Home Office Abroad – Legal Consequences for employees and freelancers
Since Corona at the latest more and more people are working from home. Many people choose to escape the city and work abroad in some more pleasant locations due to the ongoing pandemic. But if you work and live cross-border as an employee or a freelancer, it comes along a lot of legal consequences.
In this Blog I want to give you a short overview about the legal consequences and what you should to keep in mind, if you want to work and live cross-border.
This Blog is written from the perspective of an employee/freelancer.
I. Use Case – Home Office in Spain, working for a German Company
Let me explain you the legal consequences on a simple use case: You, as a freelancer or an employee, live and work in Germany for a German Company. Because of Corona you choose to escape the city and work abroad, for example in Spain. Starting from this point you should ask yourself the following questions:
II. In which country do I have to pay my taxes?
You have to clarify which country has the right of taxation. Usually, it depends on the fact in which country you have your tax residency. The problem is that if you are working permanently from another country (e.g. from your Home-Office in Spain) for a company which is based in Germany, both Spain and Germany could have the right of taxation concerning your income, no matter if you are a freelancer or an employee. Your task as of a taxable person is to clarify: Which country has the right of taxation concerning my income.
On the basis that Germany had the right of taxation so far, but you are now working in your Home-Office in Spain, the following question comes up: How long will you be considered as a tax resident in Germany according to the German tax law?
First of all, you need to know the following: Tax residency means the country where you have your place of residence or habitual abode.
If the employee does not stay abroad for more than 183 days within a fiscal year, than Germany has the right of taxation usually (according to the German tax law it is called: unlimited tax liability).
If the employee has no place of residence in Germany and is not staying in Germany for more than 6 months, Germany still has the right of taxation, but only regarding the income from your German employer (according to §§ 1 Abs. 4, 49 Abs. 1 Nr. 4a EStG – German tax law regarding employees). It works the same for a freelancer according to §§ 1 Abs. 4, 49 Abs. 1 Nr. 3 EStG (both so-called: limited tax liability). This is because your work will be exploited geographically in Germany, although you work from home in another country (e.g. Spain).
Usually, your employer will have a huge interest to clarify this legal question together with you, because according to the German tax law your employer is obligated to pay taxes on your income to the German tax authorities in the course of the so-called: “Lohnsteuerabzugsverfahren” (“payroll deduction plan”).
Nevertheless, you should keep in mind that you, as a taxable person, are responsible to prove where you actually live. So, you should archive all the relevant documents, that can prove in which country you actually work and live.
In opposite to an employee, you, as a freelancer, have to file your tax return towards the German tax authorities by yourself, since you do not have an employer who is paying your taxes automatically for you. This is why it is your sole responsibility to clarify in which country you have to pay your taxes.
Please note: The above-mentioned hints are always dependent on the exact country of your current residency. The reason is that the question in which country you have to pay taxes on your income is always dependent on the so-called double taxation agreement (in German: Doppelbesteuerungsabkommen) between the respective countries. This double taxation agreement rules which country has the right of taxation regarding your income.
To sum up: You always have to clarify in which country you will be considered as a tax resident. That is why it is always important to check the individual situation with the help of a tax adviser or a tax lawyer to avoid any disputes with the finance authorities. The answer to the question, where your tax residency is, is always dependent on the very small details.
III. In which country do I have to pay my social security contributions?
1. Why is this question so important to you as an individual?
Whilst tax law is “only” about whether you pay your taxes in the right country, the question of the applicable social security law concerns you personally as an individual. First of all, it is because the social security system is an important achievement for you as an employee and also as a freelancer. It gives you security in case of unemployment, illness and also later for your pension. But most of all I would highly recommend you to avoid switching social security systems too often in your life, as it is really complicated to foresee the consequences concerning your pension claims in the country where you have paid your social security contributions.
Due to the fact that people of our generation will permanently work cross border in the future because of the growing digital work possibilities, you should be aware of that in advance and ensure that you do not lose your pension claims.
2. General Rule – It depends on your place of work…
Starting from my use case with Germany & Spain in the beginning: The most important question is whether an employee/a freelancer can continue to be insured under the German social security system to get health insurance, nursing care insurance, unemployment insurance and pension insurance while working in a foreign home office.
Unlike tax law, you are only ever a subject to the social security law of a single state. It means that you pay your social security contributions once and in one country only within the EU (according to Art. 11 Abs. 1 EU-Regulation No. 883/2004).
The general rule is, that you are always subject to the social security legislation of the Member State where you actually work, that means where you actually physically work – this applies to both employees and freelancers (Art. 11 Abs. 3a EU-Regulation No. 883/2004).
So, the place of your work determines the social security law which applies to you (in German: “Tätigkeitsortprinzip”).
And obviously this is the problem. If your employer is in Germany, but you are working permanently or just for some months because of Corona e.g. in Spain, you would have to pay your social security contributions in Spain according to this general rule.
But of course, there are some exceptions to handle that case, as always in the law.
3. If an employee works cross-border …
Usually, the social security law of the state of residence, where you pursue a substantial part of your activity, is the law applicable to you (according to Art. 13 Abs. 1 a) EU-Regulation No. 883/2004 from 29.04.2004).
“Substantial part” means that more than 25% of your work must be pursued in the state of your residence.
The social security law of the state of your employer’s residence is applicable to you, unless you pursue a substantial part of your activities in your state of residence (according to Art. 13 Abs. 1 b) EU-Regulation No. 883/2004 from 29.04.2004).
As you can see these criteria are very soft, complicated and above all it is a matter of interpretation.
But luckily there is a possibility to receive a binding statement from the social security authority of the country of your place of residence. Via an application towards the social security authority in the country of your place of residence you can get a binding decision which social security law (e.g. Spanish or German) is applicable to you.
In case the above-mentioned rules do not come to a meaningful result for you and your employer there is also a possibility to apply for an exemption towards the authorities. This procedure helps to avoid inflexible results (according to Art. 16 EU-Regulation No. 883/2004).
4. If a freelancer works cross-border…
If you work as a freelancer in Germany (it means you are self-employed) and you pursue a similar self-employed activity in Spain, you are still subject to German social security law, if you do not work in Spain for more than 24 months (Art. 12 Abs. 2 EU-Regulation No. 883/2004). But again: This is always dependent on your individual circumstances, which must be checked precisely.
To sum up: You should clarify as soon as possible which state shall be your state of residence to clarify the social security law of which country is applicable to you in order to ensure that you will not lose a great part of all your pension claims.
IV. Further Legal Aspects
1. Contract Law
Another very interesting question in this context is, what law is applicable regarding your collaboration with your employer or your client (if you work as a freelancer). So far, the question of the applicable law was more relevant for companies (in the B2B-Business). If one company wants to collaborate with another company from another country, it is always important to clarify which law the agreement is governed by. But because of digitization and the fact, that every little child is now able to use digital services worldwide (so called: digital natives or digital nomads) you should also ask the following question: which law should my contract be governed by.
For both employees and freelancers there is plenty of scope. In a nutshell: You have the right to choose the applicable employment law/contract law together with your employer or your client. The applicable law is not mandatory by law (according to Art. 8 Abs. 1 Rom I-Regulation; 3 Abs. 1 Rom I-Regulation).
This is why I would highly recommend thinking about an issue, which applicable law is favorable for you in advance, before you sign your employment or service contract. That depends inter alia: In which country could you get the best and fastest legal protection in case of any legal dispute? If you permanently work from Spain for a German employer, you should ask yourself how easy it would be to file a legal action against a German employer in Spain? I can tell you, that it is definitely complicated. That is why it makes much more sense sometimes to choose the different law (e.g. German), although you work and live in another country.
To sum up: Please, think about all the advantages and disadvantages as for which applicable law would be most beneficial for you. According to EU-law you have a wide scope of actions and you should definitely use that.
2. Residence Law
If you are a citizen of a Non-EU-Member State, please, keep in mind that your residence permit in Germany will expire automatically, if you leave Germany for more than 6 months (§ 51 Abs. 1 No. 7 AufenthG – Residence Law).
Are you an employee or a freelancer and want to live and work cross-border? If you need help in any legal matters, feel free to contact me anytime.
Note: This Blog is a summary of my digital Webinar for CodeControl from 21st May 2021. Special thanks to Svitlana Kushnirchuk for her legal support in writing this Summary.