Last week we shared information about withholding US social security tax from wages. This week, we want to talk about social security within the European Union (EU), European Economic Area (EEA), and Switzerland. Many of the conversations we have with companies sending business travelers intra-EU involve a deep sigh and a shake of the head. Getting the Posted Worker Directive (PWD) and social security withholding obligations correct when sending an employee from one EU-member state to another is a necessary statutory requirement; yet for most it is an administrative challenge.
In general, employees pay social security contributions in the country they are working. However, employees posted temporarily (up to 24 months) or who normally work in multiple countries within the EU/EEA/Switzerland (member states) are required under various sets of employment law and social security legislation to apply for a certificate to remain in their Home country social security system, rather than paying in other countries where they are working. This certificate is essentially a certificate of coverage and is called an A1 certificate.
There are different types of A1 certificates, including those for single trips and those for employees normally working in multiple member states (i.e., employee regularly works in another member state for at least one day per month or for at least five days per quarter).
The A1 certificates are applied for separately and the application is linked to the requirements of the PWD. The PWD, in short, requires a company to confirm that they are not moving labor to benefit from a favorable social security benefits/labor law position in the other country. This applies to all mobile employees whether they are business travelers or traditional moves.
Failure to obtain an A1 certificate may result in significant tax and business risks for the employee and employer. Depending on the Host location, employees can be sent home by the local authorities and be subject to financial penalties if they do not carry an appropriate A1 certificate. Host country social security can also be assessed, with large potential fines also applicable against employers in several member states.
What do you need to know?
While the EU regulations seem clear and an employee needs an A1 certificate to work temporarily in another country, the interpretation for certain mobile employees (such as business travelers and commuters) is unclear and as a result, the current application process to apply for A1 certificates is confusing. Who needs what and when is not clear and the local application requirements in each EU member state varies. Ultimately, the country where the employee lives is responsible to apply the legislation on an individual basis. Examples of the different interpretations applied by member states include:
- Some states require an A1 certificate from day 1 or on a “per trip” basis
- Other states are a little more relaxed in that the A1 certificate is ‘in process’ and will eventually be obtained, allowing someone to travel before day 1 of working
- Some require more documentation for the A1 certificate than others
And just to add more confusion, some countries are exploring exempting business trips altogether from these requirements. The EU attempted to clarify the position in March and April of 2019, but they did not achieve consensus in determining, for example, a standard day threshold for exempting business travel. There may be hope on the horizon as the EU is looking to revisit this issue in the New Year.
What are companies doing?
For the moment, “business as usual” for many companies is largely a manual process enabled with a business traveler pre-trip tracking and alert process. Approaches vary and can include:
- Identifying travelers and applying for an A1 certificate in advance. Potential ways to identify expected needs in advance include:
- Reviewing the employee’s expected travel for the upcoming 12 months based on estimated travel needs identified by the employee and/or business; and/or
- Using the employee’s travel for the prior 12 months to provide a reasonable estimate for upcoming travel
- Applying for an A1 certificate as needed (i.e., only at the time the trip is known or occurring)
Bottom line: there is no magic answer and each country combination needs to be reviewed in isolation.
Talk to your mobility tax specialist, who understands the rules and requirements of social security tax and can help employers navigate the social security systems in an efficient manner with the proper up-front planning. Additionally, your mobility tax specialist can assist with the filing of certificates of coverage and A1 certificates, as well as identification of tax planning ideas such as review of assignment duration or localization options.
If you are seeking a mobility tax consultant who understands the ins and outs of creating a mobility tax program, do your homework and ensure you’re learning from the tax mistakes of others.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.