With the prevailing Coronavirus (COVID-19), it is recommended to work from home as much as possible. However, for cross-border workers, working from home can be disadvantageous. This is because it means they are working in another country from one day to the next. International and European rules on coordinating tax and social security rules when working across borders can be affected by working from home. This creates a lot of ambiguity for both employees and employers. Because working from home is becoming more and more natural for many professions, the Dutch state secretary of Finance just proposed to come up with a scheme for cross-border workers. In this blog, we explain the current situation in terms of social security and taxes and whether the proposal of the Dutch scheme is sufficient.
Update 25-03-2020
The Belgian, German and Dutch authorities have now taken the position that working from home due to the Corona virus will not affect the social security position of frontier workers.
Impact on social security
One of the basic principles of European law is that the social security rules of only one member state can apply to a person.[1] Thus, in the case of a resident of Belgium who works in the Netherlands for a Dutch company and performs labour exclusively in the Netherlands, Dutch social security applies to him or her.[2] When this frontier worker works from home, labour is also performed in Belgium. In that case, frontier workers who work 25% or more from home are socially insured in their country of residence rather than in their country of work, i.e. Belgium in this example.
Regular working from home can thus lead to a change in social security systems. For instance, a cross-border worker might well suddenly have to take out more expensive health insurance, have a lower pension accrual, receive less child allowance or, in case of illness or disability, receive lower benefits. Moreover, it also affects the worker’s net income as the level of premiums may differ
The employer will also have to adapt. This is because the contributions on the wages of the cross-border worker, who is now insured in his country of residence and not in his country of work, will have to be paid in the country of residence. This entails additional administrative costs for the employer as it will have to keep two different payroll records.
In order to still remain insured in the country of work, the cooperation and approval of the implementing authorities in the countries of residence and work must be granted, which is often difficult to achieve.
Taximplications
Let us again take the example of the Belgian resident who works in the Netherlands for a Dutch company. For taxation in a cross-border perspective, we have to look at the Tax Treaty[3].Here, tax duties are distributed as much as possible to the countries where the income is earned. In this example, therefore, it is wages taxable in the Netherlands. However, if this cross-border worker has a home working day to a full-time job, Belgium may levy 20% on the total wage.
Working from home thus creates splitting of taxing rights, which in turn creates additional administration and uncoordination between the levying of taxes and social contributions: both take place in a different country, which again creates additional administrative and possibly financial burdens.
No entitlement to tax credits
In addition, working from home can also affect qualification as a foreign taxpayer in the Netherlands. This qualification is necessary to benefit from all tax advantages, such as tax credits, personal deductions but also the mortgage interest deduction. To qualify as a foreign taxpayer in the Netherlands, 90% of world income must be taxed in the Netherlands. So in the example we just gave, that 90% limit is not reached and the cross-border worker will not be able to enjoy all these benefits. Indeed, residents of Belgium are always entitled to a limited number of deductions and tax credits thanks to the non-discrimination provision in the tax treaty, but the mortgage interest deduction is not among them.
A possible tax threshold scheme for home working?
The rules in Tax Treaties seem disproportionate when working from home and do not correspond to today’s reality, where working from home is mostly facilitated by employers. This is certainly not desirable in relation to neighbouring countries due to cross-border working. Dutch State Secretary for Finance – Taxation and Revenue Vijlbrief is aware of this. During the General Consultation on 5 March 2020,[4] he questioned “whether it is proportionate to have the taxing right reversed from the first home working day”.
That is why he proposes a threshold scheme, whereby the taxing right for a number of home working days will still remain in the working state. So that’s good news for cross-border workers who want to work several days at home. There are currently negotiations for a new Tax Treaty between the Netherlands and Belgium, which is a great opportunity to make new arrangements for working from home. The secretary of state will also raise this in the OECD context to prevent the tax switch when working from home for neighbouring countries at an international level.Working from home is not only desirable in times of the Coronavirus, but by now a normal phenomenon in today’s society. But tax and social security rules are not adapted to this when it comes to frontier work .So it is precisely now that the need to adapt the rules to today’s society becomes all the more apparent. The possible tax threshold regulation for working from home is at least a good first step.
Conclusion
Working from home in times of the Coronavirus is not only desirable, but also now a normal phenomenon in today’s society. But tax and social security rules are not adapted to this when it comes to cross-border work. It is still unclear how the Tax Administration and foreign counterparts will deal with the concrete case of the Corona virus. Just now, it is becoming all the more clear that adaptation of the rules to today’s society is needed. The possible tax threshold regulation for working from home is at least a good first step.
By Ruben Tans (researcher) and Pim Mertens (scientific coordinator) at ITEM: Institute for Transnational and Euregional cross border cooperation and Mobility