The ability for an organisation to mobilise an employee from one location to another brings with it opportunities and challenges in much the same measure, and in the course of discussions with all key stakeholders involved in any employee international mobilisation, is it almost inevitable that the often used words “183 days” are found to be weaving themselves into the fabric of the discussions.
This article examines this well-worn phrase in more detail and attempts to separate the fact from the fiction and answer the following questions –
- What is the 183 day rule?
- Why is it important?
- How is the rule applied (the fact not the fiction!)
In the simplest of terms, the 183 day rule is the maximum number of days an individual can be physically present in a particular jurisdiction before an income tax liability exists.
Therefore, surely it must follow that spending less than 183 days of presence in a particular jurisdiction means that no income tax liability exists in that location whilst more than 183 days spent in the location results in an income tax liability arising?
Well, anyone familiar with the beauty or otherwise of income tax legislation and regulation will surely be uttering the words “can it really be that straightforward?” and the resounding answer is “no”.
In reality, the number of days an individual is physically present in any particular jurisdiction is only one piece of a bigger jigsaw, where all parts need to be examined and put into place, before the full picture is available.
Many jurisdictions (including the UK) refer to 183 days of presence within their domestic tax legislation as one of the parameters against which they will measure whether an individual is considered to be a tax resident in that jurisdiction. However, where the 183 days of presence is most commonly found is within the dependant services (otherwise known as the employment income) article of a Double Tax Treaty (DTT).
What is a Double Tax Treaty and how does it work?
The main purpose of a DTT is to firstly determine which jurisdiction has the primary right to tax income when an individual who is a resident of one country spends time working or living in another country, and secondly to ensure that as far as possible an individual is not subject to income tax in more than one country on any source of income.
Accordingly, when an employee is being mobilised for a short period of time (usually for a period of around 6 months) from one jurisdiction (the “home”) to another (the “host”), the DTT network will be the first port of call to see if there is the possibility to avoid any income tax liabilities arising in the host location. And this is where the 183 day rule is most often misunderstood or misinterpreted.
Simply put, the 183 days of presence is only one of a number of conditions that exist within the employment income article of the relevant DTT. To enable exemption from income tax in the host location to be available by virtue of a DTT, all of the conditions laid out in the employment income article of the relevant DTT must be met not just the 183 day condition.
Assuming a DTT does exist between the “home” country (the individual’s country of residence) and the “host” country (the location to which the individual has been mobilised), the specific conditions laid out in the employment income article of that DTT must be considered.
Broadly, the 3 conditions that must be met can be summarised as follows –
- The individual must be physically present in the host location for less than 183 days in a defined period; AND
- The individual must remain employed and paid by an employer resident in the home location; AND
- The individual’s salary must not be ultimately borne by or recharged to a fixed base or permanent establishment that the home country employer has in the host location.
In theory, if all 3 conditions are met, DTT exemption can be claimed and ultimately no income tax liabilities should exist in the host location. However at this point it is clear that relying simply on the “183 day rule” to avoid taxation in the host location is a myth.
Furthermore, the conditions laid out in the employment income article of the DTT may not be quite as straightforward as they seem...
Firstly, let’s consider a “day of presence” in the host location and determine how to calculate such a day. For these purposes, a day of presence is any day or part of a day spent in the overseas jurisdiction. Therefore non-working days such as weekends or holidays count as a day of presence as well as actual working days.
Secondly, the maximum 183 days of presence requires to be measured over a defined period of time and each DTT measures that defined period of time differently. The 3 most common periods of measurement found in a DTT are -
- 183 days in a calendar year;
- 183 days in a fiscal (tax year) which may be different from a calendar year (think about the UK for example);
- 183 days in any 12 month period beginning or ending in the fiscal year concerned.
The 3rd measurement period is becoming the most commonly used period and is of course the most problematic as days of presence both prior or subsequent to the actual secondment period cannot simply be ignored when collating the 183 days of presence.
Thirdly, there are a number of potential traps waiting in respect of the 2nd and 3rd conditions outlined in the employment income article of the DTT in relation to the definition of an “employer” and the minefield that is recharging of costs however discussing those issues are for another day…
And finally, one very important point to note is that even if all of the conditions of the employment income article of the DTT are met and exemption from income tax in the host location is possible, there may well be a formal process to be undertaken in order to claim DTT exemption and that process may even include calculating, withholding, reporting and remitting income tax in the host location in the first instance.
In summary, the 183 day “rule” is not quite what it seems and a considerable amount of care should be taken when mobilising an individual from one jurisdiction to another for a short period of time. In short, please don’t just think less than 183 days means no liabilities!