The Social Security System:
Social security (as tax systems) cannot be harmonized because the countries are distinct historically, structural, and political. Differences are in the bases, in the rates and exemptions, in the pension schemes and if there is maximum contribution per period. In most cases, social systems are favourable for small incomes. For workers who are flexible, it is possible to reduce social charges by foreign employment and posting, which is possible because of the right of free movement.
EU regulation 883/2004 and regulation 987/2009 deal with the coordination of social systems between the EU member states and with associated countries. For example, Switzerland has introduced the rules 2012 with the “Wegleitung für die Versicherungspflicht” (WVP).
General principles of EU regulation 883/2004 are:
Every earnings of a physical person in the European Union from work or self-employment shall be subject to the social system. All charges based on the income of a physical person shall be collected in one country. This country of competence calculates according to its national law all contributions on national and international income, for example in case of a foreign temporary employment.
Activities in other countries have to be declared in the country of competence and liberated in the other countries using form A1.
Rules to define the country of competence (art.13):
- Employment only or >25% (time and/or money) in the country of residence – country of residence is country of competence.
- Employment in only one country that is not country of residence – country of registered office of employer is country of competence.
- Employment in more than one country that is not country of residence – country of residence is country of competence.
- Employment and self-employment – the country of competence is defined by the rules based on employment.
- Self-employment in more than one country: country of residence if a major part is done there; in all other cases the country of the centre of activities.
It is possible to design the circumstances in a way that a country with favourable regulations is the country of competence:
- Posting of workers (see below):
- Employment and self-employment in different countries: for self-employed persons, this is a possibility to determine a favourable country of competence: for example, regulations of some countries impose social charges on the income of a partner in a limited partnership, and social charges have no upside limit. If a partner, who is resident in such a county, takes an employment (at least part time) outside this country, the country of employment becomes country of competence. If this is e.g. Malta, the country with the lowest social contributions in the EU, there is a low ceiling to social charges generally and there is a liberation of the income from the limited partnership under some conditions.
- Residence in another country. If someone is e.g. resident in Malta, has the first job (25%) in Malta, then country of competence is Malta, where there is a low ceiling and where social security contributions should not be paid on the second employment, only on the first. In case if there is no full-time job, but there are two part time jobs, social security contributions should be paid on the job with the higher “basic wage” (excluding any kind of remunerations or commissions). The EU Working Time Directive 2003/88/EC limits the weekly work to 48 hours, however in Malta a person can work more than that (over several jobs) if the main employer is informed.
- Separation of the country of competence for social charges and the country where tax is paid according to double tax treaties e.g. there is a possibility to combine a first employment in Malta with a second job in another country. So, Malta becomes country of competence, and if the setup is proper, the employment (or directors fees) in the other country qualify according to Maltese regulations as second employment without social charges, and these incomes may be subject to the favourable tax of the other country, depending on the double tax treaty.
- Branch office: formation of a partnership in a country with favourable legislation and employment in this partnership, so the country becomes country of competence. The partnership opens a branch office in another EU country, there the person can act as a partner, but the country of employment remains country of competence.
Posting of Workers:
- Posting (secondment; the system and the cooperation of the EU member states is regulated in the EU Directive: 96/71/EC, often called the “posted workers directive”): a person that is sent temporarily to a different member state can remain in the social system of the present country of competence and be liberated in the foreign member state to which the person is posted. A posting can be arranged for 2 years and repeated after a short period of presence.
- In 2014, the enforcement directive 2014/67/EU was introduced so all member states put in place the rules of the EU Directive 96/71/EC: to ensure local minimum wages and working conditions, to avoid circumvention of rules, to enhance cooperation and to exchange information. Controls and proportionate penalties should have been implemented by 2018, and because of a delay, the EU issued a last warning to 24 member states in 2021 with a 2 months’ notice.
- In some cases, posting is a tool to benefit from work conditions and from the labour law in the original country and avoid parts of the legislation of the destination country, especially if some industries are protected by unions in the target country. The employee then has an employment contract in the sending state, is socially insured there, only the taxes are due in the destination state.
- Source countries avoid losing their windfall profit in social security contributions because of excess bureaucracy. However, they are under pressure from some target countries and must increase the requirements for issuing a form A1 (e.g., more than one-month physical employment in the posting country, activities for local employers, companies shall not post more than 90% of their employees).
- Switzerland has an agreement to adapt part of the EU social security system, however this agreement contains so called “accompanying measures” to protect minimum wages, ensure high transparency and enable the government to impose controls and penalties.
(Updated April 2024)