But will these potentially complex arrangements now be more straightforward for employers to navigate? We consider the potential employment, immigration and tax implications.

The pandemic saw a surge in requests from employees to work remotely in another country, often for an extended period. Initially, requests were usually short-term relocations related to the crisis. Increasingly, however, requests have involved permanent or semi-permanent moves abroad, with the trend continuing even though the public health crisis has now abated.

The challenges of the “digital nomad”

Such requests create headaches for employers. No one wants to upset their staff or put themselves on the backfoot in the war for talent. At the same time, employers are faced with a litany of legal issues which we have considered in detail before. Would the employee’s activities in the third country create a “permanent establishment” for corporation taxes? Would the employer need to register to withhold income tax, and pay employer social security charges? Does the employee have the right to work, or could the employer find itself facing immigration penalties? Would the employee find themselves in possession of a host of local employment rights, able to take the employer to a local labour court they know little about in the event of a dispute? Will the local labour inspector come knocking at the employee’s door? What about data protection? Regulatory issues? Health and safety?

It’s therefore understandable that employers tend to tread carefully on this issue. This can mean requests being refused, authorisations time limited, or permission being granted only in specific circumstances (such as where there is an existing local entity that can employ staff). Employers of record present one possible solution, but this arrangement is not without its own challenges.

Digital nomad visas – the legal implications

Is there a better way? Some countries think so: the Bahamas was fastest off the mark with a “digital nomad visa”. The basic premise behind this is that, in return for attracting well paid staff to come and spend their earnings in the local economy, the visa conditions mean that employers won’t need to worry about any of these complex issues. Countries as diverse as Estonia and the UAE have since followed suit.

Now comes a possible game changer for British employers: the so called “Start-up Law” recently introduced as a bill in the Spanish Parliament, with approval anticipated by the end of 2022. This seeks to establish a brand-new visa and residence permit for “digital nomads” which will permit people working remotely for foreign companies to live in Spain without needing a full work visa or a local sponsoring entity.

This latest development will be of particular interest to many UK employers, given Spain’s huge popularity as both a tourist and second home destination for Brits; at end of 2020 it was estimated that there were over 380,000 British citizens residing in Spain. However, employers will need to pay close attention to the detail: although the new visa will make life easier as far as immigration law is concerned, there remains a potential sting in the tail with respect to tax and employment law.

Immigration law

If approved, the bill will be a turning point in terms of Spanish immigration law. Permit-holders will be allowed to work remotely in Spain provided that their employer is located abroad and does not operate a Spanish entity. In addition, self-employed “freelancers” will be able to work for Spanish clients, provided that the time spent does not exceed 20% of the individual’s professional activity.

Under the proposed legislation there are two main immigration routes available for individuals:

• Visa for international remote work: this is intended for qualified professionals, graduates, postgraduates of renowned universities, vocational education, and renowned business schools or applicants with at least three years of professional experience.

Foreign nationals (not ordinarily residing in Spain) who intend to stay and work remotely for a non-Spain-based company would be able to apply for a visa which will be valid for up to one year, or the duration of their employment contract if shorter.

Visa holders would also have the right to apply for a “residence permit for international remote work”, starting 60 calendar days prior to the expiry of their visa, provided the conditions that led to their original visa being granted are still satisfied.

• Residence permit for international remote work: foreign nationals who either hold the “visa for international remote work”, or who otherwise have legal status to reside in Spain, would be able to apply for this type of permit.

This permit would be valid for up to three years, or the duration of the contract if shorter. Thereafter, holders would have the right to renew their permits for periods of two years, provided that the conditions of its original approval continue to be met.

Employment law

The employment law implications of the proposed visa, however, are more complex. If employees work remotely in Spain for UK employers under the new visa, the arrangement will not qualify as a “secondment” under the Spanish legislation that implements the EU Posted Workers Directive. This means that (under this legislation at least) none of the local legal protections associated with secondments - including the obligation to grant to seconded employees certain minimum employment rights and conditions - would apply.

Even where visa holders’ contracts are governed by UK law, the position on whether local employment rights will apply is not straight forward. Although an individual employment contract may be governed by the law agreed between the parties, this choice of law is not unfettered; under EU rules, certain mandatory rules (meaning those which can’t be derogated from by agreement) cannot be contracted out of.

This begs the question which mandatory rules trump this choice of law? These are the mandatory rules of the country:

• in which the employee “habitually” carries out their work;

• in which the place of business through the employee was engaged is situated; or

• which is “more closely connected” with the contract based on all existing circumstances.

When a comparison is made between the law chosen by the parties and the applicable mandatory rule, whichever gives greater protection to the employee will apply.

In this context, this means that Spanish legislation in its entirety (including applicable industry-wide Collective Bargaining Agreements (CBA)) would apply to UK employees working remotely in Spain if the following conditions are met:

• the Spanish legislation grants them enhanced rights when compared with UK legislation; and

• the employee will habitually carry out their work in Spain (placing importance on determining how much time the employee will stay in Spain working remotely as compared to their time spent providing services from the UK), or the employee is able to prove stronger ties with Spain than with the UK (for example: if social security contributions are paid in Spain; the employee becomes a Spanish tax resident; or has worked in Spain for longer than they have worked in the UK).

With this in mind, it may sometimes be prudent for overseas employers with employees working remotely from Spain under the proposed visa to acknowledge and grant the minimum working conditions established by Spanish legislation and the applicable Spanish CBA. In particular, this would be advisable with respect to rules regarding workplace accidents, which would involve the Spanish Labour Authorities. However, what is appropriate will depend on the circumstances, and we would recommend seeking local advice on a case-by-case basis.

Corporation tax

The draft “Start-up” Act does not include any special provisions in respect of corporation tax. This means that the question of whether a company will be considered to have a permanent establishment in Spain because it sends an employee there under the new visa scheme will be determined by the existing legislation. In addition, double taxation treaties signed by Spain will continue to apply. Although this is a fact specific question - mere presence of a digital nomad does not necessarily mean that there is a permanent establishment in Spain – it may be a practical limitation on employers allowing staff to avail themselves of the new visa.

Income tax and social security

As long as an employer does not carry out an “economic activity” in Spain (defined as "the organisation on one's own account of means of production and / or of human resources, with the aim of intervening in the production or distribution of goods or services"), which will be the case for most digital nomads, there will be no obligation for the company to withhold tax on employment income in Spain.

As “digital nomads” will conduct their activity in Spain, they will be covered by the Spanish social security system and must, therefore, contribute to it. That said, those who have a valid Social Security Coverage Certificate validly issued by a Member State of the European Union, or by a state with which Spain has signed a Social Security Agreement (which includes the UK by virtue of the post-Brexit trade deal), will be exempt from this obligation.

What next?

Time will tell whether the proposed new visa will result in a renewed upsurge in requests to work from Spain, and businesses should keep a close watch on the extent to which other countries follow Spain’s lead by introducing similar measures. Whilst this won’t be in place for this summer season, if the Spanish government follows through on its plans, employers may wish to consider relaxing their rules on employees working from “home” in Spain in summers to come.