Contracting in Europe - Frequently Asked Questions
What expenses can I claim for when working overseas?
In certain countries, tax breaks and special arrangements exist for expatriate individuals. In the Netherlands for example most expatriate contractors qualify for a very generous tax break known as the 30% allowance and in Spain there is a flat tax rate of 24% for non-residents.
In many European countries in addition to such allowances, you can usually claim some expenses free of tax for costs incurred in working overseas. For example you may be able to claim for travel to and from your home location and double housing costs. To be eligible for these tax breaks factors that need considered are domicile, residence, local tax allowances and your family situation, each country is unique in their approach so it is worth seeking advice on your personal circumstances with the regard the country you intend to contract in.
What expenses am I able to claim for locally?
While working overseas it is normal to expect that some of your expenses incurred are going to be claimable as tax free expenses. However there is not a European or worldwide amount that is allowable - each country has different rules and regulations.
For example, in some countries you are able to claim double housing costs but in others this would be seen as a benefit in kind and therefore taxable.
It is also worth noting that if your package includes either a per diem living allowance, monthly allowance to offset cost of living or if your company provides you with accommodation locally (paid directly by them), these will not necessarily be seen as tax-free allowances by the local tax authorities.
For example, in the Netherlands there is a tax-free allowance known as the 30% ruling which is paid to highly skilled foreign workers employed from overseas. This means that tax is only payable on 70% of the gross salary. However once you are receiving this allowance, you will not then be able to claim for other expenses, including your accommodation, irrespective of whether you pay this directly or whether it is paid for by your employer.
Whichever country you are moving to, you should contact EAFS to take advice on the package that can be put together for you regarding your tax free allowances.
What is The Netherlands 30% tax allowance?
Employees who come to work in The Netherlands from another country and can meet certain conditions are eligible for a special expense allowance scheme known as the 30% ruling.
The conditions to achieve this are that:
You must have been recruited from overseas to work in the Netherlands
Must have the relevant level of earnings and
University degree or sufficient experience within your specialist field.
The 30% allowance is only valid for a period of ten years working time in the Netherlands, so if you work in the Netherlands for three years and leave for two years, when you go back to work in the Netherlands you will still have seven years to run on the 30% allowance.
In practice it works very simply. If your salary is €10,000 then the taxable amount would be reduced by 30% to €7,000. You would pay local tax on the €7,000 and at the point of receiving your net salary add back in the original tax free 30% expense allowance. Thus increasing your take home pay substantially.
The allowance given in the Netherlands is one of the best in Europe and helps to reduce your overall tax bill while working in the Netherlands. Please see our country guide to tax legislation in the Netherlands for more information.
Where do I pay social security when working overseas?
While working abroad as an independent contractor, it is as important to ensure that you have appropriate international social security cover as it is to have tax compliance. In many cases, social security is more important from a compliance perspective, as not paying attention to this aspect of your remuneration can increase the potential liabilities for the individual, agency and end client.
If you work in another EEA country for an EEA employer you are usually insured under the social security laws of the country you work in.
However, within the EEA it is possible, in some cases, to get an exemption from local social security via an FormA1 (previously E101) form if you are being seconded by an overseas (EEA) employer. This enables you to continue payments to the social security in the country of your residence assuming your employer are resident in the same country as you, rather than paying local social security.
A FormA1 is valid for one year and in some countries can be extended annually (with the permission of the working country) for up to 5 years.
Paying social security is a legal obligation in your country of work and the FormA1 provides this legal coverage.
Can I be paid into an offshore bank account?
While working overseas, consultants are often offered ‘creative’ solutions for management of their contract income, some of which include offshore trusts or offshore payments. Given that the EU Savings Directive came into force in 2005, whereby countries are obligated to share information concerning individuals’ savings accounts, there is now even less scope for these types of arrangements to function effectively. Consultants should consequently exercise a considerable degree of caution.
Offshore companies are often used as a means by which to shield money from income tax. While some structures allow this under very specific circumstances, agencies now tend to refuse to pay to offshore bank accounts due to these directives from HMRC as they are often no more than a thin front for tax evasion (i.e. the non-declaration of income).
Under very specific circumstances, an offshore company can be an efficient structure for tax planning, but advice must be taken before considering such a structure. It is not an issue for employers to pay into offshore bank accounts but more whether correct payroll taxes and social security deductions have been paid before the net salary is paid to the bank account.
In most European countries, trusts are not recognised in the same way as they are in the UK, and you will be taxable and liable for social security deductions on all income paid into the trust by your employer. For all intents and purposes, in most countries, income put into a trust is treated in the same way as if it were put into a bank account, and will therefore be liable for the same taxes.
Why can't I pay my taxes through my Limited Company?
While working overseas, one of the most important issues for contractors, agencies and end clients is the subject of tax compliance.
It is a fact that income tax is due in the country where the income is earned. If you are contracting abroad, you need to ensure that you have a mechanism by which income tax can be paid in your country of work.
By continuing to pay tax through your Limited Company, you will be remitting tax in your home country, but not in the country where you are working. Although your tax affairs at home will be in order, under this type of arrangement a tax liability will build up in the country of work. In many countries there exists a chain law which means that the tax liability can be passed on to the client you are working for. For this reason, many clients will insist that contractors are paid via an in-country payroll.
Contractors operating through UK Limited companies outside the UK are consequently running the risk of being liable not only for unpaid personal income tax, but also for corporate tax, having created a permanent establishment in the country where they are working.
It is therefore important to ensure that your tax affairs are in order both in your home country and in the country where you are working.
What happens to my state pension when working overseas?
While working away from your resident country it is not always necessary or in fact possible to continue paying into your existing pension schemes, or if you do you may not get the same level of investment.
There is also a great difference between the state pension and any private pensions. In general, state pensions will either be covered by local social security or through your E101. Dependent on the country of work there may be an element of private pension within the social security system and therefore you need to be aware of what your entitlement is.
In every EU/EEA country where you have made social security contributions your record is preserved until retirement age. If you have made contributions for at least one year in any one country, that country will have to pay you a state pension when you reach retirement age. If you have contributed in any one country for a relatively short period, your entitlement to the state pension will be quite small.
In the case that you contributed in a country for less than one year, your contributions will not be lost. They will be taken over by the country where you have made most of your contributions during your working life, or by your final country of employment. As long as you stay within the EU/EEA countries, any time spent contributing to the social security system of an EU/EEA member state will count towards your overall state pension.
Do I need to pay voluntary pension contributions when I am working overseas?
If you work overseas within the EU/EEA and you are contributing to the social security system of an EU/EEA country, these contributions will count towards your qualifying years for a state pension. Therefore, if you decide not to make voluntary contributions in your home country, you will not create gaps in your contributions.
You should be aware, however, that your record of contributions is preserved in each country of work until retirement age. Your state pension will then be paid out in part by your home country and in part by the other countries where you have worked, the proportions dependent upon how many years are spent working in each. In some countries you may be able to transfer your contributions. You will need to check the country of work regulations regarding transfer of contributions.
When do I have to file a tax return?
As a general rule, a tax return should be filed at the end of the tax year in the country where you are working. Unlike in the UK, in most other European countries the tax year corresponds to the calendar year.
What is a double tax treaty?
This is an agreement between two countries to prevent international double taxation. This occurs when two different states impose a comparable tax on the same potential taxpayer on the same taxable item. Most developed countries have a large number of double tax treaties in place. The UK has over 110. Double tax treaties are in place between all EU/EEA countries.
When going to work on contract abroad, it is important to check that your home country has a double tax treaty with the country where you will be working. If no treaty exists, you should try to ensure that you will be able to acquire a tax certificate which clearly states how much tax you have paid in the country of work. Without this you run the risk of being taxed twice on the same income.
Where should I pay taxes?
Tax is due where income is earned. Any contract revenue should be taxed in the country where you are performing your work. The key factor is where you are physically present. It does not matter which currency you are paid in, where your agency is or where the end client’s main office is. If you are performing your work in the Netherlands, for example, the Netherlands is where tax on that income is due.
You do not have to be tax resident in a country to be liable to pay income tax there. Tax residents pay tax on their worldwide income. Tax non-residents pay tax on any part of their income earned in country.
If you work in one country and remain tax resident in another, you should pay income tax in the country where you are working and declare that income and any tax paid on it, as well as any other worldwide income, in the country where you are tax resident. The country where you are tax resident will take into account any tax paid in another country and double taxation treaties will prevent you from being taxed on the same income twice.
In order to remain compliant in respect of both the country where you are working and your home country (where you may be tax resident), you must pay income tax in the country where the income is earned.
Why is it important to be tax compliant?
When working abroad, it is essential to ensure that your tax affairs comply with the rules and regulations of the country in which you work as well as those of your home country. Failure to do so means that you are breaking the law and can result in heavy fines or even imprisonment.
There are many "exotic" solutions in the marketplace, promising super-high net retention to consultants and easy business for recruitment agencies, using a variety of imaginative methods. Some are not compliant in any relevant jurisdiction, and others may be compliant in one country but not necessarily in another; if you choose a non-compliant solution the risk is yours and yours alone.
Rules and regulations across nations are constantly changing, EAFS will help you to assess and avoid the risks for you and/or your agency by advising you of the tax legislation in a given country and specifically on what is, and what is not, possible in terms of tax planning.
Whether you are working on a contract assignment overseas or in your home country, some things never change. Tax will be due where the money is earned. However, ensuring your tax compliance with the relevant international tax legislation is a complex process - especially when multiple countries and tax authorities are involved.
At the centre of this are the rules regarding tax residency. Individuals need to be aware of these to ensure that they pay the correct tax to the correct authorities, thereby remaining tax compliant.
Additional issues that you need to be aware of are the 183 day rule, the 91 day rule and the regulations regarding double taxation avoidance.
When moving to a new country to work you are generally liable for tax from day one. This status is termed “tax non-resident” and in most countries means that for the first 183 days of work, you are taxed only on your locally-sourced income.
Once you go over the 183 days, and in some cases this can be in one tax year or cumulative over 2 tax years, your status changes to “tax resident”. This change means that you become potentially liable for tax on your worldwide income.
For most people this will actually mean no change if the locally-sourced income is the same as the worldwide income, but those with other sources of income will need to be aware of the potential tax implications this creates.
Having the status of tax non-resident does not mean that you can work without paying tax, unless you are working in a country that is zero tax rated.
How do I become a tax resident?
Becoming tax-resident may be easier than you think. When you move to a new country you can usually remain tax non-resident for a short stay, but you will almost certainly become tax-resident for longer stays (after 183 days in many countries).
The point to note is that tax is usually due where income is earned i.e. from the first day of work in your new country of work unless you have a pre-arranged exemption. If you simply carry on paying tax in your home country, “for simplicity’s sake” or because tax is lower there or because your contract is expected to be short-term, you are potentially creating problems for yourself.
Unless the assignment is short (and not extended), the local authorities will usually tax you from the first day of work and it will be up to you to try to reclaim tax paid elsewhere, which can be a very time-consuming process.
In short, it’s worth getting your tax affairs clean and correct from the start. In every case, make sure you obtain professional advice before you start a new contract.
What is the 183 day rule?
The so-called 183 day rule relating to tax liabilities rarely exists as a clear-cut rule but is used as a guideline in some circumstances (see our related newsletter).
If you work less than 183 days in many countries you may be considered tax non-resident if certain other criteria are also met. However even as a non-resident you should normally still be paying tax on the revenue you generate in that country.
If you work more than 183 days in most countries, then you will become tax-resident and liable for tax on your worldwide income, i.e. revenue from your work, interest on investments, etc.
The ‘183 day rule’ does NOT automatically mean that you can work for 183 days in a new country without paying tax or becoming tax-resident. However in most situations, particularly if a double taxation avoidance treaty exists between your country of work and your home country, you will not have to pay tax on the same income twice.
What is the 91 day rule?
The 91 day rule forms part of the test governing tax residency in the UK and it works in conjuction with the 183-day rule.
From April 2008, when deciding if an individual is resident in the UK for tax purposes, days will count if you are in the UK at the end of the day (i.e. at midnight) for residence test purposes.
A person who is currently not resident in the UK will always be treated as resident in the UK if they spend 183 days or more in the UK in any tax year. If they visit the UK on a regular basis and spend, on average, 91 days or more in the UK in a tax year (taken over a period of four years), they will be treated as resident in the UK.
If they know that they are going to visit regularly and that the time spent in the UK in that and the next three tax years will average 91 days or more in the UK, they will be resident from the beginning of the tax year in which they make the first visit.
If they have been resident in the UK and, having left the UK, continue to visit, they will continue to be treated as resident if those visits average 91 days or more a tax year, taken over a maximum period of four years.
Therefore if you leave the UK for work overseas, remain out of the UK for one complete tax year and during the period your trips back to the UK are not more than 91 days (midnight rule applies), averaged over a four year period, you will become non tax-resident.
For more information on the subject of gaining and losing tax residency see our Tax Residency FAQs or follow the link to useful UK tax forms.
How do I lose tax residency?
Becoming tax non-resident is not straightforward, and varies very much from country to country.
Sometimes it is sufficient for your “centre of economic and social interests” (your job and/or your home base) to move to another country for you to lose your tax residency in your home country. In other cases you must work outside your home country for one (or more) tax years in order to lose your tax residency.
In simple terms, it is not because you have become tax-resident in a new country that you will automatically lose your tax residency in your home country; it is quite possible to be tax-resident in two countries at the same time!
For example, to lose your UK tax residency you must be out of the UK for one complete tax year and, during that year (and averaged over a 4 year period), you must not have returned to the UK for more than 91 full days.
The 91 day rule changed its ruling in 2008 and is now based on the midnight rule (a day is counted as in the country if you are there at midnight).
US nationals will never lose their US tax residency and will always have to pay US taxes. Although in all cases the double taxation avoidance treaty between the USA and most other countries needs to be applied to ensure that you do not pay full tax twice on the same income.