Treaty relief for employment income becomes necessary where an employee is resident in one country but performs employment duties in another, or divides their working time between several jurisdictions. Payroll location, the employer’s incorporation and the bank account receiving salary do not by themselves determine which country is entitled to tax the remuneration.
Most UK double taxation agreements follow the broad structure of Article 15 of the OECD Model, but the wording of the particular treaty must always be checked before the income is allocated.
How treaty relief for employment income follows the place where duties are exercised
The general treaty principle is that employment remuneration is taxable in the employee’s treaty state of residence unless the employment is exercised in the other state. Where duties are physically performed in that other country, that country can generally tax the remuneration attributable to those duties.
The employment income article used in UK tax treaties follows this approach in most modern UK agreements.
An employee resident in the UK who works partly in the UK and partly in Germany, for example, may therefore have UK domestic tax exposure on their worldwide employment income while Germany can also acquire taxing rights over remuneration relating to German duties.
Double taxation is then relieved under the treaty or the UK’s unilateral credit rules rather than by simply excluding the overseas workdays from the UK return.
Treaty relief for employment income and the 183-day exemption
Many treaties contain a short-term employment exemption under Article 15(2). Although individual treaty wording varies, the exemption normally requires all relevant conditions to be satisfied.
The employee must remain treaty-resident in the first country, presence in the country where the duties are exercised must remain within the treaty’s 183-day threshold, remuneration must be paid by or on behalf of an employer that is not resident in the work country, and the remuneration must not be borne by a permanent establishment or fixed base of that employer there.
The 183-day condition should not be reduced to counting workdays. For UK treaty purposes, any part of a day spent in the UK can generally count towards the relevant presence test, including arrival and departure days, weekends and holidays spent here. Genuine transit between two non-UK locations can be treated differently.
The relevant measuring period also depends on the treaty. Some agreements use the tax year, some the calendar year and others a rolling twelve-month period.
The legal employer is not always enough
The condition that remuneration is paid by or on behalf of a non-resident employer requires a substantive employment analysis.
An employee can remain contractually employed by an overseas group company while working economically for a UK company that controls and bears the cost of the assignment. Merely keeping the employee on the foreign payroll does not guarantee treaty exemption.
The treaty employer condition for short-term assignments focuses on who is genuinely responsible for the remuneration rather than the payroll label alone.
Recharge arrangements between group companies should therefore be examined together with reporting lines, contractual responsibilities and who obtains the benefit of the employee’s services.
Mixed duties require an earnings allocation
Where both countries have taxing rights, remuneration frequently has to be allocated between duties performed in different locations. A working-day basis is often appropriate for ordinary salary, but it is not universally correct.
Bonuses may relate to a particular performance period. Share awards can be allocated over a vesting or earnings period. Deferred remuneration received after residence changes may require treaty analysis by reference to where the underlying employment duties were performed rather than the date of payment.
Travel calendars should therefore distinguish physical presence from actual workdays and record the location and nature of duties.
Foreign tax credit is limited to tax on the same income
A UK resident taxed overseas on foreign workdays can generally claim credit against UK tax where the foreign country had a valid taxing right. The credit cannot ordinarily exceed the UK tax attributable to the same doubly taxed income.
Foreign payroll deductions should not simply be entered as a credit without confirming that the treaty allowed the overseas country to impose them.
International employees should reconcile residence, workdays, employer arrangements and foreign tax through the appropriate foreign income tax return service. Where bonuses, equity awards, secondments or several work countries are involved, specialist tax advice should establish the treaty allocation before foreign tax credit is claimed.
Disclaimer: This article is provided for general guidance only and does not constitute personal tax, legal or financial advice. The correct tax treatment depends on the specific facts, applicable legislation and HMRC practice at the relevant time. You should contact us for advice tailored to your circumstances before taking or refraining from any action.
