In this blog, we’ll break down what the 183-day rule is. You’ll learn how it’s calculated and how to mitigate non compliance risks, to help make contractor compliance in Europe, work for you.
What Is the 183-Day Rule?
Many contractors are working under non-compliant or even illegal arrangements across major European countries, despite tax authorities cracking down on ‘tax evaders’. Often, this is due to a common misunderstanding of the 183-day rule.
The 183-day rule is a globally recognised tax guideline. The rule states that an individual must pay tax if operating in a country where they spend over 183 days living and working.
The 183-day rule is designed to protect workers and companies from becoming tax residents in a foreign country. Particularly contractors working or trading in a new country for fewer than 183 days.
Many tax jurisdictions across the world require both employers and contractors/employees to track and report non-resident business projects. However, applying a “183-day” threshold and assuming you’re within tax compliance is not sufficient. It is important to note that tax criteria vary from country to country, hence the importance of seeking local employment expertise in the area you plan to work in.
How are the days calculated in the 183-Day Rule?
There is more to the 183-day rule than simply counting the days of your contract when operating globally. How the 183 days are calculated depends on the terms of the particular double tax treaty.
As far as dependant workers are concerned the 183-day rule will only apply if:
- The individuals’ employer can demonstrate a genuine employment relationship with the worker in the country where they are tax resident
- The employer can demonstrate a history of employment with that employee.
The 183-day rule does not apply to self-employed and independent workers, who are treated as tax residents in the host country from the start of their assignment.
How Permanent Establishment & Residence Connects to the 183 Day Rule
While the 183-day rule provides a general guideline for tax residency when working on a global scale, it doesn’t apply to everyone.
For individuals working overseas through a personal service company, tax residency is determined differently. In these cases, contractors can’t rely on the 183-day rule for tax exemption because their main economic activity is based in the country where they’re contracted to work.
Similarly, for independent contractors, the company becomes a tax resident in the overseas country from the start of the contract. Consequently, so do the director and any employees of that company, regardless of the number of days they spend there.
Risks of Not Knowing What the 183-Day Rule is
If your staffing agency doesn't understand the 183-day rule when operating globally, you risk losing clients and damaging your reputation by placing contractors in a non-compliant manner.
If tax authorities investigate a contractor’s tax status, and discover non-compliance with local tax regulations, they may impose penalties on your clients for engaging them.
Remember: Lack of awareness on what is the 183-day rule or country specific employment law an tax regulations is never a defence!
Contractors operating through a personal service company outside of their home country without proper regard for the 183-day rule face significant risks. These include:
- Liability for host country income tax and social security on global earnings
- Corporate tax on any profits generated by their company in the foreign country
- Home country tax obligations that may apply and aren’t covered by a double tax treaty
- Fines for unlicensed operations in applicable countries
To expand on the last point more. When working globally, contractors may be required to hold specific licenses for the company dependent on the country of operation. For example, Germany requires a labour leasing license.
If the personal service company is not registered in the host country the contractor runs the risk of:
- Fines and back-dated liabilities.
- Restriction of operation in some countries for both the contractor and agency
- Deportation
If you plan on completing work operations on a global scale, make sure you understand what the 183-day rule is to protect contractors from non compliance.
Why Does Employment Compliance Checks Matter When Operating Globally?
Even if you think you’re in the clear, you may not be.
No tax authority across the globe is short of motivation to increase revenue. After all, it is their job. Where would they look first for taxes? Well, they often start by investigating individuals or businesses suspected of tax evasion.
Inevitably, contractors are targets.
No matter how airtight you believe your employment tax process is. No matter if you’re a recruitment agency engaging a contractor in a new global market. Or the contractor operating a short-term project in a country you are not a resident in. Regular compliance checks are essential.
Don’t rely solely on contractors, clients, or management companies alone. Instead, confirm directly with local tax authorities to ensure the contractor’s arrangement is fully legal and compliant. This is the only way to protect your business from the risks of non-compliance.
How Workwell Global Can Help?
Talk to our experts to know more about the 183-day rule and how to hire talent anywhere around Europe compliantly.
Hire.
Navigating the complexities of payroll and compliance for global contractors can be a challenge for recruitment agencies expanding globally. However, with the right expertise and partnership, it becomes a smooth and efficient process.
Whoever.
At Workwell Global, we make global employment work for you. Our global contractor management and payroll services ensure compliance with local regulations, wherever in the world. We specialise in helping recruitment agencies expand into new markets seamlessly.
Wherever.
Our team provides expert guidance in areas such as payroll management, worker classification, and full employment compliance, allowing you to focus on placing talent while we handle the administrative and regulatory requirements.
Risks of 183-day rule non-compliance for contractors completing global projects
Contractors operating through a personal service company outside of their home country without proper regard for the 183-day rule face significant risks. These include:
- Liability for host country income tax and social security on global earnings
- Corporate tax on any profits generated by their company in the foreign country
- Home country tax obligations that may apply and aren’t covered by a double tax treaty
- Fines for unlicensed operations in applicable countries
To expand on the last point more. When working globally, contractors may be required to hold specific licenses for the company depending on the country of operation. For example, Germany requires a labour leasing license.
If the personal service company is not registered in the host country the contractor runs the risk of:
- Fines and back-dated liabilities.
- Restriction of operation in some countries for both the contractor and agency
- Deportation
If you plan on completing work operations on a global scale, make sure you understand what the 183-day rule is to protect contractors from non-compliance.
Are you ready to mitigate compliance risks around Europe?
Book a call with the Workwell Global team today, and let us take the complexity out of contractor compliance in Europe.