New EC Regulations will make a number of changes to the way in which the social security contribution position of an internationally mobile worker within the EU will be determined. PricewaterhouseCoopers summed up the key points in its latest Tax & Legal Alert as follows.

The social security contribution position of internationally mobile workers within the 27 countries of the European Union (EU), Iceland, Liechtenstein and Norway, together comprising the European Economic Area (EEA), and Switzerland; is currently determined by EC Regulation 1408/71.

In addition, this regulation currently determines the eligibility of such individuals and their families for State benefits entitlement. EC Regulation 1408/71 (and its Implementation Regulation 574/72) is to be replaced by EC Regulation 883/2004 (and its Implementation Regulation) in respect of all internationally mobile workers within the EU who fall within personal scope of the new Regulation.

It is expected that Regulation 883/2004 should enter into force from May 1, 2010.

However, Regulation 1408/71 will initially continue to apply to the EEA countries of Iceland, Liechtenstein and Norway as well as Switzerland until the new Regulation is adopted by these countries.

The main purpose of the new Regulation is to modernize, simplify and clarify existing rules. However, Regulation 883/2004 makes a number of changes to the way an internationally mobile worker's social security contribution position within the EU will be determined.

There are new requirements for remaining insured in the home country for social security purposes, notably where an individual works simultaneously in two or more member states.

There is also a new electronic administrative process being introduced which will ultimately replace the existing system of E101 certificates (certificates of coverage).

Technical changes

The new Regulations, as currently drafted, do not apply to non-EEA (third country) nationals working cross-border within the EU. In the interim, the current rules under Regulations 1408/71 and 859/2003 will continue to apply to this population.

Individuals posted to another EU member state for a period not exceeding 24 months shall continue to remain insured in their home social security scheme provided they are not replacing another worker. Currently this only applies for a period of up to 12 months.

However, as is the case currently, it is expected that posted workers may remain insured in their home country social security scheme for up to 5 years (depending on the practice of the countries involved) under a special exception, provided that both the home and host authorities agree.

Multi-State workers are insured in the social security scheme of the member state in which they are habitually resident under Regulation 1408/71, provided they perform regular employment duties there. The new Regulations introduce a requirement for substantial employment duties in the home country if this social security contribution position is to be maintained. Substantial is defined as being no less than 25 percent of time and/or remuneration, or turnover.

The new Regulations also seek to strengthen the principle of unity of applicable legislation; in other words there should be no exceptions that would allow an individual to be insured in more than one member state at the same time. In particular, this change may affect individuals who are simultaneously employed in one EU member state and self-employed in another EU member state.

For the first time EU member states will have the power to enforce social security liabilities and debts against individuals and employers in other member states.

Administrative changes

Employees currently engaged in cross-border assignments will continue to be subject to the processes specified under the existing Regulation 1408/71 for a transitional period. Parallel compliance and tracking systems may be required during the transitional phase.

E101 certificates will not be issued under the new Regulations. These will eventually be replaced by an electronic system of attestations". A provisional system of paper attestations will be in place until such a time that the electronic system is introduced.

Bottom line

The new Regulations will provide both challenges and opportunities. Employers with cross-border employee populations should consider:

How the changes to social security contribution positions will impact assignment structures and how assignments may be designed to benefit from reduced social security liabilities.

How the changes will impact the current and future assignee populations in terms of contributions and benefits.

Whether any modifications to employer compliance and tracking procedures are required given old and new regimes will exist in parallel.

Any tax implications arising from changes to fact patterns that employees may wish to implement as a result of these changes should also be assessed.