Do you work remotely for foreign companies? The taxation of income earned abroad

Over the last two years, we have been able to easily observe how the pandemic has fundamentally transformed the way we work nowadays. “Work from the office” was quickly replaced with the possibility of working from anywhere in the world, a goal that some time ago seemed difficult or even impossible to accomplish.

In this context, there is a lot of confusion about the way taxes should be paid, while the most frequent question sounds like this: is this procedure carried out in the origin country of the employee (our example, Romania) or in the country where he/she works? 

In order to answer it, we present below some of the main points regarding the taxes applied on foreign income.

Which country can request tax declarations from you?

The rule says that the country where you are a resident for tax purposes can tax your total income no matter in which part of the world you obtained it. Thus, the term income includes wages, pensions, benefits, receipts from property or any other sources, or capital gains obtained from selling goods.

At the same time, each country has its own definition when it comes to residency for tax purpose, but usually:

• you will be considered a resident for tax purposes in the country where you spend more than 6 months a year;

Example 1: your home country is Romania, but you spend 10 months a year in Spain. It turns out that you are a resident for tax purposes in Spain.

• your home country will be considered the place where you are a tax resident if you spend less than 6 months a year in another EU country.

Example 2: your home country is Romania, but you spend 3 months a year in Spain, so Romania will remain the place where you are a tax resident.

Therefore, we can observe that the tax residence is not related to the residence on the identity card.

What does dual residence entail?

In some cases, you may be considered a tax resident in two countries at the same time, and consequently, both may require you to pay taxes on your income. To avoid such unpleasant situations, especially for taxpayers, most states have double taxation agreements, which set out the rules used to determine which of the two countries could consider you a tax resident.

Most of these bilateral agreements state that taxes paid in the country where you work will be deducted from the tax due in your country of residence. On the other hand, other agreements mention that income earned in the country where you work can only be taxed in that country, thus you will not pay other taxes in the country of residence.

But what about fictitious tax residence?

Under the double taxation treaties, the country where you get all or “almost all” of your income must treat you as if you were a tax resident, even if you do not live there. Some countries offer this fictitious tax resident status to cross-border commuters.

In accordance with EU law, each member state is free to determine what percentage of your income represents “almost all”.

Posted workers or jobseekers

If you are a posted worker or you are looking for a new job abroad, it will be considered that you are a tax resident in your home country. Therefore, the tax will be paid in the above-mentioned country, even if you live abroad for more than 6 months a year. 

The fundamental condition is to maintain permanent residence in your home country and, at the same time, to maintain close personal and economic ties with that state.

Who needs to declare the foreign income?

According to the Romanian law, the residents of the country and non-residents who must meet certain conditions will submit to ANAF the taxpayer registration if they have earned foreign income from independent activities, copyright, or rental. 

Thus, non-residents who meet at least one of the following residence conditions will submit the mentioned-above declaration:

a) the vital interests (family, properties, etc.) of the person are in Romania;

b) the non-resident stays in Romania for one or more periods exceeding a total of 183 days, during any interval of 12 consecutive months by the end of the calendar year, and he/she also gains foreign income which needs to be declared in Romania (from independent activities, copyright, dividends, etc.).

What categories of income do not have to be declared in Romania?

According to the law, the income from dependent foreign activities paid by a non-resident employer is not taxable in Romania; it is not declared and is not subject to the foreign tax credit.

Each country has created its own legal framework for taxation. Therefore, consultation and understanding of specific provisions are essential, along with the analysis of the agreements concluded between Romania and other states regarding tax laws.