Whether you've recently turned your side-hustle into a full-time job, have decided to take a bold step and change your position, or are currently typing on your laptop from a sunshiny beach town, one thing is true: the way you work has gone through dramatic changes over the last year and a half.
It's difficult to predict all the shifts that are still to come as the #futureofwork begins to take shape, but what we know for sure is that digitalization & internationalization are no longer mere buzzwords, but staples that every company has to keep in mind when examining their operational structures.
why care about cross-country regulations?
Although many European countries are relaxing safety measures, changes caused by the pandemic are likely to make a lasting effect: at the beginning of the year, Spotify announced that their employees can choose to work from anywhere, permanently - many companies are following suit. Antiquated 9-5 office structures are slowly disappearing, and due to the rising vaccination rates, international travel is making a swift comeback.
What's more, people are learning that their place of work doesn't need to be their home. More and more individuals are actively trying to figure out working in a different country than the one they live in, or multiple places at once. This requires a specific legal and financial examination framework in order to ensure compliance with all regulations.
To make sure you're able to cover your bases and perform your activity safely, from anywhere, our partners at ARTUS Tax Consulting sat down with us and shared their most valuable tips on social security and taxation when working from abroad.
Tax preparation is a necessary evil when you plan to work remotely, whether it is in the course of an employment relationship or while self-employed. Good preparation is key in order to not miss or overlook anything before taking the big step. In fact, what may seem like an administrative burden at first, pays off in the long run, ensuring legal security and avoiding (large) additional payments.
#1 place of residence vs place of taxation - general rules for employees and entrepreneurs
Usually, your resident country can tax your worldwide income, including wages, business income, benefits, income from property, or from any other source, whereas the definition of resident state is generally based on domicile or habitual abode.
Each country has its own definition of tax residence, yet you will normally be considered a tax resident in the country where you spend more than six months per year.
It is possible that two countries may consider you a tax resident at the same time. In this case, so-called double tax treaties – which Austria concluded with numerous countries worldwide – provide rules to determine the right of taxation between the two states in order to prevent double taxation. Most agreements stipulate that one is a tax resident in the country with which the closer personal (family) or economic ties exist, the personal aspect being the decisive factor.
tl;dr: you will have to pay taxes in your country of residence, which regularly is the place with your closest personal or economic ties, whereas personal ties prevail; if your country of residence and your country of professional activity do not coincide, the applicable double tax treaty allocates the right of taxation between them in order to prevent double taxation.
#2 working from abroad as an employee
When you are posted abroad for a longer time (more than 183 days per year), your income is generally taxed in the country of activity. If the 183-day period is not exceeded within a 12-month period or calendar year (depending on the applicable double tax treaty), and the remuneration is paid by an employer who has neither a branch nor permanent establishment in the country of activity, the resident country may tax the employment income. Net wage and hypo tax agreements can be used to prevent any tax-related disadvantages that may arise from working abroad.
If you are posted abroad and choose to stay there for more than 183 days, you may be still considered a tax resident in your home country according to the double tax treaty. This is the case if, in addition to a residence, there are stronger personal ties in your home country. In this case, the employment income is subject to taxation in the country of activity to the extent that it is attributable to working days spent there. Depending on the double tax treaty, the country of residence, which generally has the right to tax the entire world income, excludes the income taxable abroad from taxation or credits the taxes already paid on it.
tl;dr: if you are employed abroad, your income can generally be taxed in the country of activity; if you spend less than 183 days per year working abroad though, and your employer does not have a branch or permanent establishment in that country of activity, your income usually remains taxable in your residence country.
#3 working abroad as an entrepreneur or managing directors with substantial participation
Income earned by a resident of a contracting state from self-employment is subject to taxation only in that state unless a permanent establishment is regularly available in the other contracting state (= state of activity) for the exercise of that activity. In this case, income may be taxed in the other state to the extent that it is attributable to the permanent establishment. Concerning the permanent establishment abroad, above all the period (> 6 months), power of disposal, as well as its use for business activities, are crucial.
Significantly involved managing directors who, under domestic law, have income from self-employment are regularly more comparable to a self-employed person or an entrepreneur in double tax treaty law. However, jurisprudence may considerably vary throughout the EU in this regard.
If the applicable double tax treaty does not permit any conclusions as to what income from managing directors with substantial participation is to be subsumed under, the Austrian Administrative Court states that the interpretation of the law must be based on national law. If the managing director is not a resident of the same country as the company, the income is solely taxable in the resident state of the company if the managing director maintains a permanent establishment or fixed base on the premises of the company.
tl;dr: though regulations can vary throughout the EU, managing directions are generally similar to self-employed individuals when it comes to taxes - both in this case, as well as for entrepreneurs, the time spent abroad and applicable double tax treaties are highly relevant.
Find out more about what to keep in mind when working from abroad directly on the ARTUS blog (DE).
In order to avoid unwanted changes of social security systems (with the consequences that pension entitlements could arise in more countries, entitlement to unemployment money could cease in a country, etc.), it is highly recommended to assess implications before starting an activity in another state.
Within the EU/EEA/Switzerland, social security responsibility is determined by Reg. (EC) 883/2004. A person can only be subject to social security in one state. By this regulation, the employee should be protected from multiple insurances in case of multi-state work.
Basically, a person who is carrying out their (self-)employment in one state is subject to social security in that same state (principle of territoriality).
exception from the principle of territoriality
An exception of this principle applies in case of secondments from one country to another. The social security responsibility can remain in the home state of the person for up to 24 months. Self-employed individuals can apply this exception as well, as long as the activity carried out in the other state is similar or identical to the activity usually carried out in the home state.
If a secondment is planned for more than 24 months, then there would be a possibility to apply for an exceptional agreement for further being covered by the social security in the home state. The two involved states coordinate and take a decision on the competent state.
In order to be able to prove the social security competence of the other state, it is recommended that all employees carrying out their work abroad hold form A1 always with them. The A1 form has to be applied in the country whose regulations for social security purposes are relevant.
Moreover, there are special rules for employees who are physically performing their work in more than one country at the same time:
one employer – physical presence (work performed) in more than 1 country
Social security responsibility is based on the physical presence in the home state of the employee.
activity of > 25 % in the home state (e.g. home office) -> coverage by social security of the home state
The foreign employer then has to register in the home state for social security purposes and to pay the contributions to health insurance fund in the home state.
if substantial home office activity (> 25 %) is only caused by COVID-19 -> this triggers no shift of social security responsibility into the home state if the only reason for home office was COVID-19.
activity is exercised for < 25 % in the home state, the employer state is responsible for social security.
two or more employers – physical presence (work performed) in more than 1 country
total work (from all activities) is substantially (> 25 %) exercised in the home state, or
if < 25 % is exercised in the home state but employers are in different countries
-> employee is covered by social security in the home state.
All employers in other EU/EEA/Switzerland states have to therefore register in the home state of the employee and collect social security contributions from each employment separately up to the maximum base for contribution calculation (=EUR 5.550 in 2021 for individuals covered by social security in Austria). If in total (that means with all employment relationships together) the maximum contribution base is exceeded, then the employee may apply for a refund of the amount exceeding the maximum contribution base after the end of the year.
self-employment in two or more states
activity > 25 % in home country -> social security responsibility of the home country
activity < 25 % in home country -> social security in that state where the center of activity or main activity is carried out.
self-employment and dependent work in two or more (different) states
In any case, social security obligation is in the state where dependent work is exercised.
work performance outside of EU/EEA or switzerland
Basically, the principle of territoriality is applicable in this case, ie social security regulations of the state are applied where work is performed. It is to be assessed by the individual national system of social security whether there is an insurance obligation. If according to each national law, insurance obligation is given in both states, this could result in double charging for social security contributions in two states.
Nevertheless, there are bilateral agreements between many states that coordinate in which state the employee should be covered by social security. Hence, bilateral agreements can prevent double charging.
Find out more about social security while working from abroad directly on the ARTUS blog (DE).
p.s. As tax cases with cross-border aspects are usually quite complex too, it is highly recommended to consult a tax professional upfront who will support you with all tax-related matters that arise. ARTUS Tax Consulting is happy to support in case of any questions you may have.
ARTUS is an Austrian company specializing in tax consulting, HR management, auditing, accounting, and management consulting. Dedicated to their clients' economic success with enthusiasm and devotion, the ARTUS team provides individual solutions and supports both companies and individuals in making important, correct decisions.
With extensive expertise in everything connected to employee issues, including national tax and labor law matters relating to payroll accounting and home office, as well as international matters such as permanent establishments, expats and consignments, they commit to providing the highest quality, extensive specialist advice to support you on your path to success.
Paula Timofte is a tax advisor, being part of the ARTUS team since 2018 and has been a business owner for many years. Furthermore, she currently also focuses on working as a content creator.
Simone Gerner is the chief operating officer of ARTUS and a mentor at the female factor. As head of business services, her scope of duties includes Business/Organisational Development, Human Resources, and Marketing.