In February 2020, following the departure of the UK from the European Union (EU), we reported that the existing rules on social security contributions would apply for assignments between the UK and the EU/European Free Trade Area (EFTA) commencing before 31 December 2020. However, the landscape beyond that point was unclear.
Under these rules, an assignee remains in the home scheme and is not required to contribute to the host scheme if the assignment does not exceed two years, the individual continues to be employed by the home country employer and does not replace another employee who is returning from a posting. Extensions can be granted for longer assignments, subject to approval from the home and host country authorities. For multistate workers, contributions are also paid in one country, determined by a set of criteria which considers the country of habitual residence, where the substantial part of activity occurs, and where the legal employer has its registered office or place of business.
These rules will apply for the length of the assignment, including beyond 31 December 2020, provided that the posting continues without interruption.
What about assignments starting from 1 January 2021?
Firstly, the rules will depend on whether the assignment involves an EU or an EFTA member state.
Following months of negotiations, the Trade and Cooperation Agreement was concluded in December 2020. This includes a Protocol on Social Security Coordination (Protocol), which governs social security liabilities from 1 January 2021. Under Article 11 of the Protocol, the two-year rule described above is still applicable, although there is no scope for this to be extended for longer assignments. If an assignment is longer than two years in length, and this was known at the start, the assignee pays into the host scheme only for the full duration of the assignment; they cannot remain in the home scheme.
If an assignment is unexpectedly extended beyond two years, it is not yet clear when host scheme contributions commence. Would it be after the initial two-year period has elapsed? Or at the point it was known the assignment would last more than two years? Or would they be backdated to the beginning of the assignment? At the time of writing, the authorities are yet to clarify this. Either way, global mobility professionals should be aware of the potential impact on assignment costs for UK outbounds where the host social security liabilities are relatively high, such as France or Italy.
Furthermore, for the ‘two-year rule’ to be applicable, member states will have to explicitly opt in to Article 11. Although all 27 have done so, it is important to note that they have the option to individually opt out. If this happens, Article 11 ceases to apply to that state and assignees will then contribute to the host scheme only.
For multistate workers, contributions are still paid in one country only. The set of criteria used to determine which country is similar to before.
The Protocol is only applicable to EU member states. A similar unilateral agreement hasn’t been negotiated for EFTA member states (Iceland, Liechtenstein, Norway and Switzerland), so any existing bilateral agreements will take effect. These are currently in force for Iceland, Norway and Switzerland, and allow assignees to remain in the home scheme for assignments not expected to exceed one year, three years and two years in length respectively (with the possibility of a one-year extension in the case of Iceland). Again, it is not clear how assignments extended beyond these thresholds will be treated. There is currently also no agreement between the UK and Liechtenstein, meaning that dual home and host liabilities are possible.
Will a unilateral agreement between the UK and EFTA be concluded? Given that Norway and Switzerland have recently signed new agreements with the UK, and Liechtenstein is the only member state without one, this seems unlikely in the short term. On the contrary, an agreement between the UK and the EU was a more pressing need since several member states don’t have a bilateral agreement with the UK, and those in existence may be inadequate for modern work practices. If the Protocol had not been agreed, dual home and host liabilities could have become a reality for many assignees to and from the EU.
The Protocol is legislated to apply for 15 years. A member state could negotiate a bilateral agreement with the UK going forward, but a new unilateral agreement seems much more likely. The EU, and its previous incarnations, has taken a collective approach to social security coordination for the past 50 years, so it would be surprising for individual states to go against this. The only EU country to have concluded an agreement with the UK in recent years has been the Irish Republic, although this occurred before the Protocol was agreed and was deemed a priority given the close ties between both nations and the possibility of a ‘no-deal’ situation.
Given how negotiations progressed after the UK left the EU, the prospect of no agreement on the rules applicable after 31 December 2020 was a very realistic outcome. This could have meant dual social security liabilities and increased assignment costs, so the Protocol is a welcome piece of legislation. There is no equivalent agreement between the UK and EFTA, so liabilities will be governed by existing bilateral agreements. However, long-term assignees can no longer remain in their home country scheme, so costs for these assignments may rise despite the elimination of dual liabilities. Global mobility professionals are therefore advised to review assignment costs for moves commencing after 31 December 2020. Assignments commencing before this date will be grandfathered under the old rules and will see no impact.
FIND OUT MORE
Please contact us to speak to a member of our team directly.
Clear and comprehensive tax reports are available for more than 100 countries as part of a subscription to ECA data and can also be bought on demand.
Our Tax Calculator enables you to calculate hypotax at the touch of a button, and is used by our Consultancy & Advisory team to run tax calculations on your behalf.
ECA’s hypothetical tax data is built into our various assignment calculators and cost projections, including our assignment management system, ECAEnterprise.