The so-called 183-day rule is a central component of most double taxation treaties (DTTs). It determines in which country wages are taxable when a person works temporarily abroad. It is becoming increasingly important in practice, particularly in the context of secondments, cross-border projects, or remote work.
The starting point here is the so-called worldwide income principle. According to this principle, a person is generally subject to taxation in their country of tax residence on their entire income—regardless of which country that income is earned in.
So, for example, someone who is resident in Italy must report their entire income there. However, double taxation treaties ensure that this income is not actually taxed twice by dividing the taxation rights between the participating countries.
Basic Principle of Taxation
In international tax law, the basic principle is that wages are taxed where the work is physically performed.
The 183-day rule represents an important exception to this. It means that, despite working abroad, the right to tax remains with the country of residence -but only if certain conditions are met.
This exception is provided for in double taxation treaties to simplify the administration of short-term work abroad and to establish a clear demarcation of taxing rights.
Requirements of the 183-day rule
For wages to continue to be taxed exclusively in the country of residence, three requirements must be met simultaneously.
Length of stay:
The employee does not stay in the country of employment for more than 183 days in total within the relevant period (e.g., calendar year or 12-month period).
Employer:
The remuneration is paid by an employer who is not resident in the country of employment. The decisive factor here is the economic perspective (who actually bears the responsibility and the risk).
Permanent establishment:
The remuneration is not borne by a permanent establishment or fixed base in the country of employment. This means, in particular, that the personnel costs are not economically attributable to that country.
If these requirements are met, taxation remains in the country of residence. If, however, even one of these conditions is not met, the right to tax generally passes to the country of employment.
In practice, it is often the question of whether a permanent establishment exists or who is to be regarded as the employer from an economic perspective that leads to uncertainty.
Calculation of the 183 Days
The 183 days are calculated based on actual physical presence in the country of employment. This generally includes arrival and departure days as well as weekends and vacation days.
It should also be noted that the relevant period may be defined differently depending on the double taxation treaty. In some cases, the calendar year is used as the basis; in others, a rolling twelve-month period.
If the 183-day limit is exceeded, this may result in the country of employment obtaining the right to tax retroactively from the first day of stay.
Examples: Residence in Germany – Work in Italy
A typical scenario is the secondment of an employee residing in Germany to Italy.
If the employee stays in Italy for less than 183 days for a project, the employer remains based in Germany, and the costs are not borne by an Italian permanent establishment, the wages are taxed exclusively in Germany. In this case, Germany continues to tax the employee’s entire worldwide income.
The situation is different if the stay in Italy lasts longer or if the work is economically attributable to an Italian permanent establishment. In this case, Italy obtains the right to tax the portion of the work performed there. Although Germany, as the country of residence, continues to tax the worldwide income, it must avoid double taxation, for example by exempting the income or crediting the Italian tax.
Specific case study:
Mr. Müller is a resident of Germany and is sent to Italy by his German employer for a project. He works there on-site from February 1 to July 20 (= 170 days). He then spends his vacation with his family in Italy from August 1 to August 31 (= 31 days).
Result: Italy, as the country of employment, has the right to tax the wages. Mr. Müller stayed in Italy for a total of more than 183 days during the relevant period. Since the vacation is closely connected in time to the previous employment, these days must also be included in the calculation. The 183-day limit is thus exceeded.
Germany, as the country of residence, continues to tax the entire worldwide income but must avoid double taxation, generally by exempting the Italian income subject to a progression clause.
Conclusion
The 183-day rule is an essential tool for determining taxing rights in cross-border activities. It is closely linked to the worldwide income principle and the provisions of double taxation treaties. A comprehensive assessment of all requirements and the specific individual case is always decisive.
Frequently Asked Questions (FAQ)
1. What does the worldwide income principle mean?
It states that a person resident in the country must pay tax on their entire worldwide income there.
2. When does taxation remain in the country of residence?
When all requirements of the 183-day rule are met.
3. Is it sufficient to stay for less than 183 days?
No, the requirements regarding the employer and the permanent establishment must also be met.
4. What happens if the 183-day limit is exceeded?
The country where the work is performed generally gains the right to tax, often retroactively from the first day.
5. How is double taxation avoided?
Through provisions in the respective double taxation treaty, usually through exemption or credit.
6. Why is the provision complex in practice?
Because several conditions must be examined simultaneously, and each double taxation treaty has its own specific provisions.