Written by Martina Kaul and Doris Huber, licensed German tax advisors and Directors at WTS Germany
When it comes to Hybrid Work - occasional business trips across the border in place of a complete relocation with the family - good preparation from an employment law, tax and social security perspective is the be-all and end-all.
Hibernation due to the COVID-19 lockdown is over. Instead, the course is being set for a successful future after the crisis. In that future, a return to the pre-pandemic status quo is unlikely. Sweeping lockdowns proved that remote working does not necessarily lead to a productivity collapse. Indeed, they fostered confidence that this model is entirely possible.
COVID-19 remains one of the major challenges in everyday work. Employees drop out, others spontaneously step in and the strain on everyone increases. This makes it more important to respond to the needs of employees and to support them.
To offer employees any form of mobile working can lead to significant savings in office space and associated costs. Among workers, the successful implementation of the home office model will lead to demands to continue this model even after the pandemic.
It is therefore necessary to cut old ties and recognise new trends at an early stage, so as not to be left behind and to make sure you have the right employees in the right place at the right time (and to do so internationally). This also applies to demographic change, a lack of personnel, and the fight for the best talent on the labour market.
So, what do employees expect from their employers in the future? What forms of working will become the new "normal"? And what does this mean for GM?
It is common that a "yes" to a foreign employer fails due to an unwillingness to move abroad with the entire family. Changing schools or the spouse giving up their job - both of which are often the result of a move abroad - stand in the way.
If a company offers alternative solutions, the talent pool expands enormously. For example, many more doors open on the international recruitment market with flexible working models such as home-office arrangements and hybrid working. Occasional business trips mean a complete family move is no longer necessary. This makes employment attractive to more top foreign talent.
Anyone who deals with the international recruitment of specialists knows that quick action is required. Otherwise, they might simply join a rival who does move quickly. Rapid answers and swift solutions to the applicant's questions are essential. After all, these questions usually arise in complex matters such as labour, tax and social security law.
For example, which labour law applies when a Dutch employee works for a German employer mainly from the Dutch home office? Which state collects income tax from a French employee who works two days a week from his French home office and spends the remaining days with his German employer? In which country do social security contributions have to be paid when an Austrian sales employee travels across Europe for a German employer. And what does this mean for future pensions or to which country the employee pays their personal taxes?
HR can be questioned by the potential candidate, and it is highly recommended to be well-prepared upfront. It is also highly recommended to set internal guidelines of what can be offered to candidates, in certain countries, without creating any risks for the company or the employee.
Provide fiscal transparency
Most people probably do not have a great fondness for the subject of taxes. The annual income tax return is a burden that is gladly put off until the deadline. This does not get any better when, in addition to half-known domestic tax laws, there are unknown foreign tax laws to consider.
Questions arise like:
- In which country am I liable to pay tax?
- Do I have to pay taxes in two or more countries?
- Will I be taxed twice?
- What will ultimately be left over from my gross salary after taxes and social security have been deducted?
- Do I have to file a tax return in several countries?
- And what do I have to bear in mind?
- What are the deadlines?
- What penalties can I expect if I do not comply with the relevant tax regulations - perhaps without knowing it?
Each country has its own national tax law, which regularly provides for an unrestricted right of taxation of income earned worldwide, provided there is a residence in that country. If one only looks at the national tax laws of the countries concerned, a scenario of double taxation in the case of cross-border activity becomes likely.
This can be remedied by double taxation agreements - or, to put it better, agreements for the avoidance of double taxation. Germany has concluded such agreements with more than 90 countries. Some of the agreements are very similar. Some agreements provide for special regulations, such as for cross-border commuters or managing directors. It is therefore indispensable to look at the respective agreement to examine a specific situation.
If a foreign employee is to be convinced to sign a German employment contract in the context of international recruitment, a clear and transparent presentation of the tax consequences is indispensable. A preliminary estimate of the tax burden in both countries gives the candidate security. If the employer supports them in this, it creates trust.
But not only employees will have an interest in the tax consequences of cross-border activity. Employers are also strongly advised to check possible withholding obligations abroad and, if necessary, to establish appropriate processes. Likewise, the potential risk of establishing a permanent establishment must be kept in mind.
Clarify social security issues
One thing is absolutely clear, very few employees want to switch to a foreign social security system. This is because it causes a certain amount of uncertainty about expected benefits, such as the assumption of costs for dental treatment, family benefits, unemployment assistance and the amount of pension.
Unlike tax law, social security law does not, in principle, provide for division between several states. Cross-border workers are therefore usually subject to the social security law of only one state. Within the EU, the EEA and Switzerland, EC Regulation 883/2004 and EEC Regulation 1408/71 regulate which social security law applies. In addition, there are social security agreements with more than 20 states.
In terms of social security law, the desired result, namely remaining in the domestic and familiar social security system, can often be achieved if the cross-border activity is planned accordingly in advance and the relevant parameters are known and observed. For example, in the case of multiple employees (i.e., employees who regularly work in more than one EU member state), the number of working days in the home office and with the employer across the border, plays a decisive role. If certain limits are unknowingly exceeded, the applicable social security law may be overturned. However, if the regulations are discussed and clearly agreed in advance, there will be no unpleasant surprises.
Here too, as with tax law, it is in the interest of both the employee and the employer to have a clear assessment of the applicable social security law. After all, in quite a few cases, domestic employers are obliged to pay social security contributions abroad.
Labour law considerations
If a German employer hires an employee living abroad, and the employee works mainly from their home office in the Netherlands, for example, most employers naturally want German labour law to apply to this employment relationship. The reason for this is that it is familiar and can be assessed from daily practice. In theory, this can be agreed within the contract. However, since labour law is protective of employees, this principle only applies with considerable restrictions. Indeed, according to EU regulations, the employee may not be deprived of the protection he or she would be granted under the provisions that would apply in the absence of the contractual choice of law. In our example of the Dutch home office, Dutch labour law would apply without a choice of law, since the employee has his usual place of work in the Netherlands.
Accordingly, German labour law applies, but it must always be checked whether there are more favourable labour law protection provisions in the Netherlands which must then be applied. No result less favourable to the employee may be achieved than under this legal system. The content of the legal systems in question must be compared with each other, which can be very difficult in detail. The provision that is more favourable to the employee then takes precedence. This includes all mandatory labour law provisions, such as termination law, fixed-term contract law, holiday law, working time law, but also occupational health and safety provisions. In this example, the Dutch Working Hours Act regarding maximum working hours and rest periods, but also, for example, a Dutch minimum wage, must be observed by the German employer.
In this constellation, it must also be considered that the Dutch labour courts, not the German courts, would regularly have jurisdiction for labour disputes. Here, too, the EU regulations are strict.
Special attention must be paid to accident insurance in these constellations. Since the employee works predominantly at home, an accident in the domestic environment is a risk that cannot be dismissed and against which the employer must take out insurance. According to German understanding, such an accident is an occupational accident if it is related to the performance of work and the employer is regularly liable for it. Depending on which social security law applies, it must be ensured here that accident insurance also applies and that it also takes effect in such cases. If this is not the case, voluntary or private accident insurance must be considered. In serious cases, this can lead to considerable costs for the employer.
Good preparation by HR is essential
Once the right candidate has been found abroad, the global mobility department plays a crucial role in the company. It is necessary that the HR department develops a position on the topic and acquires the corresponding knowledge, as employees and their superiors will increasingly make corresponding demands - often without even knowing the complexity. If the HR department can quickly find solutions that comply with foreign law, clarify tax and social security issues, and carry out calculations, there is nothing standing in the way of signing the employment contract. To have the power to do so, it is highly recommended to set internal guidelines on what can be offered to candidates in certain countries without creating any risks for the company or the employee. This gives the HR department a strategically important role in the company.
To fight the war for talents it is advisable to make appropriate preparations for the future.
RES Forum research
This piece is from the RES Forum’s research paper – Work from Anywhere, practical issues and future possibilities. You can download the paper here.
With representation in over 100 countries, WTS Global has already grown to a leadership position as a global tax practice offering the full range of tax services and aspires to become the preeminent non-audit tax practice worldwide. Clients of WTS Global include multinational companies, international mid-size companies as well as private clients and family offices.