In this article, we will turn our attention to social security and look at the rules and regulations to consider when employees are mobilised to work overseas for a period of time.
One common misconception is that income tax and social security are one and the same (sometimes referred to simply as “employment taxes”) however the reality is that whilst many jurisdictions are continually looking to align these 2 “taxes”, in most jurisdictions they remain very different in terms of rates, regulations and processes.
Thankfully, in many ways the social security rules and regulations, as they apply to internationally mobile employees, are clear, relatively easy to understand and fairly consistent!
When looking at the social security position for internationally mobile employees, the world can essentially be split into 3 different categories and this article will consider, at a high level, the employee and employer social security position for each –
- Intra-European Economic Area (EEA) mobilisations
- Reciprocal Agreement location mobilisations
- Rest of the World mobilisations
Intra EEA Mobilisations
The European Economic Area (EEA) is made up of the 28 countries within the European Union (EU) plus Iceland, Liechtenstein, Norway and Switzerland.
The EU rules on social security coordination provides common rules to protect social security rights and deliver consistency of treatment when individual’s mobilise within the EU. Therefore, in simple terms, the EU social security legislation provides a consistent approach to determining to which country’s social security system, an individual mobilising within the EU, should contribute to.
The rules on social security coordination do not replace each member state’s national social security system with a single European system. All countries are free to decide who is to be insured under their legislation, which benefits are granted and under what conditions.
The EU social security legislation applies to -
- EEA nationals who are, or have been, insured in one of these locations, and their family members.
- Stateless persons or refugees, residing in an EEA location, who are or have been insured in one of these locations, and their family members.
- Nationals of non-EEA countries who are legally residing in the territory of the EEA, who have moved between these countries, and their family members.
The 4 main principles of the EU social security coordination rules are as follows –
- An individual is covered by the legislation of one country at a time so contributions are only paid in one country. The decision of which country’s legislation applies will be made by the competent social security institutions, an individual cannot choose which social security regime to be covered within.
- An individual has the same rights and obligations as the nationals of the country in which you are covered. This is known as the principle of equal treatment or non-discrimination.
- When social security benefits are claimed, previous periods of insurance, work or residence in other countries are taken into account if necessary.
- If an individual is entitled to a cash benefit from one country, this can generally still be received even if the individual is living in a different country. This is known as the principle of exportability.
Based on the above legislation and the guiding principles in relation to social security coordination, there are clear rules in order to determine which country’s social security legislation an employee, mobilising within the EEA, should contribute to. The rules are as follows –
An Individual works in one country
As a basic rule, an individual is subject to the legislation of the country where the individual works either as an employee or a self-employed person. The country in which an individual lives, or where the employer is based, is irrelevant in this case.
An Individual works in one country but lives in another one
If an individual works in a different EEA country from the one in which he/she lives, and the individual returns to the country of residence daily, or at least once a week, the individual is considered to be a cross-border worker (commonly known as a “frontier worker”).
The country in which the individual works is responsible for providing social security benefits and therefore contributions must be made to that country’s social security system.
An Individual is posted to another country
If an individual is sent by his/her employer (or by himself/herself if self-employed) to work in another country for a maximum period of 24 months, the individual remains insured in the country of origin (the “home” country).
This is commonly referred to as a “posted worker”. In such cases an application to remain covered in the home country social security system needs to be prepared and submitted to the home country social security authorities. If the application is successful, the individual will be issued with an A-1 Certificate confirming continued coverage in the home country social security system for the duration of the posting.
If the duration of the posting is for a period of greater than 24 months but no more than 60 months, an application for an A-1 Certificate can still be submitted however the application progress is more in-depth, with additional information requiring to be submitted and ultimately the host location must agree to the continued coverage within the home country social security system.
An Individual works in more than one country
This is a fairly common scenario where employees regularly work in more than one country concurrently. In such circumstances, if the individual pursues a substantial part of their work activity (at least 25%) in the country of residence, the individual remains covered within the home country social security system.
If at least 25% of the work activity is not performed in the country of residence, an individual will be covered by the social security system of the country where the registered office or place of business of the employer is situated. If an individual works for more than one employer, whose registered office or place of business are in different countries, the individual remains covered in the social security system of the country of residence even if a substantial part of the work activity is not pursued in that country.
Self-employed individuals who do not pursue a substantial part of their activity in the country of residence will be covered by the legislation of the country where the individual’s centre of interest of activities is situated.
One important point of note is that the jurisdiction to which an employee is obligated to make social security contributions results in the employer also being obligated to make contributions to the same jurisdiction (except in very specific situations which are not covered in this article).
Reciprocal Agreement Location Mobilisations
Many jurisdictions have established reciprocal agreements with each other in relation to social security. A reciprocal agreement is essentially something akin to a double tax treaty with the reciprocal agreement helping to determine which jurisdiction has the primary right to collect employee and employer social security contributions whilst the double tax treaty does the same thing from an income tax perspective.
From a UK perspective, at the time of writing, HMRC has concluded social security reciprocal agreements with 20 foreign jurisdictions namely –
A formal application to remain in the home country social security system must be prepared and submitted and if the application is successful, the individual will be issued with a Certificate of Coverage (COC) which is essentially the reciprocal agreement equivalent of the A-1 Certificate referred to above when dealing with Intra-EEA mobilisations.When an individual is posted temporarily from the home country to the host country, a specific article of the reciprocal agreement will deal with this scenario. Providing all of the necessary conditions, outlined in the reciprocal agreement, are met an employee can remain covered in the home country social security system (and therefore be exempt from any social security liabilities or obligations in the host location).
The specifics of each social security reciprocal agreement may be different, including the maximum duration for which a COC will be granted, however the underlying intention is the same – to ensure social security contributions are only payable in one jurisdiction when an individual is mobilised temporarily from the home location to a host location.
As with the intra-EE mobilisation category, the jurisdiction to which an employee is obligated to make social security contributions results in the employer also being obligated to make contributions to the same jurisdiction.
Rest of the World Mobilisations
This category is essentially a catch all for any mobilisations which are not intra-EEA and not between jurisdictions that have concluded a social security reciprocal agreement (therefore “non-reciprocal agreement” mobilisations).
In such circumstances, the domestic social security legislation of both the home country and the host country must be considered when determining the social security position for an employee who has mobilised temporarily from one jurisdiction to another.
Non-reciprocal agreement mobilisations can at their worst result in dual social security liabilities and obligations existing for both the employee and employer, or at their best provide complete exemption from social security for both parties, depending on the social security legislation of the jurisdictions in question.
For the purposes of this article we will consider HMRC’s approach to employee mobilisations either from the UK to a non-EEA, non-reciprocal agreement country or to the UK from a non-EEA, non-reciprocal agreement country.
Mobilisations from the UK
A UK employee who is posted temporarily from the UK to a non-reciprocal agreement country will be liable to UK Class 1 National Insurance Contributions (NIC) for the first 52 weeks of the overseas mobilisation. The UK employer will similarly be liable to Class 1 NIC for the same period.
No mandatory UK Class 1 NIC (employee or employer) obligation will exist from the 53rd week of the overseas mobilisation.
If the host country’s social security regime (assuming one exists) requires employee and/or employer social security contributions to be paid from the date the employee mobilises temporarily to the host location, a dual employee and/or employer social security liability will exist for the first 52 weeks of the temporary mobilisation. Conversely, if the host location does not have a social security regime, no social security liabilities will exist anywhere after the expiration of the UK 52 week mandatory contribution period.
Mobilisations to the UK
An employee from a non-EEA, non-reciprocal agreement jurisdiction who is temporarily posted to the UK will be exempt from UK Class 1 NIC (as will the employer) for the first 52 weeks of the posting to the UK. From the 53rd week of the posting, UK Class 1 NIC will be payable by both the employee and employer.
Depending on the social security regime (if any) of the overseas jurisdiction from where the individual has been mobilised, either dual, partial or no social security liabilities may arise for a period of time
Therefore in conclusion, the social security liabilities and obligations for an employee (and the employer) mobilising temporarily overseas, very much depends on the home and host location combination and the duration of the overseas mobilisation. However, once those variables are known a fairly clear social security path lights up!