Taxation for commuters in the Øresund region during COVID-19 lockdown
Taxation for commuters in the Øresund region
Commuters in the Øresund region who apply the Øresund Agreement for both tax and social security should be aware of the particular tax and social security consequences during the COVID-19 lockdown period. We anticipate that many commuters will have split taxation due to working from home during the lockdown period, which in most cases might be lead to a small upside in the total taxation.
Taxation of salary income
For commuters using the Øresund Agreement on taxation, the news in the information provided by the authorities is that there is "no news". This means that workdays during COVID-19 are now calculated differently due to the special situation applicable during COVID-19.
During the COVID-19 lockdown, we assume that many employees continued working from home in their home countries instead of commuting to their workplaces in Denmark/Sweden.
The tax authorities have announced that there will be no difference in the way that workdays from home will be viewed in relation to the Øresund Agreement. Based on this statement, we anticipate that during the COVID-19 lockdown period many of the employees who apply the Øresund agreement in 2020 will not be able to fulfil the requirement of more than 50% of their workdays in the employment country, and consequently split taxation between Denmark and Sweden will be applicable for this period.
For employees living in Sweden and working in Denmark, split taxation will in many cases lead to a lower overall taxation of the employment income. For employees living in Denmark and working in Sweden, split taxation may be a disadvantage if they are covered by Swedish social security. In that case, the part of the employment income that is taxed in Denmark instead of Sweden will be taxed according to the normal Danish rates up to approximately 55% instead of the lower Swedish flat tax rate of 25% ("SINK" taxation).
Commuters should be aware of this when they submit their tax returns in both Denmark and Sweden for the 2020 income year. We foresee that the Nordic withholding agreement (trækaftale) will be used in many cases in order to settle the transfer of tax between the countries.
In the beginning of the COVID-19 lockdown, the social security authorities in both Denmark and Sweden stated that the applicable social security, in particular the Øresund Agreement on social security, would not be affected by the lockdown when an employee works from home. The likelihood of a different work pattern affecting the applicable social security is thus minimal, and as such, employers will not be required to register for payment of social security contributions in another country.
Likelihood of creating a permanent establishment – working from home or place of effective management
When an employee is working from home, it is generally relevant to examine if this work from home could create a permanent establishment (PE) and corporate taxation for their foreign employer in the country of residence of the employee.
According to the OECD Analysis and the Danish guidelines (Styresignal), the situation does not in itself mean that a PE will be created due to working from home during the COVID-19 lockdown. However, it is worth noting that if the conditions regarding a PE due to a home office were present prior to the lockdown, the likelihood will remain unchanged.
The same applies to the evaluation of place of effective management of the company.
We recommend that the employer reviews the potential likelihood of a non-Danish PE in relation to employees who are allowed to work from home regularly.