With the prevailing Coronavirus (COVID-19) it is recommended to work from home as much as possible. For frontier workers, however, working from home can be disadvantageous. This is because they then work in another country from one day to the next. International and European rules on the coordination of tax and social security rules in cross-border work may be affected by working from home. This creates a great deal of uncertainty for both employees and employers. Because working from home is becoming more and more self-evident for many professions, the Dutch undersecretary for Finance has just proposed a regulation for frontier workers. In this blog we explain what the situation is now regarding social security and taxation and whether the proposal of the Dutch regulation is sufficient.
The Belgian, German and Dutch authorities have now taken the view that working from home as a result of the Coronavirus will not affect the social security position of frontier workers.
Consequences for social security
One of the basic principles of European law is that the legislation of only one Member State can apply to a person. Hence, in the case of a resident of Belgium who works in the Netherlands for a Dutch company and exclusively performs work in the Netherlands, Dutch social security is applicable. If this frontier worker works from home, work is carried out in Belgium and the rules on working in two or more Member States therefore apply. In that case this frontier worker is socially insured in Belgium if at least 25% of the work is performed there.
Working from home for a considerable amount of time thus has as a consequence that you switch your social security system. For example, a frontier worker may suddenly have to take out more expensive health insurance, have a lower pension accrual, receive less child benefit or, in the event of sickness or disability, receive a lower benefit. It also affects the employee’s net income as the amount of the premiums may vary.
The employer will have to adapt as well. Contributions on the wages of the frontier worker, who is insured in his country of residence and not in his country of employment, must be paid in the country of residence. This in turn leads to additional administrative costs for the employer because he or she will have to keep two different payroll records.
In order to remain insured in the country of employment, the cooperation and approval of the implementing bodies in both the countries of residence and employment is needed, which is often difficult to achieve.
Consequences for taxation
Let’s once again take the example of the Belgian resident, who works for a Dutch company in the Netherlands. For taxation in a cross-border perspective, we have to look at the Tax Treaty, in which the tax rights are distributed as much as possible to the countries where the income is earned. In this example, the wage is taxable in the Netherlands. However, if this cross-border worker has a home working day with a full-time job, Belgium is allowed to levy 20% of the total wage.
Working from home thus results in a division of tax duties, which in turn leads to additional administration and discoordination between the levying of taxes and social security contributions: both take place in another country, which in turn leads to additional administrative and possibly financial burdens.
No entitlement to tax credits
In addition, working from home can also affect the qualification as a foreign tax payer in the Netherlands. This qualification is necessary in order to be able to make use of all tax credits and personal deductions, such as the Dutch mortgage interest deduction. In order to qualify as a foreign tax payer in the Netherlands, 90% of the world income must be taxed in the Netherlands. In the example we just gave, the 90% limit is therefore not reached and the cross-border worker will not be able to enjoy all of these benefits.Thanks to the non-discrimination provision in the tax treaty, residents of Belgium are always entitled to a limited number of deductions and tax credits, however mortgage interest deduction is not included.
A possible fiscal threshold system for home office?
The rules in tax treaties seem disproportionate when working from home and do not reflect the contemporary reality, which is certainly not desirable in relation to neighbouring countries. The Dutch State Secretary for Finance – Taxation and Tax Administration Vijlbrief is also aware of this, as stated at the General Consultation of 5 March 2020 on the tax and social security position of frontier workers. He also doubts “whether it is proportional to have the taxation rights changed from the first day of work at home”.
For this reason, he proposes a threshold scheme, whereby the tax entitlement for a number of home working days remains in the work state. So that is good news for the frontier worker who wants to work several days at home. There are currently negotiations for a new tax treaty between the Netherlands and Belgium, which is a good opportunity to make new arrangements for working from home. The State Secretary will also raise this in the OECD context in order to prevent the tax switch at international level when working from home for neighbouring countries.
Working from home is not only desirable in times of the Coronavirus, but also a normal phenomenon in today’s society. However, it may be financially different and possibly more disadvantageous for frontier workers to work from home instead of in the working state. It is still unclear how the Dutch Belastingdienst and its foreign counterparts will deal with the specific case of the Coronavirus. It is even more clear now that the rules need to be adapted to today’s society, and the possible tax threshold scheme for working from home may be a good first step.
By Ruben Tans (researcher) & Pim Mertens (scientific coordinator) of ITEM: Institute for Transnational and Euregional cross border cooperation and Mobility
 Article 11 Regulation 883/2004.
 Article 13(1)(a) Regulation 883/2004.
 Tax treaties are often based on the OECD Convention Model https://www.oecd.org/tax/treaties/model-tax-convention-on-income-and-on-capital-condensed-version-20745419.htm
 Draft report tax and social security position of frontier workers, p. 12, https://www.tweedekamer.nl/kamerstukken/detail?id=2020D09915&did=2020D09915