The Clash between EU Law and Tax Treaties: Obstacles of Frontier Workers regarding Taxation and Social benefits

Department of Law Spring Term 2019

Master Programme in International Tax Law and EU Tax Law Master’s Thesis 15 ECTS

Title: The clash between EU law and Tax treaties

Subtitle: Obstacles of frontier workers regarding taxation and social benefits.

Author: Anila Halili

Supervisor: Prof. Dr. Bertil Wiman

Table of Contents

1. Introduction ... 4

1.1. Background problem ... 4

1.2 Outline ... 5

1.3 Delimitations ... 6

1.4. Objective ... 7

1.5. Methods and Materials. ... 7

2. THE LEGAL FRAMEWORK ... 8

2.1. FREEDOM OF MOVEMENT ... 8

2.2. EU non-Discrimination Principle in Tax law ... 9

2.3. Bilateral treaty framework. ... 10

2.4. Tax treatment of Frontier Workers ... 12

2.4.1. Definition of frontier worker ... 12

3. Regulation No 883/2004 on social security contribution ... 14

3.1 State-of-the employment principle ... 15

4. The absence of co-ordination between the social security contribution and tax legislation on frontier workers. ... 17

4.1. Substantial and procedural obstacles ... 18

4.2. Hindrances linked with child benefits and unemployment entitlements special focus on Öresund region. ... 21

4.3. Unemployment benefits ... 29

5. Suggested solutions to overcome obstacles on cross-border employment in European Union. ... 35

6.Conclusion ... 37

7. Bibliography ... 38

Abbreviations

Art. Article Ch. Chapter

SNCBs Special Non-Contributory Cash Benefits

OECD Organisation for Economic Co-operation and Development OECD MC OECD Model Convention on Income and Capital EC European Community

DTC Double Taxation Convention

FRESSCO Network on Free Movement of Workers and Social Security Coordination

pg. Page para. Paragraph

1. Introduction

1.1. Background problem

Employment activity across the national border has raised several issues concerning the fiscal treatment and social benefits of cross-border workers in European Union. The lack of coordination between Double Tax Convention and social security legislation complicates the allocation of taxing right of frontier workers in the EU and hinders their welfare benefits.

To illustrate existing problems, we can discuss an example¹, assume that a Swedish family with two children live in Malmö (Sweden) near border region with Denmark. Parents, namely Eva and Erik perform their employment in Copenhagen and commute daily from Malmö to Copenhagen. In this respect, barriers are created not only in the allocation of taxing rule which can lead to double taxation but also in the applicability of social security contribution. A variety of legislation as domestic tax law, bilateral tax conventions and the mechanism of EU regulation on social security contribution generates tax conflicts on the treatment of the relevant family.

From the perspective of the Nordic Tax Treaty between Sweden-Denmark this family must be taxed in one of the contracting states and pay the social contribution to the other State. Consequently, the inequity of taxation may reduce the social benefits of the cross-border commuters, which creates problems². Place of employment and place of residence is a decisive factor for determining the competent state regarding the taxation and the social security contribution of cross-border workers. Due to the clash of policies, taxpayers would prefer to be levied in one specific tax regime in order to receive their social benefits and pay tax rather than being subject of the dual obligation between two countries. Adding that in a cross-border case the administration and legal procedures requires more time than in a domestic situation.³ Although where frontier workers pursue their employment activity in both countries tax and social inconveniencies may arise easily. In this context, several questions shall arise as:

How is allocated the taxing right of parent employees between Sweden and Denmark? Which Member State cover the social security contribution of frontier workers as in case of this family?

1The example is inspired by the lecture regarding taxation and social security contribution and of cross-border employment between Sweden and Denmark

2 See Towards a convergence of coordination in social security and tax law?Frans Pennings, Professor of international social security, Tilburg University and Utrecht University and Marjon Weerepas, Assistant Professor, tax law, Maastricht University

3 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law, pg.54

Does this family enjoy the same personal and family allowances as in a pure domestic situation such as children benefits and unemployment benefits?

These main themes generally affect the situation of cross-border workers in European Union, who are confronted with different tax jurisdiction from which derives many obstacles due to their nature of work as it will be discussed in this thesis. Even though the EU coordination of social security contribution Regulation No 883/2004 as a legislative power overrides the national provision for commuting workers, lack of coordination linked with the specific allocating rule in bilateral agreement still exist as a separate system.⁴

Furthermore, cross-border commuters can be victims of unequal treatment in terms of double taxation and social benefits where they are charged to the social contribution fee in one Member State and is taxed in the other Member State⁵.

To the extent that there is no harmonization of tax rules in EU legislation that determine which Member State will tax income, the situation regarding the tax treatment of cross-border commuters becomes more complicated. Under the EU Social Security Coordination Regulation, no 883-2004, Article 11 only one of the Contracting States has the power to be competent for social contributions of cross-border commuters, while under the DTCs, more than one Member State can have the right to levy taxes.⁶

1.2 Outline

The first chapter presents the introduction of this study in which is centered the background problem and research questions, follows by the objective, the method, delimitation and outline of this thesis. The second part comprises an overview of the legal framework. The fundamental principle of free movement of workers Art.45 of the Treaty on Functioning of European Union is addressed as well as, the EU principle of non-discrimination concerning the cross-border laborer. The OECD Model Convention 2017 and its Commentary is also discussed. The next section is dedicated to tax treatment of frontier workers. Different requirements are introduced for the status of frontier worker as stipulated in some Double Tax Conventions.

The third part of the thesis includes the rule on coordination of social security contribution Regulation No 883/2004 with a focus on frontier workers and their welfare benefits, especially unemployment and family entitlements in

4 file:///D:/comparative%20report%20frontier%20work.pdf

Employment, Social Affairs and Inclusion Comparative Report Frontier workers in the EU,2014.

5 Marjon Weerepas, Tax and social security contribution a world of difference? Pg21,(Nordic tax).

6 in Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems (OJ L 166, 30.4.2004)

http://data.europa.eu/eli/reg/2004/883/corrigendum/2004-06-07/oj

Art 3 and 64. Moreover, the principle of the place of work (Lex loci labors) is elaborated in connection to employment across border. The chapter 4 provides an analysis on the obstacles created by the asymmetry of EU regulation 883/2004 social security contribution and fiscal system. In addition, problems faced by frontier workers in several European border regions are interpreted related to compensation of unemployment benefits, family allowances and administrative procedures likewise, residence conditions. Case law by the CJEU is elaborated which describes the provisions of free movement in respect of frontier worker regarding the social benefits. In order to see how are affected cross-border workers by the lack of coordination between social legislation and tax legislation in the Öresund region (between Sweden and Denmark) is provided a case example which begins in the introductory section of this thesis. In such view, two different scenarios are discussed regarding the employment of cross-border commuters and granting of benefits in this border zone. The chapter 5 provides the proposed solutions for arrangement of taxation and social security contribution of cross-border commuters in European framework with a special focus in the frontier zone between Sweden and Denmark.

Conclusion part will summarize thesis with concluding remarks, further proposals and recommendations for solving the relevant problems will be provided as well.

1.3 Delimitations

This thesis will be mainly concentrated on the disadvantages encountered by cross-border workers as a result of the mismatch between social security coordination and tax levies.

The situation of frontier workers in the European Union is generally analyzed and some comparative legislation are introduced. Information about frontier workers outside EU is not provided.

The subject of the thesis includes problems regarding taxation, however, we will be focused only on taxation of individuals employment income.

We delimit subject of the thesis by workers in European Union and how they are affected by the legal sources of EU law, OECD Model Convention and EU Regulation on social security contribution and tax treaties convention.

Social security system with focus to family allowances and unemployment benefits is addressed. However, pensions are not part of this thesis.

Moreover, it is presented only information about the first exception related to the exportation of unemployment benefits while the exportation of the special non-contributory cash benefits (SNCBs)-benefits between social security legislation and social assistance, as stipulated in Article 70 of the EU regulation NO 883/2004 it is not examined in this thesis.⁷

7 See, Social Affairs and Inclusion The relationship between social security coordination and taxation law pg.24. Such benefit has a great importance regarding social security contribution

Proposals solutions are provided in order to improve the situation of frontier workers in European Union.

1.4. Objective

The main objection of the thesis is to examine the obstacles faced by frontier workers as a result of non-harmonization in the EU regulation on social security contributions and tax system. An essential purpose is to describe to what extent the different national provision on tax system and social contribution scheme effect the welfare benefits of cross-border commuter with a central point the unemployment and family benefits. Administrative barriers created for frontier workers will be also addressed in this thesis.

Based on all comparative situation in several Member States crucial dispute is how to overcome the problems of the frontier workers in EU. Therefore, this thesis will try to find ways to solve the existing problem caused by the asymmetry of EU law and tax regulation.

1.5. Methods and Materials.

This thesis includes the legal dogmatic method in combination with the comparative legal method. By means that the legal dogmatic method refers to interpretation of legal norms, therefore it is suitable for analysis of legal sources in this thesis. While the legal comparative method is valuable for indication of differences on taxation and social benefits of frontier workers in EU, especially between Sweden and Denmark.

As primary sources the author includes the EU regulation on social security contribution with the purpose to cover the social security benefits and the OECD Model Tax Convention 2017 as well as its Commentary is discussed regarding the allocation rule on income from employment.

Analysis of the case law is provided to find out the way of interpretation of the Court on cross-border employment.

because in accordance with Article 70(2)(b) must be funded from general tax and shall not be provided as a contribution payment in the financing scheme. Hendrix Case C-287/05 linked with non-exportable invalidity benefit. The dispute were the change of residence from Netherlands to Belgium but frontier worker continue to work in Netherlands. Before his relocation he had been granted to a Deutch invalidity benefit (Wajong)After moving, the Netherlands denied to provide the benefit. In the light of this case the CJEU expressed that Article 39 TEC (now Article 45 TFEU) for the freedom of movement and Article 7 of Regulation (EEC) No 1612/68 must elucidated in the way that could not disqualify national provisions about the residence

requirement as the relevant benefits was non-exportable according to the Annex II(a) to Regulation (EEC) No 1408/71 so was granted only resident individuals. According to Article 70 the member state of residence was competent and Article 7 for waiving of residence was not applicable and not justified for frontier workers.

Further, general Principles such as freedom of movement and non- discrimination are identified in order to avoid discrimination on cross-border workers. The multilateral Nordic Tax Treaty has a significant role in this research in terms of the taxation of all taxpayers positioned in Sweden and Denmark. Referred to discrepancies on national provisions for the welfare benefits of cross-border commuters between Sweden and Denmark is used the Domestic law and Social security of the respective states. Different Tax Tax Treaties in European framework has been mentioned regarding the situation of frontier worker in some cross-border region.

2. THE LEGAL FRAMEWORK

This chapter gives an overview of the legal rules which apply in cross-border situations about social security and taxation, respectively.

2.1. FREEDOM OF MOVEMENT

Integration into another country for work reason make cross-border workers handled with a lot of problems such as injustice and disparity of tax treatment compared to domestic employees. However, in the European framework is established the “free movement of workers” Article 45(1) of the Treaty on the Functioning the European Union (TFEU) which covers migrant workers.⁸ As a fundamental principle, “freedom of movement” secures frontier workers the right to commute freely, to work and to reside in another Member State without any restriction.⁹ In that view, employees operating across the border shall enjoy equal treatment as the national workers deprived of any discrimination in relation to employment condition, payment and welfare benefits.¹⁰ Despite the fact that EU regulations guarantee protection to the cross-border workers during their working period in a foreign country, national legislations regulate the tax system and have still effect on workers.¹¹ In the case of a frontier worker family mentioned in the introductory section, if we assume that this family is taxed higher than in their home country or is imposed social security contributions in both countries, they may be

8 https://www.eurofound.europa.eu/observatories/eurwork/industrial-relations-dictionary/free- movement-of-workers

9 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law. EU Commission

http://ec.europa.eu/employment_social/empl_portal/facebook/20131014%20GHK%20study%20w eb_EU%20migration.pdf

10 id

11 Easing legal and administrative obstacles in EU border regions

Case Study No. 2 Labour mobility Obstacles for cross-border commuters( Sweden-Denmark)

discouraged from cross-border employment, as a consequence the free movement of workers can be influenced by the double taxation.¹²

We will discuss and elaborate on such problems further below.

In the following section, it can also be seen whether the OECD Model Convention is applied for employment income for cross-border workers and what is the solution for double taxation.

2.2. EU non-Discrimination Principle in Tax law

Non-discrimination principle in EU law is an essential. Cross-border workers are affected by the domestic legislations of two countries, the state of employment and the state of residence. Their tax treatment both in the source country and in residence country must be in line with the principle of non- discrimination and European Community Treaty freedoms.¹³

When the taxation takes part in the state of residence for example, in Germany and cross-border commuters works in Austria, frontier worker shall not be discriminated in his state of residence (Germany) since he/she exercises the employment in another state, in Austria. In this view, the state of residence should not treat in a less favorably situation the worker commuting across border than the other residents living and working therein.¹⁴

Furthermore, even where the employer has derived the income in the other country and is levied in the home state the later state should grant the same tax deductions and welfare benefits as the work were conducted there.

However, another case of discrimination could occur when the taxation of cross-border workers is collected from the state of employment. In such situation, the workers belong in the category of non-resident worker by the way that their tax residence is placed in another country.¹⁵

By virtue of the Article 39(now 45) EC and Section 7 of Regulation 1612/68,

“non-resident workers enjoy the same tax advantages as national workers.”

In terms of the personal and family allowances the above-mentioned rule applies where the cross-border workers (non-resident) is in a comparable situation with the resident worker. In principle, non-resident cross-border workers are not in a comparable situation with resident workers.¹⁶ There is an exception, where the frontier worker is denied any tax advantage from the state of residence. In such instance, there is in a comparable situation and affected by the discrimination rule as it will be discussed further in this thesis.

12 Towards a convergence of coordination in social security and tax law? Frans Pennings, Professor of international social security, Tilburg University and Utrecht University and Marjon Weerepas , Assi sta-nt Professor, tax law, Maastricht University

13 https://ec.europa.eu/taxation_customs/individuals/personal-taxation/crossborder-workers_en

14 id

15 id

16 id

2.3. Bilateral treaty framework.

The OECD Model Convention (MC) on Income and Capital, 2017 with a focus on income of employment is one of the most important factors in order to avoid existing problem connecting the double taxation.

As a starting point, EU legislation does not regulate the tax system of cross- border workers as they could only be taxed in one Member State, thus Bilateral Tax Treaties are the essential instrument to avoid double taxation of frontier workers¹⁷.

It is essential to what extent the OECD MC applies on frontier workers situation and if Article 15 on income from employment applies in such case.

As it is described further in this section it remains uncertain the application of OECD MC in cross-border work.

In addition, the OECD MC Commentary on Article 15, paragraph 10, does not stipulate any specific rule regarding the income derived from frontier workers, but indicates that national jurisdiction can resolve the issue of taxation by conducting a bilateral treaty¹⁸.

Even the concept of frontier workers is not stated in OECD MC and in its Commentary. OECD Model has not a legal binding effect on national states¹⁹. In this respect, tax treaties based on the OECD Model Convention conducted between contracting states are responsible for dividing the taxing right since State of employment will receive the taxable amount in respect of the activity pursued there and State of residence has the right to grant credit or exemption (Article 23 of the OECD MC) to prevent double taxation for cross-border workers.²⁰

Furthermore, social security contribution of frontier workers is not included in Tax Conventions hence is not regarded as taxes. As Article 2, para 2 in the Commentary of the OECD Model Tax Convention provides that:

“Social security charges, or any other charges paid where there is a direct connection between the levy and the individual benefits to be received, shall not be regarded as “taxes on the total amount of wages”²¹.It needed the direct link between the contribution and the benefits. As far as cross-border employment is concerned, although the European Union has difficulties in

17 file:///D:/mobility_of_workers%20tringular%20cases%20

18 Commentary on Model Tax Convention on Income and Capital condensed version ,OECD 2017file:///C:/Users/user/AppDeata/Local/Packages/Microsoft.MicrosoftEdge_8wekyb3d8bbwe/T empState/Downloads/OECD%20Model%20Tax%20Convention%202017%20(1).pdf

19 OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing. http://dx.doi.org/10.1787/mtc_cond-2017-en

20 See the interpretation of Article 15 by Pasquale Pistone on Income from Employment - Global Tax Treaty Commentaries

file:///C:/Users/user/Documents/pasquale%20pistone%20income%20from%20empl%20commenta ry.pdf

21 http://www.oecd.org/berlin/publikationen/43324465.pdf, Commentary OECD MC 2017 on Article 2(2).

harmonizing Member States' legislation in the field of social security, there is a gap between social security law and tax law. In this context, social security of cross-border commuters is covered only by the EU Regulation No 883/2004, which will be examined in the next chapter.

Several countries comprise a clause in their bilateral agreement for fiscal treatment of frontier workers which differentiate from country to country and may provide a threshold for the working days outside the border zone. It is worth to be mentioned that the DTC 1971 between Germany -Switzerland in which is provided the rule of 60 days employment not involved in frontier region, during this period of time the person is still qualified as a frontier worker.²²

In case that there is not coordinated the Tax law in EU framework the interpretation of cross-border region is specified in different ways.

Moreover, in case that there is not adapted a specific provision in Double Convention of Member States for the category of frontier workers, the general rule applies on income from employment is the Article 15(1) and (2) as stated in the OECD MC that may correspond to the income from employment in DTC of the Contracting States.

Regard to Article 15 of the OECD MC, a brief mention is desirable to be covered. Art. 15(1) of the OECD MC provides the exclusive taxing right to the residence state of the employee to tax salary, wages and other similar remuneration if the employment activity is pursued in the residence state.²³ If the employment is performed in another contracting State then the right to tax belongs to that state.²⁴

According to the Art.15(2) of the respective OECD MC are laid down three requirements:

”The physical presence of the employee in the state of employment for a period less than 183 in a calendar year. The remuneration is not paid by or on behalf of an employer, who has his residence established in the source place. This remuneration is not borne by a PE of the employer in the source state”.²⁵

Consequently, if any of three conditions is met, the country of source in which employment was exercised has the exclusive right to tax the income resulting from the cross-border activity.²⁶ Taking into account these requirements it is almost impossible to be applied in case of employees

22 Klaus Vogel on Double Taxation Convention, fourth edit volume 2, pg 1213. Based on the DTC Germany -Switzerland a frontier worker ceased to have this status if does not return in the

residence state for 60 days working in the other state.

23 ART. 15 (1) principle of residence, power to tax of the state of residence see Pistonen.4,s.2.1.1.

file:///C:/Users/user/Documents/pasquale%20pistone%20income%20from%20empl%20commenta ry.pdf

24 when the employment is exercised in the other contracting state, the source principle Pasquale Pistone

file:///C:/Users/user/Documents/pasquale%20pistone%20income%20from%20empl%20commenta ry.pdf

25 Klaus Vogel on Double Taxation Convention, fourth edit volume 2, De Broe pg 1115.

26 Id,

working across border because they live continuously in state of residence and after working time in the country of employment they turn back to the first state so the rule of 183 days could not be satisfied in such case.

The wording of Art 15(3) stipulates the income from employment operated aboard in a ship or aircraft, in international traffic or aboard a boat engaged in and waterways transport and the state of residence of cross-border worker is competent to tax.²⁷

As regards taxation of cross-border workers an explanation is delivered in the following section.

2.4. Tax treatment of Frontier Workers

2.4.1. Definition of frontier worker

In this section is elaborated on the tax coordination and the status of the frontier workers. Bilateral Tax Convention between contracting states do not provide directly any legal provision for the category of cross-border commuters.²⁸

The term of frontier worker is defined in the EU Regulation No 883/2004 Article 1(f) of the European Parliament on social security system as:

"any person pursuing employment or self-employment in one Member State who resides in another Member State, to which he/she normally returns daily or at least once a week".²⁹ With other words, essential is the criterion of systematic daily return of frontier worker in the state of residence.

In European Union employment of cross-border workers is established more in North-Western Europe and in the Scandinavian countries.³⁰

27

file:///C:/Users/user/Documents/pasquale%20pistone%20income%20from%20empl%20commenta ry.article15,

Pasquale Pistone

28 It must be noted that in the absence of legal provisions on frontier workers, the recitation no.5 of the EU Regulation No 492/2011 of the European Parliament and of the Council of 5 April 2011 on the regulation of the free movement of workers within the EU states: This right must be granted on a non-discriminatory basis by permanent, seasonal and frontier workers and by those who carry out their activity in the provision of services.

29 Definition stipulated in Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems (OJ L 166, 30.4.2004) http://data.europa.eu/eli/reg/2004/883/corrigendum/2004-06-07/oj

30 Information taken from workshop conducted by Frescco”Employment, Social Affairs and Inclusion, comparative report of frontier workers in the EU”. Adding that the employment of frontier worker were increased also in Estonia, Finland. Hungary, Austria and Italy.

There are only few legislations that contain special rule concerning the allocation of taxing rights of frontier workers in Europe. In respective, Bilateral Tax Convention involved between Austria-Italy, Austria-Germany, France-Germany and Nordic Convention between Sweden and Denmark include a special arrangement for employment income, which stipulates that, the income of cross-border commuters, is taxable in the residence country.³¹ Several double taxation treaty comprise a threshold for the status of frontier worker and for the definition of a “frontier zone” as setting a restricted number of working days or a specific geographical distance around the frontier region between two Contracting States.³² Regard to the status of frontier worker is provided a rule for the geographical conditions by which is defined the frontier area where cross-border workers exercise their employment activity. For instance, in the bilateral agreement of Germany with France, the first country regulates a certain geographic area as a condition while in the agreement with Austria, Germany sets approximately 30 km distance from its border.³³

The Double Tax Treaty of Germany and Austria on Income and Capital Tax Treaty (2000), Art. 15(6) contains a provision for the qualification of cross- border workers³⁴³⁵

To illustrate with an example, where a cross-border worker is resident in Germany and commutes across border to France, he works and returns daily in his place of residence. The specific provision in Art.13(a)(b) of the France- Germany DTC (which is not in line with any article of the OECD MC) indicates two prerequisites for the position and taxation of frontier worker;

the state of residence, in this case Germany has the power to tax the income of employment if the taxpayer returns daily in his country and the frontier zone of the Contracting State should contain no more than 20 km distance

31 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law, European Commission

32 See footnote nr 17, The Memorandum of understanding explain that frontier zone is considered, the region which is surround 30 km distance along the border (straight-line distance, not kilometers of road).Also the person is qualified as a frontier worker even in case that does work outside of the frontier zone maximum 45 days as the clause was laid down recently in Treaty among Austria- Germany. As well as it can be included that The Öresund treaty between Sweden -Denmark included in Nordic treaty does not provide a geographical criterion for the definition of frontier zone.

33 Triangular cases - tax obstacles to labour mobility in the European Union and tax avoidance file:///C:/Users/user/Documents/sos%20mobility_of_workers%20tringular%20cases%20art15.1.2

34“To qualify as frontier workers, individuals must return from the place of employment to their place of residence in the frontier zone on a daily basis”. Treaty between Austria and Germany Art.15(6) - MoU on application of frontier worker clause published 24 April 2019 Report from Andreas Perdelwitz, Principal Associate, IBFD

35 One of the tax agreement that provide a wording with special rule for taxation of cross border working( frontier workers who lives in one Member State and works in a municipality of the other are taxable only in the state of residence) Nordic Convention between Sweden and Denmark referred as "Öresundsavtalet" which is signed by the four Nordic Member States plus Iceland and the Faroe Islands , The Nordic Convention entered into force on 11 May 1997 and was effective from 1 January 1998.

Triangular cases - tax obstacles to labor mobility in the European Union and tax avoidance, April 2014, pg.46

away from border zone.³⁶ According to this Double tax convention the threshold criterion is the key element to determine the qualification of frontier workers and is stated by the national provisions.

Fiscal treatment of the frontier workers diverse from one legislation to another and variations of national legislations can have a negative effect on employees working over border. For instance, in cross border area between Austria-Switzerland resident frontier workers in Switzerland are subject to pay higher tax in their working place Austria than in their resident place.³⁷ Mindful of the above mentioned, the tax coordination of border commuters is not stipulated in the EU framework consequently, each Member State is responsible to design its national rules which apply in relevant cases instead of Article 15 of the OECD MC. Although, OECD MC is not a mandatory instrument for Member States so the latter are free to make a bilateral tax conventions.

Social security coordination is regulated by the EU Regulation and is examined in the next chapter.

Moreover, the interpretation of frontier workers status varies from one Member State to another, in which case the best option is to formulate this status in a harmonized EU Directive which will be discussed in the next part of this thesis.

3. Regulation No 883/2004 on social security contribution

Regulation (EU) No 883/2004³⁸ is one of the most effective instruments, which in Article 1(f) is laid down the social security status of the frontier

workers.

Additionally, the Regulation on coordination of the social security contribution as a mean of protection for the social rights of cross-border commuters, provide tax benefits to this group of workers. Article 2 states

36 Introduction to the Law of Double Taxation Conventions, Michael Lang pg,116.

37 Scientific Report on the Mobility of Cross-Border Workers within the EU-27/EEA/EFTA Countries, pg 46. https://ec.europa.eu/futurium/en/system/files/ged/mkw_workers_mobility.pdf Information about the cross-border mobility were provided for several countries and differences of tax systems. Austria – Switzerland “Taxation is in Austria higher than in Switzerland.” Bulgaria – Romania: “The transport (road) taxes for crossing the border are still relatively high (for the local standard).” Germany – Netherlands: “The rates and regulation of taxation vary strongly. Many cross-border worker pay income taxes in both countries. Taxes in Hungary are higher than in Slovakia which causes a tendency to set up private businesses for citizens from Hungarian side of border in Slovakia. On the other hand this does not motivate citizens from Slovakia for commuting to the other side of border.”

38” Regulation 883/2004 was published in OJ L 166/1 of 2004. The implementing Regulation, Regulation 987/2009, was published in OJ L 284/1 of 2009. Regulation 988/2009, published in the same Offıcial Journal as the implementing Regulation, introduced some amendments to

Regulation 883/ 2004 and included the Annexes”

which categories of persons are covered by the Regulation. First and foremost, “the principle of coordination of social security intends to remove boundaries which national social security schemes set forward to the migrant workers.”³⁹ In this respect, the basic principles of this coordination are: 1) lex loci laboris as it is referred later,2) Equal treatment, stipulated in Articles 4 and 5, which provides the right to European citizens to enjoy the same social benefits, income as nationals and prohibits any discrimination on ground of nationality in EU. 3) The exportability of Aggregation, is defined in Article 6, protects employees who moves from one state to another from keeping the benefits and rights that they were granted in the former state before their relocation to another. 4)Waiving of residence rules is stated in Article 7, the exportability of benefits linked with invalidity⁴⁰, work related disease or accidental injuries or death when working are granted irrespective where they have established the residency.

Frontier workers due to their working activity are confronted with rules of two States as they pay social contribution and take family allowances in the state of work but expect their unemployment compensation by the state of residence.⁴¹ In this view, EU Regulation has the power to decide instead of the nationals provisions in which country the cross-border commuter will receive unemployment benefits as analyzed below.

3.1 State-of-the employment principle

The EU Regulation no 883/2004 in Article 11, governs the significant issue in determining the applicable legislation on cross-border workers, the crucial rule “lex loci laboris” the principle of the employment State. According to which only one single State has the exclusive right το tax the frontier workers.⁴² In this case, the question may be raised as to which is the competent State for the payment of social security contribution?

Based on the “Lex loci laboris”, principle of the employment State, social security contribution must be paid only in one country, in the Member State where the employment activity is operated.⁴³In a situation of frontier workers, the outcome can be disadvantageous since they have paid social contribution in the state of work and will be granted social benefits in state of residence. The binding effect of the relevant Regulation constrain the Contracting States involved in cross-border issue to implement the lex loci

39Co-ordination of social security on the basis of the state -of-employment principle:Time for an alternative?Frans Pennings

40 See, Hendrix Case C-287/05.

41 Differential Welfare State Impacts for Frontier Working Age Families Irina S. Burlacu , Cathal O’Donoghue

42 Article 11(1) Regulation No. 883/ 2004

43 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law. EU Commission

laboris rule, but there is an exception only in case of the Article 16 of the Regulation Member states shall conduct mutual Agreement in order to determine the more satisfactory legislation for the taxpayer. For example, if the person in question experience a pause of his/her insurance careers due to the negative effect of the competent authorities’ rule, in such case the respective Member State could agree for the allocation of the legislation which is suitable for the taxpayer rather than the competent state.⁴⁴

On the other hand, if we refer to the pension settings two countries could not opt for such agreement in case that the taxpayer obtain pensions insurance in state A, but his health care insurance is enclosed in country B.⁴⁵

However, in accordance with the principle of employment, cross–border commuters are entitled equal treatment with national workers in the state of the employment.⁴⁶

Article 3 of this regulation describes the material scope of social security scheme which provides the social benefits of the cross-border workers like as: sickness benefits, maternity and equivalent paternity benefits, invalidity benefits, old-age benefits, survivors’ benefits, benefits in respect of accidents at work and occupational diseases, death grants, unemployment benefits, pre- retirement benefits; and family benefits.⁴⁷

Furthermore, as was mentioned in previous section the general provision in Article 7 Regulation 883/2004 regulates the abolition of the residence rule, in that way, the export of benefits is approved as a principle for coordinating rule which is used in case of unemployment benefits and for special non- contributory cash benefits.⁴⁸

It needs to be noted that, the social scheme of Member States is not similar regard to cross-border workers⁴⁹ so under the Regulation 883/2004 the field of social security contribution does not indicate all the social benefits.

Consequently, the implementation of the “substantial part” possibly is delineated in different ways between Member States

In this context, there are some gaps regarding their export services which corresponds only to the state of residence.

Unemployment benefits is one of the exceptions on compensation of welfare benefits of frontier workers, as stipulated in Article 64(1) (c) of the relevant regulation. In an unemployment position where the person is seeking for job in the other country (not in the place of last work) the frontier worker cannot

44 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law. EU Commission

45 id

46 EU Citizenship: Access to Social Benefits in Other EU Member States, Frans PENNINGS

47 Article 3 of Coordination of Social Security Systems in the European Union: An explanatory report on EC Regulation No 883/2004 and its Implementing Regulation No 987/2009

48The Impact of European Union Law on the Interaction of Members States’ Sovereign Powers in the Policy Fields of Social Protection and Personal Income Tax Benefits Bruno Peeters & Herwig Verschueren

49 Taking as example the family benefit system in Bulgaria and Luxembourg. In the first country a family receives a child benefit at a rate of 18 Euro per month while in Luxembourg the child benefits it corresponds at 185 Euro per month. See European Union, Social Security Law Suppl.

113 pg,246(2019).

export the entitlement benefits in the last state for a period of 3 months.⁵⁰ In such case the person in question is granted unemployment benefits from the previous country of work, if he/she was employed there for 12 months.⁵¹

4. The absence of co-ordination between the social security contribution and tax legislation on frontier workers.

It is worth to introduce briefly what does the social security contribution and taxation mean before examining the obstacles faced by frontier workers.

According to the OECD Data ’’social security contribution is defined as mandatory payments provided to general government, which grant entitlement to receive a (contingent) future social benefit’’.⁵²

The social policy of contribution contains a variety of benefits connected to sickness, unemployment insurance, family allowances and others as noted in last section. While the primary objective of “taxation” is to raise the necessary funds and to finance various function of a state in which may contain the social policy tasks.⁵³

Generally, two models of social security systems are distinguished in European Countries: The one called the Beveridge model which is described as a ‘’single-payer’’ social security system which is funded by the tax system and is applicable to all citizens. This social model is noticed more in Scandinavian Countries, differences of this system are illustrated below in the case study of frontier worker in Oresund region.⁵⁴ The second, Bismarck model is a social security system financed by the social insurance of both employers and employees, this kind of system is achieved more in France, Germany, Netherlands and Belgium⁵⁵. Based on this distinction it could be said that workers who belong in Bismarckian system are levied higher social contributions and lower taxes.⁵⁶

50 Article 64, Regulation No. 883/ 2004

51 Id. Also, was elaborated on Memorandum from EU Commission. Questions and Answers on the revision of social security coordination rules Brussels, 13 December 2016

52 https://data.oecd.org/tax/social-security-contributions.htm

53 As a part of social policy generally the purpose of the "Social security" is to protect individuals from one of the dangers that may arise during various stages of life.

“ Social Affairs and Inclusion The relationship between social security coordination and taxation law”

54 Tjernber, The Economy of Undocumented Migration: Taxation and Access to Welfare Mats Tjernberg Associate Professor of Taxation Law, Faculty of Law, Lund University, Lund, Sweden, pg.165

55 Id,

www.ilo.org/global/publications/world-of-work-magazine/articles/ilo-in- history/WCMS_120043/lang--en/index.htm

56 file:///D:/FreSsco%20-

%20social%20security%20coordination%20and%20tax%20law%20(1)%202014.pdf

Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law

In situation of cross-border employment, especially frontier workers the interaction of social contribution and taxation is not clear, in some circumstances can lead in a burdensome taxation of taxpayer depending how two different national provision classify the same item and if it is covered by the social security regulation. For a better clarification of this distinction, it is suitable to use as example the ’’socially earmarked taxes’’ as this kind of taxes are even not categorized as social security contributions or taxes.⁵⁷ In addition, this category of taxes is significant in cross border situation because in one state earmarked tax is classified as a general tax, but in the other state the taxpayer could pay them as a social contribution. An identical classification occurred in the case law C-34/98, Commission v. France⁵⁸. According to French legislation taxpayers who live in France were charged of 2 types of contribution (General Social Contribution, CSG) and the Contribution (‘Social Debt Repayment Contribution’ CRDS) on employment income and extra income. The issue was complicated due to taxpayers exercised their employment in another state than the place of residence and was chargeable on double contributions, but under the Regulation 1408/71 they should not pay the French social security law. From the CJEU point of view, there was a direct connection between provision of the relevant Regulation, respective Article 4, and the CSG and the CRDS, thus taxation of them was deemed to fall under the social security scheme of the Regulation⁵⁹.

Furthermore, due to the mismatch of social security contribution and the tax field, workers involved in a cross-border activity are impeded in several circumstances which are pointed out as follows:

4.1. Substantial and procedural obstacles

Workers operating across border are clashed with many obstacles during their working life as they are involved in varying fiscal systems. As a result of implications of two different national legislations, cross-border laborers can handle several of prerequisites such as residency and procedural settings which can limit their freedom of movement in EU community.

57 ‘socially earmarked taxes’ are classified as taxes which do not fund the general budget but rather a special fund the aim of which is to finance social security.

file:///D:/FreSsco%20-

%20social%20security%20coordination%20and%20tax%20law%20(1)%202014.pdf

Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law

58C-34/98, Commission v. France, para. 40, CJEU 15 Feb. 2000, C-169/98, Commission v. France, para. 38

59 C-623/13, de Ruyter, para. 26. The direct link between the contribution and the benefit is important regarding double tax conventions. As was noted in OECD Commentary’’ where there is a direct link the contributions payment should not be considered as tax on total amount of salary’’.

The Impact of European Union Law on the Interaction of Members States’ Sovereign Powers in the Policy Fields of Social Protection and Personal Income Tax Benefits Bruno Peeters* & Herwig Verschueren

A) Substantial obstacles: Foreign Tax Relief

To begin with, the primary tax barrier that frontier workers are tackled is the issue of double taxation because earning income in one country and residing in another country increase the risk of not taking full tax relief from residence country.⁶⁰ In this context, as the matter of double taxation is solved by the bilateral convention among two countries, in such case sometimes the applicable rule does not permit the state of residence to grant full credit on the foreign earned income.⁶¹ Problems referable to personal deductions are noticeable in both residence- and source state. Mobile workers and posted workers are particularly affected by this problem. These workers, generally, reside in one state while taking up work in several states during the same taxation year. The workers will pay income taxes to all source states yet they will not be eligible for tax-free allowances and deductions, as they are not considered resident in these states and the larger part of the income is not referable to one state alone.

Based on the reasoning of the Court of Justice granting no full tax relief is result of the 2 sovereign states to tax the same income in a similar way and it is not the case of discrimination or limitation of the fundamental freedom. In Gilly’s case where the couple were residents in France and worked across border in Germany, the state of residence did not ensure the full tax credit for German income.⁶² As a consequence, Mr.Gilly was limited to the French tax rate which the entitled credit was less amount than the German. The effect of different rate arouses the double taxation in this case and the taxpayer was subject in higher taxation than the situation of being taxed only in France.⁶³ The CJEU stated that disparity of tax rate between France-Germany was subject to double taxation. Furthermore, border workers remain a part of the binding provisions of national legislations regarding the unharmonized tax field in EU, therefore possibly are entitled restricted tax credit.

b) Administrative barriers

A numerous of obstacles make the situation for cross-border commuters administrative burdensome. Likewise, variety of rules and methods between two tax administration creates difficulties concerning the correct deduction or tax credit⁶⁴.

60 The Report Ways to Tackle Cross-Border Obstacles Facing Individuals Within the EU, Frank Pötgens & Mees Vergouwen,

Based on the report which was published by the expert group of EU Commission in 2015.

61 id

62 id

63 https://www.biicl.org/files/1875_c-336-96

64 https://www.etuc.org/en/document/etucs-recommendations-how-overcome-obstacles-mobility- frontier-workers-europe

The final report for the year 2017, carried out from the European Commission found administrative obstacles very problematical in European frontier regions connected to the right of free movement of workers. Cross border commuters faced a kind of barriers relating to public consulting and language particularly in neighboring regions of Austria, Belgium, Czech Republic, France, Germany, Luxembourg, Netherlands, Poland and Slovakia.⁶⁵

Different language as dealt in case of Flemish insurance care⁶⁶ was a big issue in the respective Member States, while the others faced difficulties on interpretation of tax conventions and the adequate service from national institutions.

Furthermore, non-cooperation between two different tax administrations which do not consider the bilateral tax agreement, placed frontier workers subject of double taxation.⁶⁷

c) Residence requirement and social benefits.

As regards frontier workers, Member state of residence is deemed to be the place of habitual residence rather than the State of employment. While the identification of the habitual residence linked to welfare benefits, placed cross-border commuters in a weakness position instead of the residents of the work state even though the first one pay contribution in the state of employment.⁶⁸

In some European countries, frontier workers have experienced several kinds of discrimination likewise, not receiving the welfare entitlement due to the competent national bodies refused to pay the benefits for reason that they had established their residence in another country.⁶⁹

Various characterizations of residency in cross-border situations may cause problems for spouses who obtain welfare benefits from another EU Member State. To illustrate this with the case of Hartmann, where the Austrian wife of a German national worker, resident of Austria was denied to receive the child benefits from Germany due to his habitual and permanent residency

65 Final Report January 2018, Elena Fries-Tersch, Tugce Tugran, Ludovica Rossi and Harriet Bradley January 2018 file:///D:/annual%202017_report_on_intra-eu_labour_mobility.pdf

66 The case FlemishC-212/06 Gouvernement de la Communauté française and Gouvernement wallon, which deals with Flemish care insurance, which is granted only to persons residing in the Dutch talking region, but the worker in that case resides in another part of the national and is a national of Member States other than Belgium, working in the Dutch-speaking region is therefore excluded from the benefit. It was considered that the case falls within the scope of Community law and legislation such as Flemish insurance for care may lead to restrictive effects on free

movement. The issue was that migrant workers were prevented by work participation in the Dutch office and this constituted an obstacle to their freedom of movement.

See, curia.europa.eu/juris/liste.jsf?language=en&num=C-212/06 and Part I. Coordination of Social Security Law – Supplement. 113 (2019).

67 https://www.etuc.org/en/document/etucs-recommendations-how-overcome-obstacles-mobility- frontier-workers-europe

68file:///C:/Users/user/AppData/Local/Packages/Microsoft.MicrosoftEdge_8wekyb3d8bbwe/Tem pState/Downloads/FreSsco_ComparativeReport_FrontierWorkers_20150309FINAL%20(1).pdf

69 https://www.etuc.org/en/document/etucs-recommendations-how-overcome-obstacles-mobility- frontier-workers-europe

was located in Austria and not in Germany.⁷⁰ Furthermore, such precondition should be deemed as an indirect discrimination according to the CJEU because it is disadvantageous for cross-border commuters compare to national workers.⁷¹ In the light of the case Zurstrassen, the Luxembourg Government pointed out that the prohibition of joint taxation of married couple with a non-resident spouse, justified the right for common tax assessment of residents couple only.⁷²

In addition, the CJEU has repeatedly stated that the criterion of residence in order to give benefits on cross-border commuters constitutes a restriction of the European principle of “free movement of workers”.⁷³

Therefore, as outlined above, in European Community cross-border commuters suffered several problematical procedures which hinder their activity outside the national territory. Most of these obstacles are addressed in the following chapter, where it is used an example case in Öresund region(Sweden-Denmark) in order to describe how the border obstacles are experienced by cross-border commuters in this zone.

4.2. Hindrances linked with child benefits and unemployment entitlements special focus on Öresund region.

In order to identify the effects of social security regulation and Bilateral convention rules on cross-border commuters, two Scandinavian countries Sweden and Denmark, are selected to be compared regarding the Öresund region. The respective states regulate their tax relationships in the Nordic Tax Treaty⁷⁴ which is the multilateral tax agreement and applies for people residents in Sweden, Denmark, Norway, Finland and Island. Recently, has been involved a New Nordic Social Security Convention⁷⁵ regard to the social contribution of border employment in the Nordic area. In terms of

70 Employment, Social Affairs and Inclusion The relationship between social security coordination and taxation law, European Commission

71 Id, distinction must be made between the various forms of residence as the concept of

residence is not defined in all EU provisions. Habitual residence refers to the place where a person lives regularly and is equally linked to the place where a person has his/her center of interest.

72 Case C-87/99,Zurstrassen, paras. 24&25

73 Case C-379/11, Caves Krier Frères, paragraph 53

74 The Multilateral Nordic Convention includes The Faroe Islands, Iceland, Norway, Sweden, Finland and Denmark was signed on 23 September 1996 and entered into force on 11 May 1997.

The Nordic tax treaty contain a principal treaty which applies to all Nordic states, and one supplemental protocol applies to specific states and four appendices from which the fourth appendix contains the Öresund treaty.

75 Nordic Social Security Convention 2014 (Lag 2013:134) om nordisk konvention om social trygghet) regulates the social contribution of taxpayers in Scandinavian countries, entered into force on 01/05/2014.

social insurance contribution, in the European Union is applicable the Regulation No.883/2004⁷⁶ and its Implementing Regulation No. 987/2009.

Provision of Title II of the EU regulation applies in the case of cross-border employment in Sweden-Denmark as well as, it is stated in Article 6⁷⁷, Title II of the Nordic social security convention. In this view, the European Regulation on social security contribution supersedes the Nordic Social Treaty. The Öresund Direct is the office in Malmö founded for providing legal advice regarding taxation and social security obligations (Nordic tax treaty provisions and Öresunds treaty) on cross -border employment within the Öresund zone as it includes both Swedish region and Danish region.⁷⁸ Öresund region consists of Skåne municipality in Sweden (Malmö and Lund) and Zealand in Denmark (Copenhagen). Approximately 20 000 frontier workers live and commute from Malmö (Sweden) to Copenhagen in Denmark in order to exercise their employment.⁷⁹ Cross-border employment in this border area has been considered to boost the economy of these states as well as the majority of the commuters 96% are established in Sweden and work in Denmark, many of them are Danes which makes apparent the asymmetry in number of commuters.⁸⁰ From the economic perspective, many factors like as higher salaries in Denmark, low-priced housing in Malmö and a greater level of unemployment in Skåne has enabled commuting in Öresund region.⁸¹

Since Nordic countries have similar welfare regime although there are observed some discrepancies in relation to Sweden and Denmark. In Denmark, individuals are taxed jointly, while in Sweden is not used the joint tax system.⁸² For instance, in Denmark for the year 2019, a married couple can use unit taxation and can get a deduction for the income of less than 47,000 DKK per year whereas in Sweden married couple is taxed as a single individual⁸³. An important distinction presents the contribution to the labor market, which in Denmark is supported by the employees 8% of the gross salary while employers make a lower contribution compared to the Swedish employers, who pay 30% of the worker’s salary or by self-employed which is known as a pay roll tax.⁸⁴ The compensation regime between Sweden and

76 EU RegulationNo.883/2004 on the coordination of social security systems and the procedure for implementing this regulation was stated in the Regulation No.987/2009 of the European

Parliament.

77 Lag(2013:134)om nordisk konvention social trygghet

https://www4.skatteverket.se/rattsligvagledning/2443.html?date=2019-01-01

78 Also, there is a webpage office situated in Copenhagen and regular office in Malmö. More information for EU citizens about commuting from Sweden to Denmark and vica versa can be found, www.Öresunddirekt.se.

79 Information taken on: https://akademikern.se/reportage/granspendlare

80 www.oecd.org/cfe/regional-policy/publicationsdocuments/Oresund.

81 Id,

82 https://www.oresunddirekt.se/in-english/in-english/taxes-when-working-in-denmark/danish- income-tax-a-short-introduction

83 Id,

84https://www.skat.dk/skat.aspx?oid=2035568&lang=us

Denmark is horizontal, which means compensation between states in order to compensate for tax revenue.⁸⁵ Therefore, we can see that there are several differences between countries.

As regards, the mitigation of double taxation various methods is implemented between Sweden and Denmark. In Sweden is applied most the tax credit method but also other method is used.⁸⁶ Nonetheless, regard to the Öresund Treaty, Sweden applies the exemption method for mitigation of double taxation.⁸⁷The residence state, Sweden in our case grant a deduction of the tax paid abroad, in Denmark. By virtue of Article 25(1a) of the Nordic tax treaty and Öresund treaty on behalf of cross-border workers is used the exemption method⁸⁸.While, Denmark in situation of cross-border commuters applies the credit method in accordance with Article 25(1c) of the Nordic tax treaty in case where the taxpayer is resident in Sweden or receives income from Denmark. The use of the exemption method is preferred in cross-border employment in the Öresund region as it facilitates the taxation of social security contributions as well as, reduces the duty owed by the Swedish tax authority and makes it easier for taxpayers to understand the tax rules.⁸⁹ In this context, use of different methods for eliminating double taxation, influences the insufficient coherence.⁹⁰ Based on the fact that the Swedish and Danish social security schemes are financed in various ways, makes obviously the presence of insufficient congruence between two systems which leads to legal pluralism.⁹¹ Since the provisions of tax treaty define the taxation of cross-border workers but social security contributions are provided by the EU regulation no 883/2004.

To begin with, the domestic tax provision in Sweden, “persons are subject to the tax in accordance with the principle of residence as a full tax liability, provided that they domicile (Bosatt) in Sweden and are registered in a Swedish municipality, if acquire a “habitual abode” in Sweden (stadigvarande vistas) in compliance with the 6-months residence rule or have a considerable connection (väsentlig anknytning) to Sweden such as family living there, business activity reason, obtain a home or had residency before. Individuals who are deemed resident in Sweden are subject to tax

85 Article 6,The Öresund Treaty SFS 1996:1512. Appendix 4 of the Nordic Tax Treaty.

86 https://www.riksdagen.se/sv/dokument-lagar/dokument/svensk-forfattningssamling/lag- 1986468-om-avrakning-av-utlandsk-skatt_sfs-1986-468

87 Article 25(6b) The Nordic Tax Treaty SFS 1996:1512.

88 Article 25(1a) The Nordic Tax Treaty( Nordiska dubbelbeskattningsavtalet) SFS 1996:1512.

89 See, https://www.riksdagen.se/sv/dokument-lagar/dokument/proposition/om- dubbelbeskattningsavtal-mellan-danmark_GA0394/html

and Yvette Lind about the double taxation treaty between Sweden and Denmark in “a Comparative tax Law study on Consequences of Cross-border working in the Öresund and meuserhine regions”

pg 167.

90 Id,pg.167

91 The discussion about the lack of congruence in Öresund region was made by Yvette Lind in her thesis- “a Comparative tax Law study on Consequences of Cross-border working in the Öresund and meuserhine regions” pg.144.