In our practice, we often encounter various forms of cross-border employment, which entail a number of obligations on the part of the employer both in the Czech Republic and abroad. The purpose of this article is to briefly highlight these obligations so that the employer can make an informed consideration of the business benefits of a cross-border arrangement together with its administrative complexity.
When considering cross-border employment, we believe it is important to first correctly identify or select the structure that best suits the intended foreign activities. In particular, the options are as follows:
- a business trip, which is a temporary assignment of an employee to perform work away from the agreed place of work, where the employee remains subject to the instructions of their employer;
- hiring of labour (temporary assignment or agency employment), in which a legal employer places its employee temporarily at the disposal of another employer (economic employer or user) to perform an activity under its instructions, at its risk and to its benefit;
- permanent work outside the employer's home country, i.e. a situation where the employer concludes an employment contract with a worker who is permanently established abroad.
In particular, the following areas need to be addressed, with the main point of consideration for most of them being the actual presence of the worker abroad, not, for example, a formal solution to a situation such as the agreed place of work of the worker:
- immigration matters;
- employment tax;
- social security and health insurance;
- corporate income tax (potential establishment of a permanent establishment, i.e. registration for corporate income tax abroad and taxation of part of the employer's profits abroad);
- the employment conditions of the employee, i.e. the scope of applicable foreign labour law;
- notification obligations abroad (e.g. notification of posting of workers for the provision of services) and the mandatory scope of documents that workers abroad must produce in case of an inspection;
- corporate law, in particular the assessment of the obligation to establish a branch abroad;
- appropriate communication with the employee to understand what working abroad means for them in the above areas.
In the following, we will focus on the tax and insurance implications. However, it is recommended to address the other issues mentioned above as well.
In the field of employment tax on business travel, the most common exception to the obligation to pay tax in a given country is the relatively well-known limit of 183 days of presence in a given country in a 12-month period. This can be applied if both the employee and the employer are non-residents of the country and the employer does not have a permanent establishment in the country to which the income of such employee is attributable.
In the area of social security and health insurance, the posting clause can be used in many cases to maintain the contribution obligations in the home country. For this purpose, a certificate of legal competence (known as an A1 form within the EU) must be issued.
If the exemption from tax obligations in the country of temporary activity cannot be used, the next step is to assess whether the employer is obliged to keep payroll records abroad for the purposes of employment tax, social security and health insurance.
For business trips where the employee carries out activities on behalf of their employer, we consider it necessary to assess the risk of the employer's permanent establishment abroad.
It is also important to pay attention to the applicable employment conditions in the country where you are travelling. The extent to which foreign law applies will usually depend on the length of the business trip and the employee's field of activity. A related issue is the notification obligation for posting workers for the provision of services, which is harmonised within the EU and thus applies in all EU countries. Finally, the employer should check what documents the employee must have with them for the purposes of an inspection.
Hiring of labour
When hiring labour, the employer should first address the question of whether the simplified labour law institution of temporary assignment in the Czech Republic and abroad can be applied and thus legally avoid the obligation to obtain an employment agency licence. Temporary assignment usually comes with a number of conditions that must be fulfilled in order to avoid severe sanctions by local authorities when providing workers without the relevant licence. In any case, the workers must be guaranteed comparable working conditions in the country to those of employees in similar positions.
Again, the reporting obligations abroad and the extent of documents required at the place of business also need to be addressed.
This form of arrangement usually means that the employee's income is taxable abroad from the first day of work. The tax may be the responsibility of the legal or economic employer or the employee themselves.
In contrast to employment tax, the social security and health insurance posting provisions are also commonly used in this situation, i.e. contributions continue to be paid in the home country,
Under a similar arrangement, there is usually less risk of the legal employer establishing a permanent establishment abroad.
Permanent work outside the employer's home country
If an employer needs to employ an employee who is permanently established abroad, it will usually be obliged to keep foreign payroll records for employment tax and insurance contributions purposes.
In this situation, there is a significant risk of establishing a tax presence (permanent establishment) and the need to establish a corporate law presence (branch). This is also true when the employee carries out their activities from their home.
The worker will then usually be entitled to the full scope of foreign labour law and we recommend that you carefully consider choosing a different governing law for the employment contract than that of the place of work.
In our experience, the potential administrative burden for employers is extensive and cannot be managed without the assistance of local experts. It is advisable to have an analysis of the potential impacts of the arrangement and the costs of dealing with these impacts prepared in advance. Given the current digital age and the level of information exchange, authorities are better able to identify situations and enforce the relevant obligations, including imposing related sanctions in the event of non-compliance.