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Taxing Issues for European Frontier Workers

What’s special about frontier work in Europe?

The European Union’s founding agreements provide freedom of movement, equal treatment and social protection for its citizens. These basic tenets, combined with the proximity of countries in Europe, mean that European citizens can easily cross borders in their daily commutes to work. This ease of movement can bring up a host of unique tax issues.

Where do individuals pay income tax when they live and work in different countries?

Sometimes, in both countries! Most countries adopt bilateral income tax treaties to assign taxing rights for different types of income, and to provide relief to taxpayers if the same income is taxed by both countries. Generally, the country where an individual performs work has the first right to tax employment income. If the income is also subject to tax in the country where the individual lives based on its residence rules, the country of residence provides double tax relief. In most cases, relief is provided as a credit for foreign tax paid, or by exempting the foreign income.

In Europe, however, workers pay income tax in the country where they live if they regularly commute between their home and workplace within a frontier zone. Countries sharing a border define the frontier zone, which typically encompasses a certain distance from the border. Neighboring countries have extended their tax treaties to set out exceptions for frontier workers. For example, the France-Germany Income Tax Treaty provides such a rule if the individual’s workplace and permanent home, to which the individual returns each day, are each within twenty kilometers of the border.

taxing european frontier workersWhat about social security? Where do individuals contribute to social security if they live and work in different countries within a frontier zone?

In frontier zones, as well as more globally, workers generally contribute to social security schemes in the country where they work. The key exception is when workers are temporarily posted to another country. Such workers continue contributions in their home or origin country if they meet the conditions according to the EU’s posted worker or social security agreement rules.

Hence, European frontier workers pay income tax in the country where they live and contribute to social security in the country where they work.

This adds complexity when frontier workers are sent on assignments, especially in preparing cost estimates and balance sheets under a tax equalized policy. As an example, a typical assignment cost estimate will include:

  • Hypothetical income tax for the country where employee originally lived (home country),
  • Hypothetical and actual social security contributions for the country where the employee originally worked (home work country), and
  • Actual income tax for the country where employee is temporarily posted (host country).

These frontier workers’ estimates include taxes calculated for three jurisdictions!

The frontier solution in AssignmentPro can deliver cost estimates for this complex scenario. Additionally, the Balance Sheet feature can deliver hypothetical income tax and social security for the home and home work country, respectively. Contact us to find out more if your global mobility program outbounds employees from European frontier zones.

Vickie Lau

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