Social security implications of working abroad

It is not uncommon nowadays for an employee and an employer to be located in different states. Due to Covid-19, more and more employees are asking for permission to work remotely from another country. This article explains how working abroad can affect social security obligations.

The European Union Regulations No. 883/2004 (the “Statute”) and 987/2009 (the “Implementing Regulation”) apply in Estonia, which regulate the payment of social security contributions in cases where the employee's place of work and residence or the employer's location are in different countries, or the employee works in two or more Member States for different employers. These regulations are directly applicable in all Member States of the European Union (they also apply to Norway, Iceland, Liechtenstein and Switzerland). The Estonian Social Tax Act applies, when working in other foreign countries (including the United Kingdom from 01.01.2021).^[1]

According to the European Union Regulation No. 883/2004, a person is subject to social insurance only in one country at a time (Article 11). As a general rule, social security contributions must be paid in the place where the work is carried out. A person working on board of a ship shall be subject to the legislation of the Member State under whose flag the ship is sailing (unless both the employee and the employer are located in another Member State).^[2]

Social security contributions must be paid on the entire income of the employed or self-employed person. The Estonian social tax rate is 33%. If an Estonian employer pays salary to an Estonian resident working abroad, then social security contributions must be paid abroad and no social tax liability arises in Estonia. A natural person is a resident if one of the following conditions is met: 1) his/her place of residence is in Estonia; 2) he/she stays in Estonia for at least 183 days over the period of 12 consecutive calendar months. However, an Estonian employer is allowed to pay social tax in Estonia, if an employee is sent on secondment to another country for up to 24 months. In this case, the employer must apply for an A1 certificate on behalf of the employee from the Social Insurance Board. A1 certifies that social tax is paid in Estonia, where the employee has valid social insurance. A1 certificate exempts the employer and the employee from paying social security contributions abroad. Furthermore, an Estonian sole proprietor (FIE in Estonian) can obtain an A1 certificate and operate in another Member State for up to 24 months, continuing social tax payments in Estonia.^[3]

If a person is employed in two or more Member States, the taxation is based on the employer's place of business, the employee's place of residence or the main place of work (Article 13). If a person is employed in two or more Member States and a substantial part of the person's activity takes place in his/her country of residence (at least 25% of working time or remuneration), then the social security of the country of residence applies. In other cases, the social security of the employer's state of residence applies. If a self-employed person or sole proprietor operates in two or more Member States and a substantial part of the person's activity does not takes place in the country of residence (25% of turnover, profits, working time, scope of services), the legislation of the Member State in which the person has his/her centre of interests shall apply. The ‘centre of interest’ of the activities shall be determined by the following: a person’s occupational activities, the place where the person’s fixed and permanent place of business is located, the habitual nature or the duration of the activities pursued, and the number of services rendered (Regulation (EC) No. 987/2009, Article 14).^[4]

We hope this article has helped giving you an insight into the social tax obligations when working from abroad, and have addressed some of the incorrect assumptions on this topic. If you have any further questions related to this topic, please don't hesitate to get in touch with our BDO specialists.