preliminary  recommendations  required 
agreements more effective

to  make  bilateral

7.6.1  Residence

In  the  electronic  age,  consideration  can  be  given  to  facilitating  a  simpler  way  to
demonstrate tax residence, tied in with  acceptance  of increased levels of information
exchange between the two relevant states to ensure continued compliance.

7.6.2  Employment or self-employment
In cases where individuals are treated as self-employed under the rules of one state,
but potentially acting in a way that the other state may consider them to be working

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

in  a  manner  consistent  with  that  of  employees,  countries  should  adopt  a  consistent
and symmetrical treatment where possible.

Practically, it would probably be the country where the work is performed that is best
placed to judge whether the taxpayer is in employment rather than self-employment
under  their  rules.  This  could  lead  to  those  who  are  self-employed  in  their  country  of
residence,  and hence  only  taxable  there,  being brought  into  the  scope  of  taxation  in
the country of source if deemed to be employees. However, this is consistent with the
general principles in the OECD treaty.

7.6.3  Directors and shadow directors
The treatment of non-resident directors and office holders need to be regularised.

Shadow  director  arrangements  can  be  dealt  with  using  existing  anti-avoidance
regulations,  but  would  likely  require  higher  levels  of  information  exchange  to  make
this effective.

Where increased exchange of information is required, the country of source should, if
the  relevant  treaty  permits,  notify  the  country  of  residence  of  what  income  has  been
received  and  subjected  to  tax  in  that  country.  This  avoids  the  country  of  residence
having to rely on the taxpayer reporting the income in their tax return to be aware of
the existence of the income.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

8 

Tax treatment of Frontier Workers

Historically  the  term  ‘frontier  worker’  applies  to  workers  who  live  near,  and  perform
their  work  on  the  other  side  of,  a  country  frontier  which  they  must  cross  regularly.
Many bilateral tax treaties which include a rule for taxation of frontier workers require
the  worker  to  commute  from  his  state  of  residence  to  his  place  of  work  in  the  other
state  on  a  daily  basis.  A  specific  Frontier  Worker  provision  should  serve  to  reduce
uncertainty  of  tax  treatment  and  simplify  administration,  thus  ensuring  that  tax
administration is reduced as a barrier to cross-border labour mobility.

There  is  no  uniform  definition  of  Frontier,  and  in  most  cases,  these  are  defined
specifically  for  the  treaty  in  question.  For  example,  Germany  draws  a  specific
geographical  area  in  the  agreement  with  France,  but  prescribes  a  distance  of  30km
from the border in the agreement with Austria.

The new Accession countries from 2004, 2007 and 2013 have many borders where a
Frontier  Worker  provision  may  be  useful,  but  the  existing  treaties  do  not  include
provisions.

The  Commissions’  review  of  this  issue  “Scientific  Report  on  the  Mobility  of  Cross-
Border Workers  within the  EU-27/EEA/EFTA  Countries”25 indicated that 75% of all EU
cross-border  workers  are  received  by  Switzerland,  Luxembourg,  Germany,  the
Netherlands,  Austria  and  Belgium  and  that  the  main  countries  of  origin  are  France,
Germany  and  Belgium  providing  about  60%  of  all  out-going  cross-border  workers  in
the EU. The study  also indicated  that  important  countries  of  origin  in relation  to  the
number of employees in border regions include Estonia, Slovakia and Slovenia.

Table  2  below  from  the  study  identifies  the  borders  where  high  volumes  of  border
crossing may take place.

25 “Scientific  Report  on  the  Mobility  of  Cross-Border  Workers  within  the  EU-27/EEA/EFTA  Countries”  MKW
Wirstschaftsforschung GmbH, Munich, and Empirica Kft., Sopron, January 2009:
ec.europa.eu/social/BlobServlet?docId=3459&langId=en

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Table 2 – Extract from Cross-Border Workers report

The  study  set  out  an  analysis  aimed  at  stating  a  link  between  commuting  intensity
(level of commuting in Table 2) and possible influence factors. Full details are provided
in the study but in broad terms it is based on an ‘obstacle index’ worked out for every
border region based on each  of the 9 obstacles to mobility26 which was then adjusted
based on averages so that there was an obstacle index for entire cross border regions
and for each commuting direction. Two basic economic indicators, the unemployment
rate  between  region  of  destination  and  region  of  origin  and  the  GDP  per  capita
between region of destination and region of origin were then included to arrive at the
Index  of  Mobility  to  cover  entire  cross-border  regions  for  each  commuting  direction.
The values referred to below are taken from the study.

The study indicates that the Index of Mobility is intended to serve as a solid predictor
on the level of commuting in the respective border regions. It notes that regions with
a  high  level  of  commuting  generally  reflect  lower  mobility  barriers  (meaning  less  of
the 9 obstacles may apply and there may be an unfavourable level of income and/or
higher rate of unemployment within that region). In contrast, regions with a low level
of  commuting  will  reflect  greater  mobility  barriers  (meaning  more  of  the  9  obstacles
may apply and there may be a favourable level of income and/or lower unemployment
rate within that region).

The study notes that the values for the Index of Mobility vary around a mean average
of  2.45  with  a  maximum  of  4.65  for  Slovakia  to  Austria  and  a  minimum  of  -2.32  for
Germany  to  Luxembourg.  Per  the  study  a  high  level  Index  of  Mobility  means  a  low
level  of  commuting  and  a  low  level  Index  of  Mobility  means  a  higher  level  of
commuting.

As Slovakia to Austria has a high Index of Mobility value it would be expected that this
would feature in the lower left cells of Table 2 as having a low level of commuting but

26

Mentality,  language,  transport  infrastructure,  tax  regulations,  rights  to  pension,  other  rights  to  social
insurance,  legal  restrictions  on  the  labour  market,  acceptance  of  formations/graduations  and  the  lack  of
information – see page 71 of the study

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

it does in fact appear in the medium level of commuting. This can be explained by the
fact  that  the  study  notes  that  the  correlation  between  the  values  may  be  subject  to
variation  by  other  factors  such  as  economic  indicators.  Austria  to  Hungary  and
Germany  (Bavaria)  to  Czech  Republic  have  a  high  Index  of  Mobility  value  (4.51  and
4.12 respectively)with a resultant low level of commuting and feature in the lower left
cells of Table 2. The low level of commuting can be explained by the higher levels of
GDP per capita in Austria and Germany (Bavaria) respectively.

The low Index of Mobility value for Germany to Luxembourg (-2.32) results in a high
level of commuting and so this is included in the upper right cells of Table 2.  France
to  Luxembourg  (-2.12)  also  has  a  low  Index  of  Mobility  value  as  does  Hungary  to
Austria (1.22) hence each of these two commuting directions is included in the upper
right cells of Table 2. The high level of commuting can be explained by a higher level
of GDP per capita in Austria compared to Hungary and in the case of each of Germany
and  France  to  Luxembourg,  a  higher  level  of  GDP  per  capita  and  lower  level  of
unemployment in Luxembourg.

As  per  Section  3.5  above,  only  a  small  number  of  Member  State  bilateral  treaties
include  a  frontier  workers  clause.  Table  3  below  provides  a  summary  of  states  that
have  a  tax  treaty  which  includes  a  special  rule  regarding  the  taxation  of  frontier
workers.  In  this  study  we  have  not  established  that  the  lack  of  a  frontier  workers
clause  is  a  tax  obstacle  to  labour  mobility.  The  level  of  commuting  is  driven  by  a
number of other factors including language transport links, wage levels, availability of
jobs and rates of tax.

Frontier  Workers  would  normally  be  taxable  on  their  employment  income  in  the
country  of  working  under  prevailing  sourcing  rules,  as  they  would  likely  exceed  the
183 days test in Article 15, and / or be paid by an employer based in that country, and
hence not entitled to the exemption under Article 15 (2).

However, a Frontier Workers provision will often move this to the country of residence,
usually  for  the  purposes  of  encouraging  cross-border  employment  and  permitting
employers in one country to access the labour market in a wider range. This is evident
from  Table  3  below  from  which  it  can  be  noted  that  in  virtually  all  cases  the  frontier
worker is taxable only in the country of their residence. The EY offices did not highlight
any particular difficulties applying to frontier workers in the context of avoiding double
taxation and the need to obtain documentation referred to in Section 12.2. Typically it
should  only  be  necessary  for  the  worker  to  provide  evidence  to  support  the  position
that  they  are  resident  in  a  Member  State  so  as  to  be  exempt  from  tax  in  the  Host
Country under a Frontier Workers provision.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Table 3: Frontier Worker provisions – country of taxation

COUNTRY OF
RESIDENCE

TREATY PARTNER

Austria

Belgium
Denmark

Finland

France

Germany

Italy

Portugal
Spain

Sweden

Germany
Italy
France
Finland
Sweden
Denmark
Sweden
Belgium
Germany
Italy
Spain
Austria
France
Austria
France
Spain
France
Portugal
Denmark
Finland

TAXABLE IN COUNTRY
OF RESIDENCE (R) OR
OF WORKING (W)
R
R
R and W
R
R
R
R
R and W
R
R
R
R
R
R
R
R
R
R
R
R

Note:  applies  to  Personal  Income  Tax  only;  Social  Security  contributions  covered  separately
under the EU Regulation 883/2004.

The  France–Belgium  treaty  has  been  amended,  to  harmonise  taxation  from  the
country  of  residence  to  the  country  of  working  with  effect  from  1  January  2012.
French  tax  resident  frontier  workers  already  benefitting  from  the  treaty  at  that  date
will able to continue to utilise the old provisions until December 31, 2033 and remain
taxable in country of residence.

Although the Belgium-Netherlands tax treaty does not have a rule for frontier workers
it  does  include  a  revenue  sharing  provision  between  the  source  state  and  the
residence state.

Sweden  and  Denmark  have  a  separate  convention  just  covering  cross-border
working.27  The  Nordic  Convention28  (to  which  the  four  Nordic  Member  States  plus
Iceland and the Faroe Islands are signatory), has specific provisions for those living in
one and working in a municipality in the other are taxable only where resident.

It  is  interesting  to  note  that  at  the  moment,  analysis  by  EY  offices  in  each  of  the
recent  Accession  States  has  not  identified  any  country  pair  combination  that  has
chosen  to  respond  to  the  Accessions  of  2004,  2007  and  2013  by  adding  a  Frontier
Workers clause into a relevant Double Tax Agreement.

Technical  analysis  from  our  EY  teams  in  the  relevant  Member  States  suggests  that
there is reluctance on the part of source countries to cede taxing rights to the country
of residence in a current environment of shrinking tax revenues and job protection. It

27

Referred to "Öresundsavtalet"

28 The Nordic Convention entered into force on 11 May 1997 and was effective from 1 January 1998

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

is  likely  that  there  will  be  a  limited  appetite  for  Frontier  Workers  provisions  to  be
added in the near future, particularly as the employers in the country where the work
is performed are receiving a corporate tax deduction for the wages and salaries paid.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

9 

Triangulation Cases

identified 

 Specific  Triangular  cases 

9.1 
Convention
Certain circumstances lead to regular recurring triangulation cases, and so the OECD
Model  Convention  has  included  specific  wording  to  address  those  issues.  These
circumstances include (Art. 15(3) OECD Model):
§ Ships or aircraft operated in international traffic;
§

in  the  OECD  Model

Inland waterways.

No  other  Triangulation  case  is  deemed  significant  or  recurring  enough  to  warrant  a
special  provision  in  Article  15  to  address  the  technical  specifics  thereof.  However,
directors and office holders in multinational organisations also have Triangular issues,
as dealt with in Section 7.3.1 above.

The term ‘Triangulation’ refers to cases where potentially three countries are involved.
Typically an individual will be resident of one country, work in another, and potentially
have duties in, or be employed by a company based in a third.

The  presence  of  the  third  country  gives  a  particular  issue  in  cases  of  international
transport (inland waterways or aviation), so these are addressed separately.

9.2  Simple Triangulation
Three simple triangulation cases are outlined below.

9.2.1  Case 1
An employee (“X”) resides in State R.
X  is  employed  by  a  company  resident  in  State  W  but  his  presence  there  does  not
exceed the 183 days  during the  reference period specified in Article 15(2) (a) of the
State R/State W tax treaty.
X  may  also  exercise  his  employment  on  behalf  of  a  permanent  establishment  of  his
employer in State P.

State R

State W

State P

Employee

Employer

Render
services 
in
State  W,  but
on  behalf  of
the PE

PE

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Answer

In this case we would expect X to be taxable on his remuneration attributable to work
undertaken within State W (under Article 15(1)) as his employer is a resident of that
state. Whether or not X is subject to tax in State P will depend on whether or not part
of X’s remuneration is borne by the permanent establishment in State P.

State R will tax the full income from X and provide relief for double taxation under the
tax treaty between State R and State W.

If  the  proportion  of  X’s  remuneration  from  the  employer  in  State  W  is  borne  by  the
permanent  establishment  it  has  in  State  P,  that  State  will  be  allowed  to  tax  the
proportion attributable to work performed in that State. As the remuneration will also
be taxed in State R, relief for double taxation should be allowed by State R under the
tax treaty between State R and State P.

Relief  for  double  taxation  will  depend  on  the  terms  of  the  relevant  tax  treaty  –  the
exemption method or credit method.

9.2.2  Case 2

An employee (“X”) is resident in State R.
X is employed by Company P which is also resident in State R.
Company  P  assigns  X  to  render  services  to  its  subsidiary  “Company  S”  which  is
resident in State S.
During the assignment Company S has the authority to instruct X and bears the risks
and responsibilities of X’s work.
Company P does not have a permanent establishment in State S and X is not present
in State S for a period exceeding 183 days in the reference period specified in Article
15(2) (a) of the State R/State S tax treaty.

Answer

In this case we would expect X to be taxable on his remuneration attributable to work
undertaken within State S. Although Company S is not the legal employer it is, based
on  the  2010  OECD  commentary,  likely  to  be  regarded  as  the  “economic  or  de  facto
employer” for the purposes of applying Article 15(2). This applies even if X spends not
more  than  183  days  in  State  S  in  the  tax  year,  as  the  Economic  Employer  principle
applies.

Relief  for  double  taxation  should  be  allowed  by  State  R  under  its  bilateral  tax  treaty
with State S – the exemption method or credit method.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Above: Case 2

Below: Case 3

9.2.3  Case 3
An  employee  (“A”)  is  a  resident  of  State  R  and  works  as  a  sales  representative  for
Company B which is a resident of State W.
A visits clients in State R and State P.
Company  B  does  not  have  a  subsidiary  or  a  permanent  establishment  in  either  of
States R and P.
A’s work pattern is such that he visits clients in State R in the morning (4 hours) and
visits clients in State P in the afternoon (4 hours).

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Excluding  the  time  spent  at  B  company  premises  in  State  W,  A  is  present  in  State  R
for periods exceeding 183 days and also in State W for more than 183 days.

Answer

In this case we would expect A to be fully taxable in State R as he is resident there. If
there is tax payable by A in either or both of States W and P, relief for double taxation
should be allowed under the bilateral treaty that State R has with State W and State
P. The relief will either be by the “exemption method” or “credit method” as specified
in the bilateral tax treaty.

We would expect State P to tax A on his remuneration attributable to his workdays in
that state under Article 15(1) – if State P counts any part of a day spent in state P for
counting toward the 183 day rule in Article 15(2) we would expect this to be exceeded
and so exemption under Article 15(2) will not be due.

A should be taxable on his remuneration attributable to work undertaken within State
W when spending time at B company premises under Article 15(1) – exemption under
Article  15(2)  will  not  be  available  as  his  employer  is  a  resident  of  State  W  and  he
spends more than 183 days there.

9.3  Practical application of triangulation issues
As detailed in Section 7.1, the presence of a third country starts to give issues where
the tax residence is unresolved between the first two countries.

As the examples above show, the general principles are relatively clear, where applied
by  those  with  experience.  However,  for  cross-border  employees,  and  smaller
employers, the situation is complex, and may be perceived of as ‘unfair’ when looked
at  from  the  perspective  of  the  individual  taxpayer,  whilst  being  ‘fair’  when  looking  at
the relative position of the two Member States involved.

Typically the third country will either cede its taxation powers back to the Country of
Residence, or the Country of Residence will tax with Double Tax Relief being applied.
However,  where  a  taxpayer  resident  of  Country  A  moves  to  Country  B  with  sufficient
nexus that Country B also considers him resident, then once income arises in Country
C, there is a conflict as to whether Country A or Country B’s treaty with Country C is
the relevant one in determining where income is taxed.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Example

A taxpayer resident in Country A goes on a two year work assignment to Country B,
moving his family into a rented house in Country B where he works full time.

He owns a holiday home in Country C which he rents to holidaymakers through an
agent in that country. He therefore has a bank account in that country also, which
earns interest.

Where is each source of income taxed, and what problems does this create?

Position of each country:

Country C:
Income  from  residential  property  is  taxed  in  the  country  where  the  property  is
located – so this will be Country C.
Interest income is usually taxed in the country where it is earned, unless the treaty
allocates taxing rights back to a country of residence.
Triangulation situation arises as there is a link back to both Country A and Country
B, which Country C needs to reconcile before it can make a final judgement of the
overall position.
This  will  require  review  of  the  treaties  with  Country  B  and  Country  A.  But,  which
one is relevant?

Country B:
Will tax all employment income, on a source basis?
Could tax property income only if he were a resident, then could be required to give
double tax relief?
Sole rights to tax interest income if he were resident there.

So,  difference  between  being  Resident  and  non-resident  is  whether  Country  C’s
income comes into Country B’s tax net.

Country A:
Will still treat him as taxable on worldwide income as a Resident?
Would give full exemption for employment income in Country B already?
Would require real estate income to be reported and Double Tax Relief claimed?
Would like tax on the Interest income as country of residency?

Conflicts:
Country C does not know whether to tax the Interest (if the taxpayer is resident of
A) or not (if the taxpayer is resident of B).
Country  C  does  not  know  where  to  report  income  to  under  Mutual  Exchange  of
Information articles.

Such  cases  would  normally  be  easy  to  resolve  were  it  possible  for  the  taxpayer  to
obtain  a  ruling  from  Countries  A  and  B  as  to  which  country  he  was  resident  in.  This
could then be shown to Country C, to avoid penalties for incorrect disclosure.

However, obtaining such certification is not always as straightforward as it should be.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

10  Special rules in Article 15(3) for Aircrew

10.1  History of the special rules
The issues of cross-border transportation have long been recognised. The OECD Model
Treaty commentary to the article explained its inclusion as follows:

“Paragraph  3  applies  to  the  remuneration  of  crews  of  ships  or  aircraft  operated  in
international  traffic,  or  of  boats  engaged  in  inland  waterways  transport,  a  rule  which
follows  up  to  a  certain  extent  the  rule  applied  to  the  income  from  shipping,  inland
waterways transport and air transport, that is, to tax them in the Contracting State in
which  the  place  of  effective  management  of  the  enterprise  concerned  is  situated.  In
the  Commentary  on  Article  8,  it  is  indicated  that  Contracting  States  may  agree  to
confer the right to tax such income on the State of the enterprise operating the ships,
boats  or  aircraft.  The  reasons  for  introducing  that  possibility  in  the  case  of  income
from shipping, inland waterways and air transport operations are valid also in respect
of remuneration of the crew. Accordingly Contracting States are left free to agree on a
provision  which  gives  the  right  to  tax  such  remuneration  to  the  State  of  the
enterprise. Such a provision, as well as that of paragraph 3 of Article 15, assumes that
the  domestic  laws  of  the  State  on  which  the  right  to  tax  is  conferred  allows  it  to  tax
the remuneration of a  person  in the service of the enterprise concerned, irrespective
of his residence. It is understood that paragraph 3 of Article 8 is applicable if the place
of effective management of a shipping enterprise or of an inland waterways transport
enterprise is aboard a ship or a boat. According to the domestic laws of some Member
countries,  tax  is  levied  on  remuneration  received  by  non-resident  members  of  the
crew in respect of employment aboard ships only if the ship has the nationality of such
a State. For that reason conventions concluded between these States provide that the
right to tax such remuneration is given to the State of the nationality of the ship. On
the  other  hand  many  States  cannot  make  use  of  such  a  taxation  right  and  the
provision  could  in  such  cases  lead  to  non-taxation.  However,  States  having  that
taxation principle in their domestic laws may agree bilaterally to confer the right to tax
remuneration in respect of employment aboard ships on the State of the nationality of
the ship.”

These  rules should be considered in  conjunction  with the aviation legislation existing
at the time, which granted flying rights on a bilateral basis between two states.

This  would  mean  that  the  airline  based  in  Country  1  would  operate  its  planes  from
Country  1,  with  crew  hired  and  paid  from  Country  1,  who  would  pay  tax  and  social
security in Country 1.

Meantime,  the  airline  based  in  Country  2  would  operate  its  planes  from  Country  2,
with  crew  hired  and  paid  from  Country  2,  who  would  pay  tax  and  social  security  in
Country 2.

As  rights  were  typically  allocated  to  try  and  ensure  a  broadly  equal  arrangement
between  the  airlines  in  each  country  (which  were  typically  still  state  owned  at  that
point), the net position of each revenue authority was likely to be broadly consistent.

Article 15 (3) ensured that each taxpayer’s position was not unduly complicated, and
that  issues  such  as  whether  operating  in  airspace  meant  that  income  should  be
sourced to the country being flown over were avoided.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

EU  Aviation  Policy  has  evolved  over  the  last  20  years,  and  legislation  such  as
Regulation  (EC)  No  1008/2008  establishing  common  rules  for  the  operation  of  air
services  in  the  Community29  and  its  predecessors have  meant  that  air  carriers
registered in one Member State can now operate from a base in another.

This has led to a reduction in the number of routes operated equally by carriers based
in each country, which has removed the ‘symmetry’ argument of each country taxing
its own share of the workers.

Additionally,  routes  are  now  routinely  operated  by  a  carrier  headquartered  in  neither
the  country  of  departure  nor  arrival,  meaning  that  a  route  between  two  countries  is
potentially outside the tax scope of both countries.

This has also led to a number of carriers, typically low cost carriers, to try and ‘base’
their  crew in  a  geographical  location  to  optimise  the  use  of  the  existing  Double  Tax
Agreements, to take advantage of possibilities available.

10.2  Issues arising

10.2.1  Operational overview

This  may  often  mean  that  an  airline  operating  in  one  country,  hires  employees
resident in another, who operate out of a Base in a third. This may be quite common
where an airport is close to a country land border, and the aircrew member happens
to be based in the other country, or chooses to move there.

Typically this will occur when an airline sets up a ‘Base’ – choosing to locate a certain
number of  planes  at  a specific  airport,  which is neither their home location nor their
place  of  registration.  Crew  will  then  be  hired  to  fly  from  the  ‘Base’  –  even  though  it
has no distinct legal identity.

10.2.2  Basis for taxation

The two most common ways to deal with this would be the following;
§ Tax based on residence of the employee or
§ Tax based on the place of effective management of the airline.

System used
Tax based on
place of
effective
management

Tax based on
residence of
employee

Advantages

Disadvantages

· Simple for airline
·

Permits consistent
withholding to be
applied for all crew
Easy to operate

·
· Withholding is
consistent with
employee’s final tax
liability
Perceived sense of
fairness as tax paid
only in country of
residence

·

·

·

·

·

Place of management may
not be consistent with crew
residence
Permits re-registration in
lower cost jurisdictions
Employer would have to run
payroll based on 28
different tax rates
Employer would need to
form view of employee’s
personal residence
situation, which may
conflict with privacy
legislation

29 europa.eu/legislation_summaries/transport/air_transport/tr0008_en.htm

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

The business of flying passengers clearly takes place from the Base, and that is where
the transport service is rendered from.

Under  the  older  system  where  most  rights  were  bilateral,  using  the  country  of
residence of the employee as the basis for taxation was less preferred than the place
of management. Using country of residence would require additional work on behalf of
the employer to ascertain what that country should be, and additional work on behalf
of the employee to obtain certification.

In  most  cases,  the  place  of  taxation  would  have  been  the  same  when  a  carrier  was
flying  under  bilateral  rights  from  its  country  of  registration  using  a  local  workforce,
hence  the  preference  for  place  of  management.  However,  the  Single  Market  has
meant that the world is now more complex than that.

However, as the employer is legally taking advantage of single market regulations to
be registered in a different jurisdiction, the old test of ‘place of effective management’
is  no  longer  the  logical  location  to  levy  tax.  Thus  employees  may  be  resident  of  a
country  which  is  neither  the  place  of  management  of  the  airline,  nor  the  country
where  they  report  to  work  every  day.  This  creates  a  gap  in  reporting,  and  the
potential ability to leave unclear reporting lines and consequential unpaid tax.

Management  of  the  enterprise  is  no  longer  so  closely  linked  to  the  place  where  the
business  of  flying  passengers  takes  place  from.  Therefore,  were  the  issue  being
considered  for  the  first  time,  the  definition  of  location  of  the  employer  could  be
expanded to include the Base as an alternative, as that would likely give more overlap
with  the  country  of  residence  of  the  employees  than  the  Effective  Management  test
does.

It should be noted that the OECD has opened a public consultation headed “Proposed
changes  to  the  OECD  Model  Tax  Convention  dealing  with  the  operation  of  ships  and
aircraft  in  international  traffic”.30  Per  the  introduction  “This  public  discussion  draft
includes proposals for changes to the Model Tax Convention resulting from that work,
which primarily concerns international shipping and airline enterprises as well as their
employees. The  Committee invited interested parties to send their  comments on this
discussion  draft  before  15  January  2014.  These  comments  will  be  examined  at  the
February and September 2014 meetings of the Working Party. These are discussed in
detail in Section 10.7 below.

10.2.3  Payroll issues
For an enterprise incorporated in one country, employing personnel living and working
in  multiple  countries,  it  would  be  of  practical  difficulty  for  any  employer  to  identify
where  each  employee  is  resident,  and  operate  a  different  payroll  withholding
depending  on  that.  Those  airlines  that  operate  multiple  bases  in  different  countries
could  find  that  they  are  required  to  operate  a  payroll  that  correctly  calculates
withholding based on almost all different Member State tax rates.

Most commercial payroll software systems work in a selection of countries rather than
across the whole EU. That practical step should not be insurmountable with the correct
amount of notification. The bigger concern would potentially be that this would place a
requirement  on  each  and  every  employee  to  obtain  certification  of  residence  in  their
individual country to ensure that the correct payroll withholding was operated.

30 http://www.oecd.org/tax/treaties/Discussion-draft-international-taffic.pdf

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

A  move  to  bring  a  ‘Base’  within  the  definition  or  interpretation  of  a  Place  of  Effective
Management might therefore be easier than shifting to a Residence based withholding
system.  This  would  only  require  Member  States  to  expand  their  definition  of  an
‘employer’  required  to  withhold  tax  to  include  also  Airlines  registered  abroad  who
operate  from  a  Base  within  that  Member  State.  That  Base  would  then  be  required  to
operate withholding based on the rules of that country and the employee would then
need to claim Double Tax Relief in their home Member State.

10.3  How the special rules work
As noted in Section 4.8.3, the rule in Article 15(3) deals with remuneration derived in
respect  of  employment  performed  aboard an  aircraft in international  traffic. Bilateral
tax treaties reflect a number of variations in the way in which Article 15(3) applies and
these are summarised as follows:
§ Remuneration  derived  in  respect  of  an  employment  exercised  aboard  an  aircraft
operated  in  international  traffic  [by  an  enterprise  [or  resident]  of  a  Contracting
State  may  be  taxed  in  that  State]  or  [may  be  taxed  in  the  Contracting  State  in
which the place of effective management of the enterprise is situated]. This is the
most widely used variation.

§ Remuneration  derived  in  respect  of  an  employment  exercised  aboard  an  aircraft
operated in international traffic may be taxed in the Contracting State in which [the
profits from the operation of the aircraft are taxable according to the provisions of
Article  8  (Article  8  provides  that  profits  from  the  operation  of  aircraft  in
international traffic shall be taxable only in the Contracting State in which the place
of  effective  management  of  the  enterprise  is  situated)]  or  [the  person  to  whom
profits  accrue  from  the  operation  of  the  aircraft  is  resident].  This  variation  will
typically apply in bilateral tax treaties entered into by Greece.

§ Remuneration  derived  in  respect  of  an  employment  exercised  aboard  an  aircraft
operated  in  international  traffic  by  an  enterprise  of  a  Contracting  State  shall  be
taxable only in that State, except where the remuneration is derived by a resident
of  the  other  Contracting  State,  in  which  case  it  may  also  be  taxed  in  that  other
State.

§ Remuneration  derived  in  respect  of  an  employment  exercised  aboard  an  aircraft
operated  in  international  traffic,  [shall  be  taxable  only]  or  [may  only  be  taxed]  in
the Contracting State in which the place of effective management of the enterprise
is  situated.  However,  some  bilateral  tax  treaties  specify  that  this  will  only  apply  if
the  remuneration  is  subject  to  tax  in  the  State  of  effective  management  (for
example, UK/Denmark and France/Germany.

§ Remuneration  derived  by  a  resident  of  a  Contracting  State  in  respect  of  an
employment  exercised  aboard  an  aircraft  operated  in  international  traffic,  shall  be
taxable  only in  the State in  which  the crew member is resident.  This  wording  will
typically apply in bilateral tax treaties entered into by the Netherlands.

As  noted  above  the  most  widely  used  variation  of  Article  15(3)  provides  that
remuneration  may  be  taxed  in  the  Contracting  State  in  which  the  place  of  effective
management  of  the  enterprise  may  be  situated.  However,  this  is  a  permissive  right
and it assumes that the State will impose tax under its’ domestic legislation. This may
not be the case in practice.

The  table  in  Appendix  4  provides  a  summary  of  the  variations  of  Article  15(3)  in
bilateral tax treaties between Member States.

This shows that the majority of countries prefer the basis of taxation to be around the
employer,  either  the  place  of  effective  management  or  where  the  operations  are

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

taxable. Only the Netherlands structures the majority of its treaties to tax on the basis
of the state of residence of the employee.

10.4  Country issues
For example, in a case where the place of effective management of an airline operated
in  international  traffic  is  in  Portugal,  tax  would  be  imposed  by  Portugal  under  its
domestic  legislation.  In  contrast,  if  the  place  of  effective  management  of  an  airline
operated in international traffic is in the UK, there would be no tax imposed on non-
residents unless there were UK duties.31

As a general rule we would expect airline crew working aboard an aircraft operated in
international traffic to be subject to income tax in the State in which they are resident
unless the terms of Article 15(3) provide for a different tax treatment.

§

For example:
§ Under  the  UK/Germany  bilateral  tax  treaty  German  resident  crew  members  of  an
airline  which  has  its  place  of  effective  management  in  the  UK  are  taxable  only  in
Germany, their state of residence.
If say a crew member moves across the border and becomes a resident of Poland
but still works out of the “base” airport in Germany, the UK would be allowed to tax
the  remuneration  (under  Article  15(3)  of  the  UK/Poland  tax  treaty).  Under  its
domestic  legislation  the  UK  would  only  tax  the  remuneration  attributable  to  UK
duties.  Article  15(3)  would  not  apply  under  the  Germany/Poland  tax  treaty  as  the
airline does not have its place of effective management in either country. Germany
would  be  allowed  to  impose  tax  under  Article  15(1)  of  the  Germany/Poland  tax
treaty but limited to the proportion of remuneration attributable to German duties.
Germany  would  not  be  allowed  to  tax  if  the  conditions  in  Article  15(2)  of  the
Germany/Poland tax treaty are fulfilled. Poland, as the residence state, should allow
relief  for  double  taxation  under  the  terms  of  the  Poland/UK  and  Poland/Germany
tax treaties.

Whilst  some  treaties  provide  for  taxation  based  on  the  country  of  residence  of  the
individual and others provide for taxation based on the place of effective management
of  the  enterprise,  there  will  be  the  possibility  to  construct  fact  patterns  to  move
income outside of the net of withholding.

Additionally, the increasing presence of flexible working arrangements, such as Pilots
being  sub-contracted  through  Personal  Service  companies  potentially  based  in  any
number of jurisdictions, enables also e.g. shadow director or dividend structures to be
used  as  explained in  Section  7.4. It  should be noted that  the  use  of  contractor  type
relationships to shift the cost of flexibility onto the employee rather than be borne by
the  employer  imposes  a  social  cost  which  is  being  addressed  in  the  study  ‘Social
protection  rights  of  economically  dependent  self-employed  workers’32.  However,  that
study does not specifically reference Air crew, nor does it include much analysis of tax
issues that arise.

31 Since the case of Robson v Dixon (48TC527) in 1972, it has been clear that taking off or landing a plane
constitutes a UK duty, and is not ‘merely incidental’ to the journey as a whole
32  ’Social  protection  rights  of  economically  dependent  self-employed  workers’,  European  Parliament,
Directorate-General for Internal Policies, 2013:
http://www.europarl.europa.eu/delegations/en/studiesdownload.html?languageDocument=EN&file=92570

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

10.5  Case examples
The  European  Commission  has  highlighted  a  couple  of  cases  which  are  considered
below.  The  reference  to  Ireland  is  because  Irish  legislation  changed  in  2011  to
specifically address this issue.

10.5.1  Case 1
An  airline  that  has  its  effective  place  of  management  in  a  Member  State  is  provided
with  cabin  crew  members  by  an  employment  agency  in  another  Member  State,  to
work from different bases throughout the EU.

Comment

In  most  of  the  bilateral  tax  treaties  entered  into  by  Member  States,  Article  15(3)
allows the Member State in which the airline is managed to have the full taxing rights
on employment income arising to a flight crew member in respect of an employment
exercised aboard an aircraft operated in international traffic.

To  give  effect  to  this  ‘taxing  right’,  domestic  legislation  needs  to  also  provide  for
withholding to be levied on non-residents. Otherwise, the country of residence would
have ceded taxing rights to the country of management which chooses not to exercise
it.  That  would  default  the  taxing  right  back  to  the  country  of  residence,  but  typically
with  no  withholding  obligation.  It  then  becomes  up  to  the  taxpayer  to  declare  the
income, in accordance with domestic legislation, in the country of residence.

As an example, Ireland introduced legislation effective 1 January 2011 to charge Irish
tax  in  the  circumstances  outlined  above.  As  a  result  Irish  income  tax  withholding
(starting  at  20%  with  a  top  rate  of  41%  plus  a  further  4%  additional  income  tax
referred  to  as  universal  social  charge)  is  due  irrespective  of  whether  the  crew
members  are  resident/not  resident  in  Ireland  and  whether  the  crew  members  are
employed  directly  by  the  Irish  airline  or  another  entity  such  as  an  employment
agency.

Therefore  in  this  case  if  the  State  in  which  the  airline  has  its  effective  place  of
management is Ireland we would expect Ireland to tax the employment income in full
and the State of residence of the crew member to provide double taxation relief under
a bilateral tax treaty with Ireland (either by exemption or credit).

Individuals  would  therefore  be  obliged  to  report  that  income  in  their  country  of
residence,  and  claim  double  tax  relief  by  way  of  credit  or  exemption,  for  the  income
that had been subject to tax in Ireland.

This  would  mean  that  if  there  is  an  exemption  system,  Ireland  is  obtaining  the  tax
revenues, as the country of residence would exempt.  If there is  a credit system, the
country of residence taxes at its own rate with a credit for any Irish tax suffered.

It  should  be  remembered  that  this  change  brings  Ireland  into  line  with  many  other
Member States that would incorporate withholding under domestic law with a place of
Effective Management test in their treaties. So there is not a prima facie case of unfair
tax  competition,  unless  the  rate  of  withholding  is  lower  for  aircrew  than  in  other
countries.  Nevertheless,  it  may  deprive  Member  States  of  tax  revenues  they  were
previously  receiving,  even  though  the  previous  receipt  was  more  than  they  were
entitled to under their bilateral arrangements.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Member  States  should  look  at  their  Exchange  of  Information  arrangements  with
Ireland to  see to  what  extent  information  can  be  requested,  and  consider  reminding
taxpayers in their state of their reporting obligations.

10.5.2  Case 2

The European Commission has also highlighted their concerns regarding “bogus” self-
employment  in  the  aviation  sector  in  the  context  of  individual  pilots  under
investigation  by the  authorities in  Germany,  Italy,  Netherlands,  Norway  and Sweden
with the following assumed fact pattern.

A Limited Company (“shell Company”) is set up in a specific Member State and 3 to 6
pilots  are  directors  of  the  shell  Company.  Each  receives  their  income  as  a  director’s
fee instead of salary.

A  company  in  another  Member  State  (employment  agency)  contracts  with  an  airline
based outside that Member State to provide it with pilots as and when required.

The  employment  agency  contracts  with  the  shell  Company  for  the  provision  of  pilots
which  the  employment  agency  will  then  provide  to  the  based  airline  under  the  terms
of its contract with the airline.

The pilots are provided with contractual terms with the shell Company – they have no
contract with the airline. Furthermore the pilots are not permitted to know where the
other pilots are working out of different bases within the EU.

The  pilots  report  their  income  from  the  shell  Company  as  income  from  self-
employment as a director’s fee is taxed as self-employment under local rules.

Comment

As  outlined  in  Case  1  above,  full  income  tax  should  be  due  on  the  income  received.
Member  States  have  the  ability  to  challenge  the  employment  /  self-employment
aspect under domestic legislation. In most cases, it should be possible to demonstrate
that  the  relationship  is  akin  to  employment  as  the  contractual  relationship  between
the  employment  agency  and  shell  Company  will  specify  more  details  than  a  self-
employment  relationship,  e.g.  there  is  no  ability  for  the  workers  to  choose  their  own
working hours when flying to a schedule.

We  have  not  been  able  to  establish  the  extent  to  which  there  are  incidences  of
supposedly  “bogus”  self-  employment  and/or  the  use  of  an  intermediary  entity  to
provide the services of pilots to airlines. However, what is apparent is that rather than
tax saving considerations the use of these arrangements tends to be dictated by the
airlines need to manage their headcount by not having an excess of pilots during the
less  busy  periods.  Instead  the  airlines  can  obtain  the  services  of  pilots  through  an
intermediary entity to meet the demands of their busy season without the need to hire
them as permanent employees.

As outlined in Case 1 above, certain countries such as Ireland that have specific rules
for  aircrew  ensure  that  their  definition  includes  both  employees  and  agency  staff.  If
countries adopted similar rules that would ensure tax is charged on pilots irrespective
of the way in which they are engaged for their flying duties.

In  this  case,  if  the  effective  place  of  management  of  the  airline  was  in  Ireland,  the
State  of  residence  should  provide  double  taxation  relief  under  the  bilateral  tax  treaty
with Ireland (either by exemption or credit) unless the bilateral tax treaty with Ireland

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

includes a different version of Article 15(3). All of Ireland’s treaties with other Member
States  include  a  Place  of  Effective  Management  test,  except  for  Romania  which
includes  a  slightly  broader  “Place  of  Management  /  state  where  the  person  deriving
profits is resident” definition which in practice will lead to the same conclusion. There
is no Article 15(3) equivalent in Ireland’s treaty with the United Kingdom.

10.6  Proposed solutions to address the issue
To  the  extent  that  Aircrew  are  based  at  a  specific  location  that  is  somewhere  other
than the Place of Effective Management, that Base could be considered as the source
location/place for the duration of their posting to that Base.

Tax would then be applied based on the rules in force in the country where the Base is
– this would be less likely to be incorrect than if operated based on head office rules.

For  social  security  purposes  EU  regulation  465/2012  which  came  into  force  from  28
June 2012 introduced the "home base concept" to apply to flight crew and cabin crew
members.

That  regulation  inserted  a  new  deeming  rule  (paragraph  5  of  Article  11)  to  deal  with
flight  crew  and  cabin  crew  undertaking  activities  in  air  passenger  or  freight  services.
What this means is that an activity as a flight crew or cabin member is now deemed to
be  an  activity  pursued  in  the  Member  State  where  the  home  base  is  located.  As  a
result, Article 13 (the normal multi-state rules) and especially the substantial working
test  in  the  country  of  residence  is  no  longer  relevant  in  determining  the  applicable
legislation for flight and cabin crew. Unless covered by transitional arrangements the
liability to social  security  will  be in the state in which the home  base is located.  The
home  base,  is  defined  in  Annex  III  to  Regulation  (EEC)  No  3922/91,  as  "the  location
nominated  by  the  operator  to  the  crew  member  from  where  the  crew  member
normally  starts  and  ends  a  duty  period  or  a  series  of  duty  periods  and  where,  under
normal conditions, the operator is not responsible for the accommodation of the crew
member concerned".

To  have  a  similar  rule  for  income  tax  purposes,  there  would  be  a  need  to  obtain  a
consensus  between  Member  States  given  that  in  contrast  to  social  security
contributions  where  there  is  EU  legislation  in  place,  Member  States  are  allowed  to
apply  their  own  income  tax  systems  alongside  double  tax  treaties.  This  may  be
difficult  to  achieve.  It  is  important  to  note  that  withholding  of  tax  in  the  location  of
source  does  not  necessarily  result  in  a  conflict  with  the  taxability  rules.  Individuals
who believe they are taxable only in the country of residence would be free to obtain
certification  of  residence  from  the  home  country  to  alleviate  withholding,  assuming
that this were straightforward to obtain. The  act  of applying for  the certification thus
alerts the country of residence to the existence and source of the income.

It  should  be  noted  that  any  amendment  to  the  status  quo  would  require  individual
treaties  to  be  renegotiated,  or  a  consensus  across  Member  States  that  the  Place  of
Effective  Management  will  be  broadened  in  their  domestic  legislation  to  include  a
Base.

10.7  Proposed  changes 
Discussion Draft
On  15  November  2013,  the  OECD  published  a  discussion  draft  of  potential  changes
that  they  intend  to  make  in  Article  8  (which  covers  the  corporate  tax  situation  for
Shipping, Inland Waterways Transport and Air Transport) and Article 15 (3).

in  the  OECD  Model  Tax  Convention  –

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

The majority of the discussion draft refers to the corporate tax position of the carrier,
and  the  intention  of  these  changes  is  to  shift  taxation  from  the  place  of  effective
management of the enterprise to its place of residence.

However there is also a proposal for a corresponding amendment to Article 15 (3).

In  the  discussion  draft  background  to  the  proposed  changes  to  Article  15  (3)  it  is
noted that:
a. these are intended to address interpretation issues that arise from the use of the

phrase “may be taxed”, which is used in a permissive sense in the Convention and
unlike the words “shall be taxable only”, does not restrict a State’s taxing rights.

b. the changes are also intended to deal with the application of Article 15 (3) in

triangular cases that might not have been contemplated when the provision was
first drafted, e.g. where a resident of State A is present in State B for more than
183 days and works aboard an aircraft that an enterprise of State C operates in
international traffic.

c. the proposed changes take into account the fact that the domestic law of many

countries does not allow them to tax non-resident employees simply because the
employer has its residence or place of effective management in these countries,
which means that these countries cannot, in effect exercise the taxing right
provided for in Article 15 (3).

The  proposal  is  for  Article  15  (3)  to  be  amended  to  tax  employees  in  their  state  of
residence only so as to provide a clearer and administratively simpler rule concerning
the taxation of the remuneration of these crews.

It  is  also  proposed  that  the  definition  of  international  trafficker  is  modified  to  ensure
that  it  is  applied  to  transport  aboard  an  aircraft  operated  by  an  enterprise  of  a  third
State so as to allow the application of Article 15 (3) in the situation envisaged in (b)
above.

The proposed changes include an alternative whereby the primary taxing right is given
to  the  State  of  the  enterprise  that  operates  the  aircraft  and  the  State  in  which  the
employee  is  resident  may  also  tax  the  employee  but  is  then  require  to  provide  relief
for double taxation.

If these changes are incorporated it should avoid the possibility of non taxation which
can  arise  currently  in  particular  fact  based  circumstances.  Clearly  that  thinking  on
behalf of the OECD does not take into account the discussion above in respect of the
practical aspects of determining the tax residency of each individual employee.

However, it does remove the need to look at redefining Place of Effective management
to  include  a  Base.  Also,  the  amended  wording  will  only  apply  to  new  bilateral
agreements entered into after the change is incorporated, or where states specifically
agree  an  amended  wording.  Therefore,  the  comments  and  changes  proposed  above
would still be necessary.

The  Working  Party  of  the  OECD  asked  for  comments  before  15  January  2014,  to  be
examined  later  in  the  year  prior  to  a  recommendation  being  made.  At  initial  review,
the  proposal  addresses  the  needs  identified  in  the  earlier  parts  of  Section  10,  and,
subject  to  the  practical  constraints  of  proving  residence  for  each  taxpayer  and  being
able  to  operate  a  28  country  payroll,  may  ensure  that  this  aspect  of  harmful  tax
competition is satisfactorily dealt with.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

11  Students, Business Apprentices and Academics

11.1  Issues identified
As  noted  in  Section  4,  Students,  Business  Apprentices  and  Academics  are  a  specific
category of cross-border workers deemed worthy of a specific tax provision to ensure
that  their  work  is  treated  clearly  from  a  tax  perspective.  Nevertheless,  these
provisions  are  not  widely  known  or  understood,  and  the  fact  patterns  that  underlie
them  make  certainty  of  treatment  difficult  to  obtain,  and  thus  may  prevent  the  free
movement of labour for these categories of workers.

A  number  of  tax  treaties33  may  include  a  provision  within  Article  20  to  exempt  the
remuneration  of  professors  or  teachers  from  tax  in  the  Host  Country  provided  that
they remain  resident in the  other state. However, such  exemption is typically limited
to  2  years  (although  some  treaties  may  be  for  longer).  In  the  absence  of  such
exemption the remuneration of professors and teachers would be taxable in the Host
Country under the standard terms of Article 15.

The  OECD  Commentary  on  Article  15  (paragraph  11),  notes  that  no  special  provision
has  been made regarding remuneration derived by visiting  professors and that many
treaties contain rules of some kind or other concerning such cases, the main purpose
of which is to facilitate cultural relations by providing for a limited tax exemption.

From a review of a series of Researchers Questions asked to the EURAXESS Services
Centers  (www.euraxess.eu;
http://www.euraxess.de/portal/taxation_in.html)  we
identified that most of the questions were simple requests to understand the rules in
specific personal cases, which were not predominantly Triangulation related, and from
review did not bring forth any specific technical issue other than the need for personal
circumstances to be interpreted on a case by case basis.

The  major  anomaly  identified  was  where  substantially  full  time  researchers  that  also
teach part time as professors would be able to benefit from the treaty provision, which
would  be  a  potentially  different  treatment  from  non-teaching  full  time  researchers,
who are covered by normal rules.

This seems to be a matter for Member States to address in their internal regulations,
determining  what  is  an  appropriate  split  of  the  time  spent  between  teaching  and
researching, to enable a visiting academic to qualify for relief under Article 20.

In terms of business apprentices, there is a need to distinguish between a payment for
services  and  a  payment  for  their  maintenance  or  training.  What  this  means  is  that
business apprentices who spend time in the Host Country will be subject to the rules
of Article 15 for determining whether or not their remuneration is taxable in the Host
Country  whereas  payments  purely  for  their  maintenance  or  training  will  be  exempt
from tax in the Host Country.

11.2  Recommendations to address this issue
Member States who exempt visiting academics from taxation on the basis of Article 20
should ensure that their guidelines for exemption clarify whether they wish to exempt
all of the income of someone whose stay in the country qualifies under Article 20, or

33 For example, the treaties between Belgium and Denmark, France, Germany, Netherlands and the treaties
between France and Germany, Italy, Spain.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

whether  they  intend  the  exemption  to  apply  only  to  the  income  categorised  under
Article 20.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

12  Elimination  of  tax  obstacles  with  respect  to
procedures, interpretations or legal instruments

12.1  Procedures for claiming Double Tax Relief
Most countries will require proof of taxation in the Host Country to permit double tax
relief in the Host Country.

In a simple world, the most effective process would work something like as follows:
§ The individual bears tax on his income received in the Host Country
§ The  employer  provides  him  with  evidence  at  the  end  of  the  tax  year  of  income

received and tax paid on it

§ The individual completes a tax return in the Home Country, and claims double tax
relief.  He  does  this  by  either  exempting  the  income  from  tax,  or  crediting  the
foreign tax paid against the Home Country liability.

Doing this should be possible with one form, transposing the Income Earned line from
the Host Country form to the Income section of the Host Country return, or including
the Taxes Paid amount in a box in the Taxes Payable section.

In practice, the following issues often arise;
§ The  Home  Country  tax  return  is  due  before  the  Host  Country  tax  position  is

finalized, meaning that numbers are not available

§ The basis of calculation is different (see example below)
§ Tax  offices  in  either  country  are  unfamiliar  with  double  tax  agreements,  and

extensive work is required to explain the situation to them

§ Foreign language documentation is not acceptable, and the taxpayer has to obtain

official translations of the documents, often at excessive cost

§ Differences  in  interpretation  in  how  the  foreign  calculation  maps  to  the  Home

Country tax system, leading to different positions within the same country

§ Countries with Tax Assessment systems may ask for copies of the Tax Assessment
in the Host Country, which countries operating a ‘file and pay’ system are unable to
provide.

Many  of  the  new  EU  countries  in  2004  and  2007  have  been  through  an  extensive
learning exercise over the past 20 years, and the issues identified above are less of a
problem  than  they  may  have  been  in  the  1990s  or  2000s,  however,  the  practical
issues still remain in many places.

The Commentary to the OECD Model Treaty says the following:34

“A number of Articles of the Convention limit the right of a State to tax income derived
from  its  territory.  As  noted  in  paragraph  19  of  the  Commentary  on  Article  10  as
concerns  the  taxation  of  dividends,  the  Convention  does  not  settle  procedural
questions and each State is free to use the procedure provided in its domestic law in
order  to  apply  the  limits  provided  by  the  Convention.  A  State  can  therefore
automatically limit the tax that it levies in accordance with the relevant provisions of
the  Convention,  subject  to  possible  prior  verification  of  treaty  entitlement,  or  it  can
impose the tax provided for under its domestic law and subsequently refund the part
of  that  tax  that  exceeds  the  amount  that  it  can  levy  under  the  provisions  of  the
Convention.  As  a  general  rule,  in  order  to  ensure  expeditious  implementation  of
taxpayers’ benefits under a treaty, the first approach is the highly preferable method.
If  a  refund  system  is  needed,  it  should  be  based  on  observable  difficulties  in

34 Limitations of source taxation: procedural aspects – paragraph 26.2 of the Commentary on Article 1.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

identifying entitlement to treaty benefits. Also, where the second approach is adopted,
it  is  extremely  important  that  the  refund  be  made  expeditiously,  especially  if  no
interest is paid on the amount of the refund.”

12.2  Documentation Requirements for Claiming of Double Tax Relief
Member States each have their own rules to determine how they validate a claim for
Double Tax Relief under the appropriate Double Tax Agreement

Table  4  summarises  what  they  require,  whereas  Table  5  summarises  what  they  are
able  to  provide  to  taxpayers  from  another  state  that  require  documentation  to  claim
relief in the other state.

Points to note include the following;
§ Some countries require all foreign documents to be translated, others are happy to

accept certain major foreign languages such as German, English or French;

§ Some translations need to certified in a foreign consulate (e.g. Greece)
§ Some will only ask for documents if a return is audited, thus permitting taxpayers

to defer the costs, and potentially avoid if no audit takes place.

Difficulty arises in obtaining proof of tax paid
§ Some  countries  (e.g.  Hungary,  Denmark)  that  have  a  self-assessment  system  do

not have an official document that evidences the tax that has been paid

§ Other countries require that as proof, meaning that excessive time can be incurred
agreeing  with  the  tax  authorities  in  that  country  what  constitutes  valid  proof  for
them to accept a double tax relief claim.

Tax filing deadlines in each Member State vary, meaning that where a return is filed in
one country much sooner than in the other, there may be considerable delays in
obtaining documented proof.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Table 4 - Documentation required to support claim for Double Tax Relief

Copy of
tax
return

Copy of tax
assessment

Proof
of tax
paid

Additional
comments

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech
Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

Yes

Yes

No

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Non

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

No

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

Note 7

Note 8

Note 9

Note 2

Note 2, 8

Note 2

Notes to Table 4:
1   Austria - Certified translation required if documentation not in German or English.

In some cases, proof of domestic right of taxation is required.
2 Bulgaria - Slovakia, Spain, and UK - Only required upon audit

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

3   Estonia - Certified evidence of tax paid or withheld is required.
4   Finland - Translation may be required.
5   Greece - Documentation needs to be translated into Greek by the Greek consulate in the

other country.

6   Hungary - Difficulties arise as there is no common standard applied by the tax authorities.
7   Italy – foreign tax needs to be regarded as final and not repayable; translation required if

not in English, French or Spanish

8   Lithuania – Certified Translation required
9   Netherlands - English/German/French documentation generally accepted.

As  the  tax  return  and  claim  for  Double  Tax  Relief  is  being  filed  in  the  country  of
residence, a Residence Certificate from another country will not be applicable.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Table 5 - Documentation available to Other State to support claim for Double
Tax Relief

Residence
Certificate

Copy of
tax
return

Copy of tax
assessment

Proof
of tax
paid

Additional

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech
Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

No

Yes

No

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

No

No

Yes

Yes

Yes

No

Yes

No

No

no

No

No

No

Note 1

Note 2

Note3

Note 4

Note 5

Note 6

Note 7

Note 8

Note 9

Note 10

Note 11

Note 12

Note 13

Note 14

Note 15

No

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Notes to Table 5:
1  Austria - Documentation  only  in  German – certified  translation  needs  be  obtained
externally.  If  worker  only  has  wages  subject  to  withholding  a  tax  return  needs  to  be

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

submitted on a voluntary basis.

2   Croatia – Certificate of Residence does not identify period to which it relates
3 Czech Republic - Czech/English/German versions can be provided on request
4 Denmark - Tax authorities are reluctant to provide proof of tax paid
5 Estonia - Unable to provide details of tax paid on fringe benefits as reported separately

and tax is paid by employer.

6 Finland - The taxpayer may need to obtain a translation.
7 France - Residence  certificate  can  only  be  issued  before  September  following  year  of

assessment.

8 Germany - German language documentation only
9 Hungary  has  a  self- assessment  system  and  so  an  assessment  cannot  be  provided.
Residence  certificate  cannot  be  obtained  after  leaving  Hungary  and  deregistering
Hungarian address.

10 Italy – tax assessment can only be provided on an audit
11  Luxembourg  –  not  all  taxpayers  are  required  to  file  a  return.  In  those  cases,  other

documentation needs to be requested.

12 Netherlands  -  Where  tax  returns  not  required  the  Dutch  tax  authorities  can  issue  an

official income statement if required.

13 Romania - There is no tax return requirement for pure salary income.
14 Slovakia - Documentation can be provided in Slovak/German/English
15 Slovenia - Documentation is typically bilingual. Upon application a certificate of tax paid

in Slovenia can be provided.

12.3  Recommendations to simplify Double Tax Relief claims

§ Each  tax  authority  should  ensure  that  clear  instructions  are  given  to  their

respective tax offices in how to apply a treaty.

§ A  pan-EU  list  of  the  relevant  forms  numbers  and  agreement  on  what  the  correct
lines  to  cross-reference  to  the  return  in  each  country  will  also  help  lower  income
taxpayers prepare their returns.

§ Some countries may prefer to implement a separate tax office for the tax affairs of
those with Foreign Income, or for international employers, to ensure consistency in
the treatment of Double Tax Relief claims.

§ Taxpayers  should  be  able  to  provide  the  source  documents  from  the  host  country
without being required to pay for translations individually, to ensure access to the
reliefs to which they are entitled.

§ This  can  be  done  either  by  cross-referencing  the  list  of  relevant  forms,  or
introducing  a  standardised  Double  Tax  Relief  information  form,  that  the  taxpayer
files  with  his  tax  return  in  the  Host  Country,  that  will  be  accepted  in  the  Home
Country.

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13  Final Recommendations of this Report

Based  on  the  work  performed  in  this  report,  the  Commission  should  consider  the
following recommendations;

13.1  Bilateral tax agreements
Member  States  that  do  not  yet  have  bilateral  tax  agreements  should  work  to  ensure
that  these  are  entered  into  as  soon  as  practical,  to  ensure  consistency  of  treatment
across the Union.

Consideration should be given to the possibility of having a consistent definition of key
terms and procedures in agreements between Member States including:
§ The method of counting days in determining residence and sourcing income.
§ The  timelines  in  Mutual  Agreement  cases  with  a  view  to  reducing  them,  to  avoid

uncertainty

§ The  interpretation  of  “employer”  for  the  purposes  of  applying  the  Employment

Income Article in a bilateral tax treaty.

§ Review  whether  there is  a  case  to  answer  in  respect  of the  need  for  Enforcement
Proceedings  in  cases  where  tax  residence  for  treaty  purposes  is  only  in  practice
available to nationals (see Section 5.2 above).

13.2  Frontier Workers
In  isolation,  a  Frontier  Worker  provision  is  unlikely  to  be  willingly  entered  into,  as  a
Member State cedes taxing rights back to the country of residence. However, Member
States  with  high  amounts  of  cross-border  traffic  should  consider  whether  a  Frontier
Worker provision would encourage investment and economic development as part of a
broader  package  of  structural  reforms  to  address  redevelopment  needs  in  certain
geographies.

13.3  “Subject to tax” clauses
Where  Member  States  permit  Double  Tax  Relief  based  on  income  having  been
subjected  to  tax  in  another  Member  State,  they  should  ensure  that  the  income  in
question has in fact been taxed in that other state before granting relief.

13.4  Tax withholding for non-residents
Further work is required in ensuring that taxpayers are not subjected to multiple levels
of  tax  withholding  at  the  same  time.  This  will  typically  occur  where  they  remain
resident  in  their  Home  Country,  but  subject  to  withholding  in  the  Host  Country.  In
those  cases,  it  should  be  possible  to  ensure  that  Home  Country  withholding  can  be
suspended  on  a  clear  and  transparent  basis,  without  the  burden  of  double  taxation,
whilst not permitting withholding to be ceased altogether.

Many Member States should endeavour to provide a Certificate of Tax Residence on a
timely basis. Where the taxpayer is fairly taxable in the Host Country, a Certificate of
Tax Residence is in any event not relevant, however the taxpayer may need the Host
Country  to  provide  some  documentation  back  to  the  Home  Country  to  minimise
withholding.

Consideration  could  be  given  to  providing  a  ‘Confirmation  of  requirement  for  tax
withholding’  in  the  Host  Country  to  attach  to  a  withholding  relief  application  in  the
Home country to alleviate double withholding.

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

13.5  Triangulation
Triangular situations create particular complexity.

In this context, it would  be desirable for Member States to provide more information
as  to  the  applicability  of  tax  treaties,  combined  with  an  easier  way  to  determine  the
ultimate country of residence in order to ensure that treaties are applied in the correct
order.

13.6  Aircrew
Existing  double  tax  agreements  typically  give  the  country  from  where  the  place  of
management of the airline takes place the right to tax the employment income of the
aircrew.  However,  those  countries  do  not  always  have  a  provision  in  their  domestic
law to enable them to tax non-residents on work performed outside the country.

The  current  OECD  consultation  on  this  matter  in  process  at  the  moment  seems  to
prefer moving taxation back to a country of residence basis. A change in this direction
will not apply to treaties currently in force, and consideration should be given to taking
steps  to  ensure  that  all  existent  bilateral  agreements  within  the  EU  are  amended  at
the same time to implement the new wording on a consistent basis.

13.7  Procedures for claiming Double Tax Relief
Clearer simpler instructions should be provided by Member States to enable taxpayers
to  access  information  regarding  Double  Tax  Relief.  Additionally,  forms  should  be
simplified  and  possibly  standardised  to  enable  the  process  to  be  faster  and  more
certain for taxpayers.

A  Communication  clarifying  what  forms  each  country  can  and  cannot  provide,  and  a
bilateral understanding of what is and is not available, should ensure that the debate
takes place at a Tax Authority level, and not case by case for each taxpayer.

Consideration should be given to providing some form of cross-border tax certificate in
a standardised form, to avoid onerous requirements for translations, especially costly
notarised or official translations.

13.8  Single Tax Office to deal with workers from other Member States

working in Host Country

Member  States  should  have  a  single  tax  office  to  deal  with  workers  from  other
Member  States  working  in  their  state  with  a  view  to  avoiding  potential  lengthy
disputes  about  double  taxation  and  the  interpretation  of  bilateral  tax  treaties.  The
Netherlands  and  the  UK  are  examples  of  Member  states  that  adopt  this  approach.
Even  if  it  was  not  possible  for  all  Member  States  to  adopt  this  approach,  Member
States  should  be  encouraged  to  have  a  single  tax  office  in  each  Member  State  which
advises  all  other  tax  offices  in  that  State  of  the  tax  treatment  to  be  applied.  The
benefit of this is that it should reduce compliance costs for dealing with and resolving
cross  border  tax  issues  as  each  Member  State  would  have  a  specialist  office  with
expertise in cross border tax issues such that a common interpretation of tax treaties.
is  applied.  This  would  also  allow  for  the  earlier  resolution  of  disputes  between  tax
offices in Member States.

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Appendices

Appendix 1
Appendix 2

Appendix 3
Appendix 4
Appendix 5

Tax Treaties between the EU Member States
Variation  in  bilateral  tax  treaty  measurement  periods  for
the 183 day rule
Method of application of Double Tax relief
Application of Article 15 (3) in respect of Aircrew
Summary of Directors’ fees treatment

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Appendix 1: Tax treaties between the EU Member States

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

Demark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

Date signed

Austria

Belgium

Bulgaria

Croatia

N/A

Cyprus

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Czech Rep.

Demark

N/A

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

N/A

N/A

N/A

No Treaty

Before 1963 - Prior to first OECD
model

Between 1963 and 1966 - based on
OECD Model from 1963

Between 1967 and 1977 - based on
OECD Model from 1966

Between 1978 and 1982 - based on
OECD Model from 1977

Between 1983 and 1992 - based on
OECD Model from 1982

Between 1993 and 1998 - based on
OECD Model from 1992

Between 1998 and 2000 - based on
OECD Model from 1998

Between 2001 and 2003 - based on
OECD Model from 2000

Between 2004 and 2005 - based on
OECD Model from 2003

Between 2005 and 2008 - based on
OECD Model from 2005

Between 2009 and 2010 - based on
OECD Model from 2008

2010 onwards - based on OECD
Model from 2010

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

April  2014 | 73

Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Appendix 2: Variation in bilateral tax treaty measurement periods for the 183
day rule

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

Demark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Key

N/A

No Treaty

183 days in any 12 month
period

183 days in the tax (fiscal )
year concerned

183 days in any twelve month
period commencing or ending in
the fiscal year concerned

183 days in the calendar
year

183 Day Period as specified
within treaty

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

Demark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

April  2014 | 74

Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Appendix 3: Method of application of Double Tax relief

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

Demark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Key

N/A

No Treaty

Credit method

Exemption method

Exemption with
progression

ROW COUNTRY
        →

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

1

Demark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

won set 1

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

April  2014 | 75

Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Appendix 4:

EU member states Double Tax Agreement: Application of Article 15(3) in respect of aircrew

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Rep.

Demark

Estonia

Finland

France

Germany 

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxemborg

Malta

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

UK

Austria

Belgium

1

1

1

Bulgaria

1

1

3

1

1

3

1

1

1

Croatia

N/A

Cyprus

Czech Rep.

1

3

Demark

1

1

1

1

3

1

1

1

1

1

1

1

N/A

Estonia

Finland

1

1

1

1

2

1

4

1

1

3

1

1

1

1

1

1

N/A

France

Germany

Greece

N/A

No Article 15(3) provision

1

2

3

Remuneration may be taxed in the Contracting State in which the place of effective
management of the enterprise is situated

Remuneration may be taxed in Contracting State in which the profits from the
operation of the aircraft are taxable

Remuneration taxable only in the contracting State in which the place of effective
management is situated/or in which the person deriving profits from operation of
aircraft is resident

4

Remuneration derived by a resident of a Contracting state in respect of employm ent on
aircraft operated in internatuional traffic is taxable only in that State.

2

1

1

1

1

1

1

1

1

1

1

2

1

1

1

1

3

1

1

1

1

2

1

2

2

2

2

2

2

2

2

1

1

Hungary

Ireland

1

1

1

1

1

1

1

1

1

1

1

2

1

1

1

3

1

1

1

1

1

1

1

1

2

3

1

Italy

Latvia

1

1

1

1

1

1

1

4

1

2

1

1

1

3

1

N/A

N/A

1

1

1

1

1

1

1

1

1

1

1

2

1

1

1

N/A

1

1

1

1

1

1

1

1

1

1

2

1

1

1

1

Lithuania

Luxemborg

Malta

1

1

1

1

1

1

1

1

1

1

1

2

1

1

1

1

1

1

N/A

3

3

4

4

4

4

4

4

4

1

2

4

4

4

4

4

4

4

Netherlands

Poland

Portugal

1

1

1

1

1

1

1

1

1

1

1

2

1

1

1

1

1

1

1

4

N/A

1

1

1

3

1

1

1

1

1

1

2

1

1

1

1

1

1

1

1

1

Romania

Slovakia

1

1

3

1

1

1

1

1

1

1

1

2

1

3

1

1

1

1

1

4

1

1

2

1

3

1

1

1

1

1

1

1

1

2

1

1

1

1

1

1

1

4

1

1

1

Slovenia

Spain

1

1

1

1

3

1

1

1

1

1

1

2

1

1

1

1

1

1

1

1

1

1

1

1

N/A

N/A

3

1

1

1

1

1

1

1

1

2

1

1

1

1

1

1

1

4

1

1

1

1

1

Sweden

UK

4

1

3

1

1

1

4

1

4

1

1

1

1

1

1

1

1

1

1

4

1

1

1

1

1

1

N/A

N/A

2

4

4

1

1

2

3

1

2

1

4

4

1

1

1

1

1

4

1

1

1

2

1

2

1

April  2014 | 76

Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Appendix 5: Summary of Directors’ fees treatment

Member
State

Type of
Company

Whether Director
treated as employee
or self- employed
under domestic tax

Austria

Limited Liability or
Public Limited

Management Board -
employee

Austria

Belgium

Limited Liability or
Public Limited

Supervisory Board – self
employed

SPRL, SA, SC

self-employed

Bulgaria

Bulgaria

Cyprus

Limited Liability and
Public Liability

Employee

Limited Liability and
Public Liability

Self-employed if non-resident
with no fixed base in Bulgaria

Limited Liability and
Public Liability

Executive directors -
employee

Cyprus

Limited Liability and
Public Liability

Non-executive directors -
employee

Relevant Tax
Treaty Article

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Article 16, Director Fees

Article 16 for directors
fees earned in respect of
work typically performed
by a director, i.e.
strategy, special
projects assigned by the
Board and board
meeting attendance.
Article 15 (employment
income) for
managerial/executive
type work)

Article 15, Employment
Income

Article 16, Director Fees

Article 15, Employment
income

Article 16, Director Fees

Tax
withheld
at source

Yes -
withholding
under the Pay
as you earn
system

No

Yes

Yes

Yes

Yes -
withholding
under the Pay
as you earn
system

Yes -
withholding
under the Pay
as you earn
system

Czech
Republic

Czech
Republic

Czech
Republic

Denmark

Joint stock company
(similar to Public
Limited company in
the UK, in Czech
"Akciová společnost")

Limited liability
company (in Czech
"Společnost s ručením
omezeným")

Limited liability
company (in Czech
"Společnost s ručením
omezeným")

Limited Liability
Companies (public
and private)

employee

Yes

Article 16, Director Fees

Non- Executive Director -
employee

Yes

Article 16, Director Fees

Executive Director: -
employee

Yes

Article 15, Employment
income

Main rule: employed

Exception: the Director may
be considered self-employed
if board memberships are
part of the Director's natural
business (e.g. lawyers or

Yes (when
considered an
employee)

Article  15,  Employment
Income  (on  the  basis
that  the  nature  of  work
is 
normal
managerial/executive
type work)

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Estonia

Finland

Finland

Limited Liability
Companies (public
and private)

Limited Liability
Companies (public
and private)

Limited Liability
Companies (public
and private)

France

SA, SAS

independent consultants)

Management Board Member -
employee

Yes

Article 16, Director Fees
(regarding fees for
board work only, e.g.
attendance at board
meetings)

Article 16,Director Fees

Members  of  Board  –  usually
regarded as self-employed.

Yes

Article 16,Director Fees

Other directors (CEO, CFO
etc) - employee

Yes

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Président Directeur Général,
Directeur Général and
Directeur Général Délégué –
employee

Director only – passive
income

Only for non-
residents

Article 15, Employment
Income

Article 16, Director Fees

France

SARL

Gérant majoritaire - employee

Only for non-
residents

Article 15, Employment
Income

Gérant majoritaire – self-
employed

Germany

Gesellschaft mit
beschränkter Haftung
(GmbH)

Director/General Manager

Yes

(Geschäftsführer) – employee

Director shareholder –
employee, provided that the
salary is appropriate (arm’s
length principle)

Germany

Aktiengesellschaft
(AG)

Supervisory Board
(Aufsichtsrat) – self employed

Germany

Aktiengesellschaft
(AG)

Board of Director (Vorstand) -
employee

Greece

Greek S.A.

Employee

Greece

Limited Company

Named Administrator –
treated as employee

Hungary

All types of companies  Employee

None unless
the individual
is subject to
limited
taxation at
source

Yes

Yes

Yes

Yes

Article 16, Director Fees

Article 15, Employment
Income

Article 16,Director Fees

Article 15, Employment
Income

Article 15, Employment
Income

Article 16, Director Fees
for fees paid for
attendance at board
meetings.

Article 15, Employment
Income

Article 15, Employment
Income

Article 16, Director Fees
for genuine director
activities (e.g., member
of supervisory board)

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Ireland

Limited Liability

Employee

Ireland

Public Limited

Executive Director - Employee

Yes – PAYE
withholding

Yes – PAYE
withholding

Ireland

Limited Liability or
Public Limited

Non-Executive Director -
Employee

Yes – PAYE
withholding

Italy

Limited Liability
company/other type
of companies (srl,
spa, sas)

If term contract applies –
employee

Yes

If director role is part of
ordinary “professional
activity” by a VAT registered
individual – self employment

Limited Liability or
Joint Stock company

Member of the Board or the
Supervisory Board - employee

Latvia

Latvia

Lithuania

Lithuania

Limited Liability or
Joint Stock Company

Limited Liability
Companies (public
and private)

Limited Liability
Companies (public
and private)

Luxembourg All

Luxembourg All

Malta

Malta

Malta

Netherlands

Netherlands

Partnership en
commandite

Partnership en
commandite

Limited Liability
(BV)/Public
Liability(NV)

Limited Liability
(BV)/Public
Liability(NV)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Director not a Member of the
Board or the Supervisory
Board - employee

Directors (CEO, CFO etc) -
employee

Member of the Management
Board – self-employed

Directors (day to day
management) - employee

Member of the Management
Board – self-employed

Employee

Employee

Statutory  director  (executive
director) - employee

Yes

Supervisory  board  member
-
(non-executive  director) 
employee

Yes

Limited Liability

Employee

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Article 16, Director Fees
(this assumes that it can
only be performed by a
director, for example by
attendance at board
meetings)

Article 16, Director Fees
will normally apply

Article 16 – Director
Fees

Article 15 – Employment
Income

Article 15 – Employment
Income

Article 16 – Director
Fees

Article 15 – Employment
Income

Article 16 – Director
Fees

Article 15 (Employment
Income) and Article 16
(Directors’ Fees)

Article 15 (Employment
Income) and Article 16
(Directors’ Fees)

Article 15 (Employment
Income) and Article 16
(Directors’ Fees)

Article 16 (Director
Fees)

Article 16 (Director
Fees)

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

Poland

Poland

Portugal

Portugal

Romania

Slovakia

All Companies

All Companies

Directors  (CEO,  CFO  etc)  -
employee

Yes

Directors 
resolution/management
contract

based 

on

Yes

All Companies

Executive Director - Yes

Yes

All Companies

Non-Executive Director - Yes

Yes

All Companies

Employee

Yes

Limited Liability
company

Employee

Slovakia

Joint Stock company

Employee

Slovenia

Slovenia

Slovenia

Limited Liability

Employee

Public Limited

Executive Director - employee

Limited Liability or
Public Limited

Non-Executive Director -
employee

Spain

All Companies

Depends on legal analysis –
may be employee or self-
employed

Sweden

All Companies

Employee (normally)

Yes

Sweden

All Companies

Self-employed if the Director
invoices the company from a
privately owned company

Limited Liability

Employee

United
Kingdom

United
Kingdom

Public Limited

Executive Director - Employee

Yes – PAYE
withholding

Yes –Pay as
you earn
withholding

Yes –Pay as
you earn
withholding

Yes -
withholding

Yes -
withholding

Yes -
withholding

Yes

No if the
company is
registered as a
taxpayer and
complies with
Swedish tax
rules

Yes – PAYE
withholding

Article 15 (Employment
Income) for executives

Article 16 (Director
Fees)

Article 15 (Employment
Income) for executives

Article 16 (Director
Fees) for non-executives

Article 15 (Employment
Income)

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Article 16, Director Fees
(this assumes that it can
only be performed by a
director, for example by
attendance at board of
directors/ supervisory
board meetings)

Article 15 (Employment
Income)

Article 15 (Employment
Income)

Article 16 (Director
Fees)

Article 15, Employment
Income (where there is
an actual employment
relationship)

Article 16, Director Fees
for functions undertaken
as a director.

Article 15 (Employment
Income)

Article 7 and/or Article
16

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive
type work)

Article 15, Employment
Income (on the basis
that the nature of work
is normal
managerial/executive

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Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance

United
Kingdom

Limited Liability or
Public Limited

Non-Executive Director -
Employee

Yes – PAYE
withholding

type work)

Article 16, Director Fees
(this assumes that it can
only be performed by a
director, for example by
attendance at board
meetings)

April  2014 | 81