Ltd Companies

Undoubtedly this is a question that you have either asked or been asked many times before.

Let’s dispel a few myths…

It is possible for a contractor to use their own limited company in many European countries, but there are certain limitations to this.

A company is generally deemed to be a tax resident in the location where its physical control and management is exercised. Since the control and management of a sole-owner limited company is generally retained by the controlling director (i.e. the contractor him/herself), then it naturally follows that should the director be physically located in, say, Brussels, then the Belgian authorities would have a very good case if they decided to assess the company as though it were a Belgian one.

The implications of this for the individual can be quite severe. For one thing, the contractor as an employee of the so-called Belgian tax resident entity would automatically be liable to Belgian taxes and social security at source on any payments made to him/her by the company. Also, any profits made by the company (including those paid as dividends to the individual) would be liable to Belgian corporate taxes.

Needless to say, Belgian income and corporate taxes and social security are significantly higher than their UK equivalents; and since the contractor would almost certainly not have pre-declared his/her status to the Belgian authorities, penalties and interest would probably be added to any assessment. Therefore, this approach could prove very costly to the contractor.

The same rules apply for the majority of European Union countries, except TheNetherlands. In The Netherlands, under chain law, a contractor must work through an employer-based solution, or under a VAR agreement.

Chain Law in The Netherlands

Where a contractor is employed by a third party, the Material Employer / End Client can be held liable under the Placement of Personnel by Intermediaries Act (Waadi Act, hereinafter referred as "chain law") by the UWV for the employment related social security contributions and by the tax authorities for the wage tax, turnover tax ("VAT") and the national insurance contribution. When contractors are not employed in a compliant way, the End Client can be held liable for the unpaid taxes and social security premiums. The appointment of liability can also apply regarding the tax and collection interest (so long as imputable). Naturally the tax authorities and the UWV should first seek to recover their claims as far as possible from the Formal Employer.

As you can imagine, Dutch clients put compliance requirements in their contracts with Formal Employers and will also state in their contracts that all tax and social security premiums will be passed onto the Formal Employer in case they are faced with additional tax and social premiums. This means that the chain law should be regarded as a real exposure if the solution cannot be regarded compliant after all.

Everyone is exposed under chain law as long as they are in the chain between (and including) the Formal Employer and the Material Employer (End Client).

With regards to Belgium, the 183 day rule is actually set out in most of Belgian's double tax treaties and is an exception to the general rule that income is taxed in the state where it is earned. However, it is only applicable for an employee working with a company in one country and working for the same company (employer) in another country. It is important to realise that all contractors working via an agency with a company in Belgium are thus not in a position to apply for this 183 day rule, as they are not seconded. Their income in Belgium is taxable in Belgium as of day one.

With regards to Germany, the German tax authorities will often deem a contractor, using their own foreign limited company, as an actual employee of the End Client. They are performing a particular duty under a specific contract, during a specific time frame. They report to a manager and are documenting the hours worked. Furthermore, any contractor that is paying their social security in any other European country through an E101 has to be able to show that they have habitual ties in that particular country.