First of all, it is important to determine in which country this employee must pay taxes and social insurance contributions. The answer to this question is laid down in tax treaties on the one hand and in a European regulation on the other. So it is not possible for the employer and employee to make their own choice. You simply have to follow the rules. In a situation where your employee lives and works in another country full-time, the ‘country of work principle’ generally applies. This principle means that an employee pays tax and social insurance contributions in the country where he/she works.

In practice, employers often base their agreements with employees abroad on the rules that apply in the country in which they are based. After all, those rules are known. The only question is whether this is permitted.

Our answer? Theoretically, you may apply your own legal system to the employment contract with your employee abroad. However, you need to take into account that some local labour law provisions are mandatory in nature and therefore take precedence. As a result, you may not be able to uphold some provisions you have included in the employment contract. These are mandatory provisions, often relating to probation period, termination of employment, sick leave and contractual working hours.

Our advice in practice? Prevent local and foreign rules from getting mixed up and make sure you use an employment contract that complies with the local rules as they apply in your employee’s country of employment. Especially when the employee has social insurance there. This will prevent conflicts arising between you and your employee, for example over public holidays, continued payment of wages during sick leave and end of contract.

Then it is important to review the tax and social insurance positions separately. The main rule for taxation is that taxes must be paid in the country of work (country of work principle). If work is carried out in more than one country, tax must in principle also be paid in more than one country, unless certain conditions are met, such as the condition that the employee stays less than 183 days in the country of employment.

These are the 3 conditions that must be met in order to be allowed to pay tax in the country of residence, while working in another country:
1. The employee stays in the country of employment less than 183 days (the definition of this period differs per tax treaty, so it can also vary per country of employment)
2. The wage is not paid by or on behalf of a resident (read: employer) of the country of employment and
3. The wage is not charged to a permanent establishment in the country of employment

In terms of social insurance, an employee can only be insured in one country at a time. If the employee usually works partly in the country of residence (at home) and partly in another EU country, for example at your office, the employee can remain insured in the country of residence provided he/she works there at least 25% of the contractual working hours. If your foreign employee is temporarily seconded to your head office, he/she can apply for an A1 certificate in the country of residence to show that he/she remains subject to social insurance in the country of residence while working abroad.

Please note that these are the main rules and, as always, many exceptions apply! Every situation is different, and we always advise you to apply for an A1 certificate well before you leave, in order to have certainty about the contributions due.

Of course, you are free to give your employee an appropriate allowance for his/her home office. However, the question of whether such reimbursement can be provided untaxed varies from country to country. This can only be answered on the basis of the rules that apply in the country where your employee pays tax and social insurance contributions.

Moreover, the question is whether these rules apply permanently or only temporarily, for example in the context of the corona crisis.

To give you an idea:

• In Belgium, even before the corona crisis, employers could grant a lump-sum untaxed compensation for structural “telework” to certain employees. This was a maximum of € 126.94 and was increased to € 129.48 per month. However, fairly strict rules apply to this scheme, including having to sign a home working agreement.
• In the Netherlands, from January 2022, employers can give an untaxed home working allowance of € 2 per day, considerably lower than in Belgium.
• In France, an employer can give an untaxed allowance for “télétravail” to their homeworkers. The amount depends on the number of days per week the employee works from home and is currently € 50 per month for an employee who works 5 days per week from home.
• In Germany, employees have the possibility of deducting a flat-rate allowance of € 6 per day on their income tax return for “Werbungkosten”, up to a maximum of € 1,250 per year. One of the conditions is that there is a separate work room.

In addition to the general home working allowance, most countries also have other flat-rate allowances such as travel expenses. It is also often possible to reimburse costs associated with working from home (workspace, office chair, etc.). However, in most countries, this is subject to strict conditions and restrictions. It is therefore wise to always seek advice in advance when granting untaxed compensation. Not only relating to the amount of the untaxed allowance, but also regarding the concurrence of various regulations and transitional arrangements that often exist in connection with the temporary home working policy within the corona framework. For example, as of 1 January 2022, it is not possible in the Netherlands to pay both a tax-free home working allowance and a travel allowance on the same work day, even if the employee works partly at home and partly at the office on the same day.

Of course you can. However each country has different rules for untaxed allowances. This means that a certain amount can be provided tax-free in one country but not in another. A practical solution in this case could be to pay out the portion of the allowance that may not be paid tax-free in the countries concerned on a gross basis, so that the employees still receive the same net amount on balance. Practical advice is to review this with due care, and to basically just follow the local rules. Each country has its specific advantages and disadvantages, and trying to bridge the differences in this way may well lead to a tendency for employees to get the ‘best of both worlds’, and that will be the end of it.

Many countries have now reached agreements on the application of social insurance and taxation rules. After all, without agreements, the sudden need to work from home could result in suddenly having to set up a payroll in another country. In order to prevent this, many of our neighbouring countries have agreed that, for the time being, these employees will remain taxed in the country where they were before they started working abroad as a result of corona.

The EU arrangement for social security when it comes to working at home has recently been extended until June 30, 2022.

Please note that the arrangements regarding taxes may be different for each country. For example, many agreements have been extended at least until 1 January 2022, the Netherlands has extended the agreement on taxation with Germany and Belgium until the end of March 2022, and the Franco-Belgian agreement was recently extended until the end of June 2022.

In any case, it is wise to regularly scrutinise any cross-border cases in this scope. This is especially important when something changes in the home or work situation, in order to avoid mistakes and subsequently corrections.