Home Office Abroad – Navigating Between Tax Law and Mobility

In 2020, the home office has turned from an exceptional case to a standard solution due to the corona crisis. Despite the challenges of working from home, many employees enjoy the increased flexibility. Especially in the sometimes rainy German summer, it surely sounds tempting to work from the beach in Spain or with a beautiful view of the Norwegian fjords. Although technology may well make such scenarios possible, it has to be kept in mind that relocating the home office abroad will result in special tax and social security regulations that both employer and employee must take into account. Sometimes the question of a work permit also becomes important.

When working abroad, there are numerous questions regarding social security law. If the employer is located in a different country than the one from which the employee performs work, it must first be determined in which country the social security contributions need to be paid. The European Regulation (EC) No. 883/2004 sets the rules for the EU and EEA area (EU + Switzerland, Norway, Liechtenstein). The basic rule is that the law of the member state where the work is actually performed is applicable (Art. 11 III a).  However, there is a special exception when the work is first performed in Member State A (e.g. Germany) and the employee is then sent to Member State B (e.g. Italy) to continue working for the employer there. If this employee posting does not last longer than 24 months and the employee does not replace another employee, the social security obligation in member state A (here: Germany) continues to apply. However, an additional condition for an employee posting is that the employee must have been employed by the employer (or another employer) in Member State A for at least one month before the employee posting. If this is not the case (e.g. in the case of new hires), an employee posting is ruled out. An employee posting also requires that the employee works in another country on the instructions of the employer. An employee posting with the consequence of social security coverage in the country in which the employee has previously worked in the employer’s company is not possible if the employees perform their work from their home office in another country without the employer’s knowledge.

Article 13 regulates cases in which the work is performed in two or more Member States. Accordingly, the social security obligation exists in the country of residence if a substantial part of the work is performed there. A substantial part of the work in the country of residence does not mean that a majority of the work must be performed there. If less than 25% of the work is performed in the member state of residence, it is usually assumed that only an insignificant amount is performed there. In this case, the special regulation would not apply and the social security obligation arises in the country in which the work is actually performed.

To prove employment and the applicability of the obligation to pay social security contributions in only one EU member state, an A1 certificate may be required. This certificate is a document confirming that social security contributions have already been paid in one country. If social security contributions are not paid or not paid in the correct place, additional payment obligations may arise. Furthermore, such a failure may violate § 266a StGB (German Criminal Code) under German law and may therefore result in criminal prosecution. It should also be noted that if the social security contributions are paid incorrectly, there is no entitlement to insurance cover despite payment, and if benefits were received from that insurance, claims for damages may arise.

With regard to income tax liability, there is no EU-wide, uniform regulation. In Germany, income tax is automatically deducted at source from the salary calculated and paid out. However, if the activity is performed in another country, such a tax may also accrue under the income tax regulations of that country. Numerous countries have concluded double taxation agreements under which double taxation of income is not possible under certain circumstances.

It should also be noted that any work performed in the home office abroad may, under certain circumstances, lead to the establishment of a permanent business establishment which is taxable. In such a case, the company may incur significant additional expenses and may be subject to tax abroad. A permanent business establishment may already be established if office space is rented abroad or if the employee is given the power of attorney to conclude contracts for the company abroad. Thus, caution is required here.

Employers may want to explicitly forbid their employees from performing their work in a country other than Germany when working in the home office. Exceptions to this rule must be examined carefully in each individual case to avoid unpleasant consequences.