More and more employees are living permanently in Spain after emigrating, while simply remaining employed by an employer in their original home country. The employee works from home in Spain, is on the Spanish payroll and is covered by Spanish social security. This can be arranged perfectly well, as we explained in an earlier article: Teleworking from Spain for a foreign company (EU)
But what happens when the employee occasionally returns to their original home country? A few days for meetings, two weeks to visit clients or perhaps two months for a project? From a tax perspective, things can become surprisingly complicated very quickly.
Income tax withholding
Most tax treaties between Spain and other European countries date from a time when structurally working from home in another country was hardly imaginable. They still apply legally, but do not always fit very well with today’s reality.
For income tax purposes, most tax treaties basically provide that employment income is taxable in the country of residence, unless the work is physically carried out in the other country.
Payroll tax for an employee who lives in Spain and works remotely from Spain must therefore, in principle, be paid in Spain. But as soon as the employee travels to the country where the employer is established and physically performs part of the work there, that country will in many cases acquire the right to tax the salary attributable to those working days.
It is often assumed that as long as an employee works in the other country for fewer than 183 days, no income tax is due there. However, that is only one of the conditions. The exception applies only if three conditions are met simultaneously. One of them is that the employer is not established in the country where the work is physically carried out.
For example, if an employee of a Dutch employer who normally works remotely from Spain physically performs part of the work in the Netherlands, this condition is not met. In theory, even a single working day in the Netherlands may therefore be relevant, and tax may be due in the Netherlands on the salary attributable to that day, while the employee remains a tax resident of Spain.
Social security contributions
A common mistake is to treat payroll tax and social security as one and the same issue. They are two different systems.
Where income tax is payable is determined by the relevant tax treaty. Within the EU, social security is governed by Regulation 883/2004 and the corresponding implementing rules.
An employee who normally works in Spain but also occasionally works in other EU countries may, for example, remain exclusively covered by the Spanish social security system if a substantial part of the work is carried out in Spain, the country of residence. The EU rules are specifically designed so that only one social security system applies.
In practice, this is documented by means of an A1 certificate. Working days abroad therefore do not automatically mean that foreign social security contributions also become payable.
More bureaucracy and administration
Putting this theory into practice in the payroll administration makes things more complicated. The employer must keep track of how many working days were actually performed in the other country and what part of the salary is attributable to those days.
This may mean that, in addition to the existing Spanish payroll, payroll and withholding obligations also arise in the other country in order to process the wage taxes correctly.
An employee who occasionally returns to the office can therefore suddenly become subject to two tax payroll administrations, while only one country remains competent for social security purposes.
Income tax for the remote worker
This also affects the employee’s final income tax position. Spain must ensure that the same income is not taxed twice.
It will therefore be necessary to consider the allocation of salary between the different working days, possibly correct Spanish tax already withheld and ultimately apply the relevant tax credit or other relief from double taxation.
For employers: look beyond the tax treaty rules
When an employee working remotely from Spain temporarily returns to the EU country where the employer is established, it is advisable to look at the complete picture before changing the existing payroll arrangements.
The relevant tax treaty may indeed give the country where the employer is established a right to tax. But that does not yet determine how the payroll should be administered in practice, how double taxation in Spain should be avoided or which country remains competent for social security purposes.
With cross-border remote working, the main legal rule is sometimes the easiest part. Putting it into practice can be costly, even though the final tax result may remain neutral for both employer and employee.
Lex Foris can help employers and employees determine in advance which tax and social security obligations arise when work is carried out from different EU countries.
Roeland van Passel