As growing numbers of businesses start to operate across borders, HR and payroll professionals worldwide are increasingly facing the challenge of having to deal with international contractor workforces. Given the variations in legislation around the world, ensuring your firm and the contractors it uses remain compliant from country to country is no easy task.
Moreover, given that many authorities across the globe are becoming ever stricter in ensuring legislative requirements are followed to the letter, the risks associated with paying and manging international contractors are also growing.
In the first of a two-part series, we take a look at how employment and tax regulations vary across European Union (EU) member states. Our second article will focus on non-EU countries in which the regulations are particularly tricky.
Belgium
Most of Belgium’s legislation is straightforward, but there are a few exceptions that might cause trouble if they are not adhered to. Perhaps the country’s most important rule to follow is the ‘Limosa’ declaration. If employers either send one of their employees to the country or hire in a self-employed professional from elsewhere, they will be required to fill out this declaration before work begins.
Failure to comply could see the employer, their client and the individual themselves all facing fines and possible criminal charges. For example, companies with external workers on site that do not have the correct declarations in place could face a fine of up to E300,000 (US$354,000).
Foreign contractors registering as self-employed are also subject to scrutiny and must meet specific criteria to work in the country. They need to have either a recognised university degree or diploma to register their self-employed status or be able to show a ‘certificate of experience’. This certificate must show their educational or professional background and demonstrate that they have studied for, and passed, a multiple-choice exam on Belgian regulations and legislation in either French or Flemish.
Spain
Contractors seeking employment in Spain need to obtain a ‘Numero De Identificacion de Extranjeros’ or ‘NIE’ number, which is the foreign equivalent of the national identity number (DNI) used by local residents. It is important to note that lead times for appointments to apply for the NIE can be lengthy, particularly in Barcelona, often resulting in late start dates. As a result, it is common to use local agents in order to speed up the process.
Spanish payroll is regulated by government-issued standard employment contracts so, unlike most EU jurisdictions, there is little or no option to modify or vary terms. This means that all mandatory requirements, including holiday pay and sick pay, apply and must be taking into consideration when hiring.
Germany
Contractor management in Germany is a complex process, particularly since the reform of the Labour Leasing Act (AÜG) in April 2017. These amendments added further restrictions to labour leasing laws in order to prevent the misclassification of contract and freelance workers.
The key changes to the Act are:
- Each worker can be taken on for a maximum period of 18 months, and an uninterrupted period of three months must elapse before they can be hired again;
- Equal pay after nine months of continuous work with the same company is mandatory and includes pay for any benefits in kind such as subsidised canteen food that a comparable employee would receive;
- ‘Chain leasing’ is now classified as illegal, which means that AÜG licence holders must have a direct contract with the end-client without there being a middleman.
France
Processes for paying contractors can be complex here due to the way taxes and social security are managed during the first three years of working. Here is an overview of how the system operates:
- Year one: Workers pay only minimal social security contributions as they have no declared funds at this point. As such, the social security office has no revenue to act as a benchmark. Because social security payments are tax deductible, the lack thereof in year one results in an inflated tax on profits;
- Year two: Due to a failure to pay social security contributions in the first year, which led to higher profits, it is necessary to pay higher social security payments now;
- Year three: The above items are reconciled against one another.
As with most EU member states, the French authorities are increasingly scrutinising how workers are classified and what criteria should be used to differentiate between employed and self-employed people. But given that French employers’ social security ‘Charges Patronales’ are among the most expensive in Europe, reclassifying workers constitutes a real and significant risk for everyone concerned.
Netherlands
Change is afoot in the Netherlands as the Dutch authorities renew their attempts to manage growing levels of self-employment in the country. Having previously disbanded ‘VAR certificates’ - the declaration provides contractors and their clients with clarity about tax payments and employer contributions - a return to this model is now in process.
But these new VAR rules are likely to differ to those in the past. For example, the introduction of three different categories of self-employed worker, each with differing rights, is expected to come into force. It will also be necessary to work out whether or not self-employed individuals should be considered employees of the end-customer for tax purposes.
The aim is to clamp down on the currently all-too-common misclassification of employment status, but due to the complexity of the issue, many companies are choosing to hire people directly onto their payroll in order to minimise risk.
UK
While managing contractors in the UK is less complex than in many other EU countries, recent legislative changes have greatly increased employers’ risk factors. The Criminal Finances Act 2017, which was introduced in October last year, made it a criminal offence for firms to fail to prevent ‘associated persons’ from undertaking tax evasion.
This means that any company incorporated in the UK, or overseas businesses operating there, can face prosecution should contractors associated with the organisation evade taxes. The situation also applies to UK contractors operating in foreign countries.
As the offence in question amounts to failure to prevent fraudulent activity, companies could face prosecution unless they can demonstrate that reasonable procedures are in place to prevent someone from committing fraud.
Italy
Taxes in Italy are rather complex, particularly when it comes to contractors. Self-employed individuals conducting business in the country must open an Italian bank account and apply for their personal fiscal code, “Codice Fiscale”, locally.
They are also required to submit a registered business address, which may be an apartment or office but cannot be a hotel, to the tax office. After the relevant documentation has been filed, the tax office decides whether the individual should be authorised to use the premises as their registered business office.
Michelle Reilly has almost 20 years’ experience in contractor management. She joined CXC in 2009 to set-up its global Europe, Middle East and Africa business, and last year led a management buyout of the recruitment agency side of the organisation. Michelle is now chief executive of 6CATS International, which provides compliant contractor management solutions.
As growing numbers of businesses start to operate across borders, HR and payroll professionals worldwide are increasingly facing the challenge of having to deal with international contractor workforces. Given the variations in legislation around the world, ensuring your firm and the contractors it uses remain compliant from country to country is no easy task.
Moreover, given that many authorities across the globe are becoming ever stricter in ensuring legislative requirements are followed to the letter, the risks associated with paying and manging international contractors are also growing.
In the first of a two-part series, we take a look at how employment and tax regulations vary across European Union (EU) member states. Our second article will focus on non-EU countries in which the regulations are particularly tricky.
Belgium
Most of Belgium’s legislation is straightforward, but there are a few exceptions that might cause trouble if they are not adhered to. Perhaps the country’s most important rule to follow is the ‘Limosa’ declaration. If employers either send one of their employees to the country or hire in a self-employed professional from elsewhere, they will be required to fill out this declaration before work begins.
Failure to comply could see the employer, their client and the individual themselves all facing fines and possible criminal charges. For example, companies with external workers on site that do not have the correct declarations in place could face a fine of up to E300,000 (US$354,000).
Foreign contractors registering as self-employed are also subject to scrutiny and must meet specific criteria to work in the country. They need to have either a recognised university degree or diploma to register their self-employed status or be able to show a ‘certificate of experience’. This certificate must show their educational or professional background and demonstrate that they have studied for, and passed, a multiple-choice exam on Belgian regulations and legislation in either French or Flemish.
Spain
Contractors seeking employment in Spain need to obtain a ‘Numero De Identificacion de Extranjeros’ or ‘NIE’ number, which is the foreign equivalent of the national identity number (DNI) used by local residents. It is important to note that lead times for appointments to apply for the NIE can be lengthy, particularly in Barcelona, often resulting in late start dates. As a result, it is common to use local agents in order to speed up the process.
Spanish payroll is regulated by government-issued standard employment contracts so, unlike most EU jurisdictions, there is little or no option to modify or vary terms. This means that all mandatory requirements, including holiday pay and sick pay, apply and must be taking into consideration when hiring.
Germany
Contractor management in Germany is a complex process, particularly since the reform of the Labour Leasing Act (AÜG) in April 2017. These amendments added further restrictions to labour leasing laws in order to prevent the misclassification of contract and freelance workers.
The key changes to the Act are:
- Each worker can be taken on for a maximum period of 18 months, and an uninterrupted period of three months must elapse before they can be hired again;
- Equal pay after nine months of continuous work with the same company is mandatory and includes pay for any benefits in kind such as subsidised canteen food that a comparable employee would receive;
- ‘Chain leasing’ is now classified as illegal, which means that AÜG licence holders must have a direct contract with the end-client without there being a middleman.
France
Processes for paying contractors can be complex here due to the way taxes and social security are managed during the first three years of working. Here is an overview of how the system operates:
- Year one: Workers pay only minimal social security contributions as they have no declared funds at this point. As such, the social security office has no revenue to act as a benchmark. Because social security payments are tax deductible, the lack thereof in year one results in an inflated tax on profits;
- Year two: Due to a failure to pay social security contributions in the first year, which led to higher profits, it is necessary to pay higher social security payments now;
- Year three: The above items are reconciled against one another.
As with most EU member states, the French authorities are increasingly scrutinising how workers are classified and what criteria should be used to differentiate between employed and self-employed people. But given that French employers’ social security ‘Charges Patronales’ are among the most expensive in Europe, reclassifying workers constitutes a real and significant risk for everyone concerned.
Netherlands
Change is afoot in the Netherlands as the Dutch authorities renew their attempts to manage growing levels of self-employment in the country. Having previously disbanded ‘VAR certificates’ - the declaration provides contractors and their clients with clarity about tax payments and employer contributions - a return to this model is now in process.
But these new VAR rules are likely to differ to those in the past. For example, the introduction of three different categories of self-employed worker, each with differing rights, is expected to come into force. It will also be necessary to work out whether or not self-employed individuals should be considered employees of the end-customer for tax purposes.
The aim is to clamp down on the currently all-too-common misclassification of employment status, but due to the complexity of the issue, many companies are choosing to hire people directly onto their payroll in order to minimise risk.
UK
While managing contractors in the UK is less complex than in many other EU countries, recent legislative changes have greatly increased employers’ risk factors. The Criminal Finances Act 2017, which was introduced in October last year, made it a criminal offence for firms to fail to prevent ‘associated persons’ from undertaking tax evasion.
This means that any company incorporated in the UK, or overseas businesses operating there, can face prosecution should contractors associated with the organisation evade taxes. The situation also applies to UK contractors operating in foreign countries.
As the offence in question amounts to failure to prevent fraudulent activity, companies could face prosecution unless they can demonstrate that reasonable procedures are in place to prevent someone from committing fraud.
Italy
Taxes in Italy are rather complex, particularly when it comes to contractors. Self-employed individuals conducting business in the country must open an Italian bank account and apply for their personal fiscal code, “Codice Fiscale”, locally.
They are also required to submit a registered business address, which may be an apartment or office but cannot be a hotel, to the tax office. After the relevant documentation has been filed, the tax office decides whether the individual should be authorised to use the premises as their registered business office.
Michelle Reilly has almost 20 years’ experience in contractor management. She joined CXC in 2009 to set-up its global Europe, Middle East and Africa business, and last year led a management buyout of the recruitment agency side of the organisation. Michelle is now chief executive of 6CATS International, which provides compliant contractor management solutions.
