During the Covid-19 pandemic, many cross-border workers were forced to work (at least partially) from home. Employers have meanwhile adopted hybrid working policies as employees have embraced working from home.
In a cross-border situation, this has a significant impact for income tax and social security purposes that requires a well-guided approach. Time for an update.
In an international context, employees are in principle considered taxable in their country of residence, unless the employment activity is physically performed in the country where the employer is located. Belgian residents working from home for a foreign employer are therefore taxed in Belgium on their employment income.
In order to avoid an undesired change of tax liability during Covid, Belgium had concluded specific agreements with the Netherlands, Germany, France and Luxembourg to implement a mutual force majeure tolerance for cross-border employees in relation to the COVID-19 (travel) restrictions. Based upon these agreements, home working days of cross-border workers from 11 March 2020 until 30 June 2022 can be regarded as days worked in the country where the employee would have worked under normal conditions (that is in absence of COVID-19 measures).
The EU Regulation 883/2004 on the coordination of social security systems and the EU Regulation 987/2009 laying down the procedure for implementing Regulation (EC) No 883/2004 stipulate that, if an employee carries out activities in two or more Member States, this employee is subject to the social security legislation of the Member State of residence if the employee performs at least 25% of their working time or if the employee receives at least 25% of their remuneration for their activity in the Member State of residence (the so-called ‘substantial part of the activity’).
An increased level of home working may therefore lead to a possible re-evaluation of the applicable social security legislation (for example if a substantial part of the activity is suddenly carried out in the Member State of Residence where this was not the situation before). In order to avoid such situation for this (limited) period and following a decision of the Administrative Commission for the Coordination of Social Security Systems, the Belgian government has decided that periods of home working performed in the Member state of residence by cross-border workers due to the coronavirus will not be taken into account to determine the applicable social security legislation. This measure applies from 13 March 2020 onwards and has recently been extended until 1 July 2023.
As the tax agreements with our neighbouring countries ended on 30 June 2022, the provisions of the relevant tax treaties are ‘re-installed’. This means that all days spent in the home office as from 1 July 2022 should be taxed in the country of residence. Cross-border commuters will therefore have to deal with a salary split. Although a salary split may be beneficial in many cases, it also results in additional administration for the employer and/or employee, for example starting up a payroll in the different countries in order to pay obligatory withholding taxes, separate individual tax return per country, etcetera.
The end of the so-called ‘no impact policy’ for social security purposes will further increase the administrative burden for employers and may affect the social security contributions payable by both the employer and the employee.
Please note that – in order to apply the above exemptions – the changed work patterns may in principle only be due to the virus mitigation measures and should be ‘normalised’ afterwards. In this respect, it is still uncertain how the various authorities in the member states will react to permanent changes to work patterns during the Covid period and/or employees who have only started during this period, and whether this, for example, might retroactively affect the application of the exemptions.
The employer will also need to explore the impact from an employment law perspective and the home office might even lead to questions with regard to the creation of a permanent establishment and obligations on a corporate tax level.
Managing the increased number of cross-border commuters, now that the Covid exemptions have ended or will end, is a considerable challenge from an HR perspective.
For this reason, many countries, as well as the Administrative Commission for the Coordination of Social Security Systems, have already expressed their intention to negotiate a structural solution for cross-border commuters working from home and to update the (old) international rules to reflect modern ways of working. As this will, however, take some time, it is crucial that employers take the necessary steps to ensure accurate compliance on all levels.
If you have any questions on dealing with cross-border employment, please do not hesitate to contact us.
