Myths of the 183-day rule - 6 Cats International - Experts in Compliance Advice and Tax Solutions

183 day rule

2nd March 2018

The 183-day rule sounds relatively simple on paper. This internationally recognised tax concept means that workers and corporations operating in a foreign country for less than 183 days aren’t required to become residents and therefore do not pay tax in the host location.

However, there’s much more to this concept than meets the eye.

183-day rule misuse

The problem with the 183-day rule is that it is easily misunderstood and subsequently misused. We often hear claims that a contractor is covered by this directive as their assignment will last less than six months, but this is simply not the case.

This regulation only applies to dependent workers who are able to prove that they are in a full employment contract with the company in question. It does not apply to self-employed and independent workers. These individuals are instead treated as tax residents in the host country as soon as their assignment begins. As such they are subject to local tax payments.

Those operating through a personal service company (PSC) abroad are also unable to use the 183-day rule and will be required to become a tax resident in the host country once the contract begins. This applies for the company, its director and any employees.

The impact internationally

If the rule is misinterpreted and incorrectly applied, the host country is defrauded of the appropriate tax, VAT and social security contributions for the worker during their contract. It’s also a breach of the recently introduced Criminal Finances Act 2017 in the UK. This means that agencies, clients and contractors could all face prosecution for the misuse of the regulation.

The impact on recruiters and contractors

For recruiters, the wrongful use of the 183-day rule when placing contractors could have damaging consequences for their agency. In the first instance, there’s the risk of losing clients if a contractor is non-compliant when placed. With tax authorities launching an investigation and seeking to penalise your clients, you can be certain that relationships will be damaged long-term. There’s also, of course, the possible penalties that agencies themselves could face due to their association with non-compliant individuals.

Contractors also risk paying the host country income tax and social security on their entire global earnings as well as corporate tax on all profits by operating through a PSC outside their home country. And, of course, should these workers choose to use a PSC which is not registered in the host destination, they risk fines, penalties and back-dated liabilities.

In more severe cases, the individual and the agency could even face operating restrictions within the country and the contractor could be deported or even sentenced to time in jail.

Seek expert advice

The simple solution to the 183-day rule challenge is to seek expert advice. As we’ve demonstrated, it’s not a clear-cut issue, so don’t expose your agency, contractors and clients to the risks.