Split payroll arrangement: key considerations
One of the ongoing consequences of the COVID-19 pandemic is the wish of many employees to telework, at least partially, from home. It is fairly straightforward to implement this if the employee resides in the same country as that in which their employer is established.
The situation becomes more complex if the employee resides in another country and partially teleworks in their home country (the so-called home office) and partially in the country where the employer is established. Such a situation is commonly referred to as an “informal” split payroll arrangement.
This is a variant of the “formal” split payroll arrangement pursuant to which an employee works in two (or more) different countries to the benefit of two (or more) different employers.
Physically performing employment functions in different countries can have far-reaching consequences. We herewith outline the most relevant points of attention.
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Applicable social security
A split payroll arrangement implies that an employee works on an alternating basis over a longer period of time in different countries.
In an EU-context the home country social security regime will apply if the employee performs at least 25% of their working time in the home country. This may lead to a situation whereby the employer established in another country is to register with the employee’s home country social security administration.
Many employers consider this a hindrance. As a result, a framework agreement has been concluded effective 1 July 2023. Pursuant to the framework agreement an employee can remain covered by the social security regime of the country where the employer is established provided that they telework less than 50% in the home country. See our newsletter regarding the entry into force of the framework agreement for an overview of all conditions.
If the split payroll arrangement covers a third country, it has to be verified whether there is a social security treaty.
In the affirmative (e.g. the US, Canada, etc.) one will typically have to contribute towards the social security regime of both countries, depending on the split of working time and salary between the countries.
Absent a social security treaty with Belgium, the employer may decide to maintain Belgian social security coverage or, possibly, to apply the overseas social security regime. However, at a local level it always needs to be verified whether the employee is also subject to local social security contributions.
! Several European countries have a mandatory notification system in respect of employees who work part-time on their territory and who do not contribute to the local social security regime. Always check if the country where your employee works on an alternating basis has such a notification system. See our newsletter about the introduction of such a mandatory notification system in the Netherlands.
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Applicable tax regime
With regard to professional income, employees are as a matter of principle taxable on their worldwide income in the country where they are resident for tax purposes. As an exception to this rule, if an employee physically works in the country where their employer is established and is paid by their employer, they will become liable for taxes in the employer’s country.
We recommend having each scenario thoroughly analysed by a tax advisor. If an employee becomes taxable in another country, this will indeed have implications on a salary administration level (wage tax withholding and/or reporting).
More specifically in the framework of an informal split payroll arrangement (telework) the question arises as to whether the home office in the employee’s home country can be considered a permanent establishment of the employer in which case there may be ramifications on a corporate income tax level. Again, specialised tax advice will be needed.
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Work accident insurance
In the framework of a split payroll arrangement, it will always have to be verified whether the employee is covered or must be covered by a work accident insurance for each portion of their employment and in each country.
Always check beforehand with your insurance company whether this can be coordinated, and whether additional formalities/premiums apply.
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Applicable labour law
As a rule, parties are free to choose the labour law applicable to the employment relationship. However, there are limits to this choice of law. These are linked to the place(s) where the employee performs their activities and local law that has to be complied with. It is recommended that you check beforehand with your legal advisor so that the split payroll arrangement can already start with the correct contractual documents.
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Immigration
If the employee works in another country, it also needs to be verified whether they have the right to work in that country on an alternating basis. It is recommended that you obtain advice in a timely manner and, if need be, to start up the procedure well in advance in light of the fact that the processing time can easily take a few weeks, if not a few months.
