Remote working is on the rise thanks in part to the Covid-19 pandemic which disrupted the world order. When Covid-19 was at its peak and the vaccine was still a pipe dream, many got stranded in locations different from  their workplaces but work had to go on. 

In Rwanda, measures to curb the pandemic saw international travels halted as early as March 2020 affecting people who were planning to depart the country for their jobs in several countries abroad. Consequently, where practical, virtual working for the stuck employees was arranged.

But now, it is not only about Covid-19. The narrative of office-based work is slightly changing with companies around the world increasingly hiring remote workers from other countries for relatively different reasons including saving on business costs, having access to the very best talent across the globe without undergoing the rigorous process of importing them, seeking more productivity (Global Workplace Analytics’ research has shown that remote workers are significantly more productive on a scale of 20-25% more than office-based employees) and so forth.

These arrangements raise concerns of tax risks both for the employer and the employee. This article, therefore, aims at shedding some light on tax implications associated with the remote working arrangements in Rwanda.

Rwanda’s corporate income tax is based on the concept of "permanent establishment (PE)” which is defined as a known fixed place of business through which the business which gives rise to income is wholly or partially carried on. The remote working of employees residing in Rwanda may raise concerns regarding the creation of PE risks for their foreign employers.

 According to Rwanda’s Income Tax Law,2018, where an employee concerned [except for independent contractor] acts on behalf of the employer and has the capacity to make contracts in the name of the employer, that employer is considered as if he/she owns a permanent establishment in respect of activities his/her agent/ employee undertakes for her/ him. 

This law suggests that a foreign company that has a remote employee residing in Rwanda with a vested capacity to enter into contracts on behalf of the company creates a PE in regards to the activities performed by the remote employee.  

Accordingly, profits made by the employer proportional to the activities undertaken by the remote employee will be treated as having accrued in Rwanda for that tax period and is, therefore, taxable in Rwanda.

Regarding employment income-related taxes applicable to remote employees based in Rwanda; the Income Tax Law observes that for a person to be subjected to these taxes he/she has to first qualify as a "tax resident” of Rwanda. 

An individual is a tax resident of Rwanda if that person either has a permanent residence in Rwanda, he/she has a habitual abode in Rwanda; or that person was in Rwanda for 183 days or more in a period of 12 months, either continuously or intermittently. Therefore, a resident individual in Rwanda who is an employee of a foreign company will be subject to tax on his/her virtual employment income.

Conversely, employment income received from a foreign employer who is not a resident in Rwanda by a non-resident individual [anyone who does not fulfill the above-discussed conditions] for the performance of services in Rwanda is not taxable. 

However, in the case of Covid-19 disruption, the Organization for Economic Co-operation and Development (OECD) which Rwanda has been a member of since May 21, 2019, observed that due to the unique nature of the Covid-19 crisis which has triggered the unintentional temporary dislocation of individuals globally, this fact should not create a PE risk for organisations and insisted that tax administrators should not consider the existence of a PE risk provided the circumstances created by the pandemic. In addition, the Organisation has encouraged tax administrations to mind a more normal period of time when evaluating the resident status of an individual. 

The OECD has further reinvigorated countries to initiate "country-specific” regulations to provide clarity to anyone concerned in this regard. From the above, people obligated by Covid-19 to work remotely in Rwanda and their employers may be exonerated from the tax liability incurred during that period of forced stay.

It is, however worth noting that these tax risks discussed herein are subject to the existence of a double tax agreement between Rwanda and the resident country of the foreign organization and/ or bilateral/multinational agreements Rwanda is a party to. But if there is no such arrangement between Rwanda and the resident country of the company, there is a risk of double taxation for the employer in case the PE would be established in Rwanda. For the employee, double taxation risk surfaces in the event he/she is a citizen of countries with tax systems levying taxes based on citizenship like the US or else if her/ his salary is first taxed in the resident country of the employer as country of employment.

Understanding the double taxation risk associated with remote working: The East African Community 

(EAC) case study

In respect to employment income-related taxes for instance, on the one hand, Kenya levies taxes on employment income made by a non-resident person from an employer who is resident or has a permanent establishment in Kenya.

 On the other hand, as discussed above, Rwanda levies employment income-related taxes on employment income made by tax residents regardless of where the income is streaming from. Consequently, this implies that if you reside in Rwanda and work remotely for an employer based in Kenya then you are subject to paying employment income-related taxes in both countries, thus, double taxation. Yet, since Rwanda and Kenya are members of the East African Community and parties to the 30th November 2010 East-African Community Double Taxation Agreement, this double taxation threat is kept at bay. You are thus liable for tax related to this employment income only in Kenya.

Whereas for business income to this same employer in case the PE is established through this remote worker based in Rwanda [considering the factors discussed above], Rwanda is just allowed by the aforementioned EAC members’ agreement to tax only the income attributable to the activities of that remote employee. Kenya, which principally would tax the business income based on the residence/ PE character of the employer, is prohibited to tax that same income when repatriated to Kenya by the company. In the event there was no such agreement barring double tax between Rwanda and Kenya, then the story would have been different.

Notwithstanding what has been discussed above, it is self-evident that remote working is becoming the new normal and it is important for employers and remote employees to put into consideration the tax liabilities threats that come with it.

The views expressed in this article are of the author and do not constitute legal advice. Please seek professional advice in relation to any particular matter you may have.

The writer is a corporate and commercial lawyer and Trainee Associate at K-Solutions & Partners