Contracting in Europe through CPM - Factsheet 102 (PDF)
Factsheet 102
Contractors working in Europe are generally advised to avoid the traditional one-man (director-controlled) company.
A one-man company will normally deemed tax resident where the “management and control” are physically present. So if you are in, Belgium, carrying out a contract, your company is more than likely to be deemed tax resident in Belgium. That means, quite simply, that all payments into and out of your company would be subject to Belgian taxes at source. This is a fact of international tax law, and no “183-day” rule applies in these circumstances.
Furthermore, a contractor will not avoid the implications of IR35 simply by taking a foreign contract.
Offshore companies
If a contractor undertake a contract in Europe through an “offshore” company (Isle of Man, Channel Islands, BVI, Gibraltar) it is reasonably certain, in all bluntness, to be involved in tax evasion. Regardless of the offered, or the background that may be presented, offshore companies cannot comply with EC social security legislation and are used in practice to funnel funds away from their tax source, in the classic “I'll never be found out anyway” blind approach of many UK contractors.
Self-employed contractors
There are some situations in Europe where it would be legal for a contractor to claim UK “self-employment” as a means of avoiding their overseas obligations. Most European countries however have IR35 type legislation defining self-employment, and contractors don't generally comply. In certain circumstances overseas registered self-employment may be valid, but check on the background to this before issuing the contract, and in all cases of self-employment, look for some independent verification of the status.
The CPM Solution
- The CPM Management Company will be UK based or will be based in the country where the contractor will be carrying out the contract.
- The CPM Management Company is run by an accountancy firm, and staffed by qualified accountants.
- The CPM Management Company will ensure that the individual is registered locally where required, and comply with all local requirements.
- The CPM Management Company will absolve the agency from all obligations as regards tax and social security compliance.
- The CPM Management Company will attempt to achieve the best “bottom line” for the contractor, taking account of all the circumstances.
Client requirements
Clients may sometimes insist that contractors on their site are appropriately registered and may insist on certain local legal practices being adhered to. For example in The Netherlands most clients will insist upon evidence that the contractor is registered on a Dutch payroll and is accounting for Dutch wages tax.
In Germany there may be an insistence on German labour licensing being complied with, as it is illegal to “hire out” employees to third parties without a licence to do so.
In Italy there may be an insistence that local social security withholding is applied, without which the freelancer cannot generally be operating legally.
CPM provides a solution for the contractor as well as provide a solution that satisfies the client's requirements.
Local registrations
It should be recognised that for a contractor to be “legal” in his host country, certain local obligations must be complied with.
Local registration requirements vary from country to country. Most countries have a form of “national insurance number”, which usually doubles up as a tax registration number and you should ensure that your contractors obtain such a number, as this is the only way of proving that they have registered for local taxes.
Certain countries also have a requirement to obtain a local ID card, without which they cannot rent a property, get connected to the electricity supply, hire a car etc.
Using a contractors own company when working overseas.
A UK contractor may be tempted to make the mistake of taking an overseas contract through their own UK company, billing the agency or client as normal, and remaining in the UK tax system. However it's a simple fact of life that by carrying on like this the contractor is facing the prospect of exposure to local taxes and social security without the ability to utilise any tax planning techniques, as the local tax authority may either “see through” this company and tax the contractor as an individual, or alternatively they may treat the contractors UK registered company as “resident” in the local country, thereby exposing it to local corporate and employer's taxes. The two main things that influence tax taxability when are working overseas are: -
- Personal residence
- the residence of the employer
For personal residence, please refer to our Factsheet 101, Working abroad through CPM. If using the contractors’ own UK company while overseas, then corporate residence becomes a factor. The residence of a company is generally defined by the location of its “centre of control and management”. Broadly speaking, the centre of control and management of a company is the place where its controlling directors are physically located, in effect the place from where they are controlling the company.
If you have a UK one-man company, which is obviously controlled and managed by the contractor, and who is physically located in Paris, Brussels or some other European city, then that UK company could be deemed to be resident in France, Belgium etc.
The net effect of this is that the company is taxed as though it is registered in the foreign country! It would be subject to foreign corporate taxes on its profit (much higher than the UK's 20%), and all payments by that company to the contractor would be subject to foreign tax at source. Using a one-man company while overseas does not represent sound tax planning!
Does going overseas mean avoiding IR35?
There are two main points to be made here.
The first is that IR35, or special tax status for personal service companies, already exists in most major European countries and has done so for many years. In the UK we were in a unique position in being able to take dividends to avoid national insurance, or in being able to split income with (e.g.) a spouse to avoid higher rate tax. The traditional UK concept of contracting has, until recently, been quite alien to overseas employers, who were more inclined to use “software houses” or “big 6” consultants to man short-term projects.
Secondly, referring back to the previous section, you can't avoid IR35 implications on your UK one-man company simply by moving overseas. The rules apply to UK personal service companies. And is not restricted to UK personal service companies operating in the UK!
Simply moving overseas is not going to magically remove a contractor from the IR35 net, a bit more thought and planning is required!
Avoiding UK tax by moving overseas
This is possible only when certain pre-conditions are met, the principal one being that you have achieved non-resident status in the UK. To achieve UK non-residence, in its most simplistic form, you will have to satisfy a number of conditions. The main criterion is that you spend an entire tax year outside the UK, where it was not your intention to come back permanently to the UK.
During the complete tax year outside the UK, you are allowed 90 days back in the UK, but use these for vacations only and avoid taking up or even seeking employment during that period, as this would contradict any commitment not to permanently return to the UK.
If you plan to leave the UK in say February / March, in a particular year to take up employment overseas then the full tax year requirement is not so onerous, as only 13 –14 months overseas is required to achieve the full tax year (i.e. up to April 05 in the following year). However if you are contemplating going abroad in April or May, and want to avoid UK tax, remember you need to stay out of the UK until after April 05 almost two years later.
A contractor won’t pay any tax if they go to a country for less than six months
This applies only to the host country and may also be subject to additional local regulations.
Most countries have a “183 day” rule, which entails that you will not be deemed to enter their tax system as long as you work for a foreign employer and spend less than 183 days in total on your assignment there. However if you work for a resident employer you will not get out of the system (and remember your own one-man company could be deemed a resident employer).
But don't forget, 6 months in a foreign country is not enough to get you out of the UK tax system, so you will have a UK tax liability to meet.
About CPM
Based at Haseley Manor in rural Warwickshire, the philosophy behind the company is simple – make life for the freelancer as easy and straightforward as possible by providing comprehensive administrational support services, allowing them to spend the maximum amount of time doing what they do best – IT contract work.
CPM aims to provide IT-specific administration services to the tens of thousands of freelance contractors in the United Kingdom more cost effectively than those offered by traditional accountancy practices.
It provides a comprehensive portfolio of services, which can be tailored for every freelance UK IT professional, and specialist working at home or abroad, whether they are working as a consultant or as a freelance operative within a management, support, programming or hardware structure. They may also be operating on a PAYE Limited company or self-employed basis.
CPM is managed by a team of former IT industry employees who genuinely understand the individual needs of the freelance contractor. These include founder Solomon Williams, a Chartered Certified Accountant, who has extensive experience in a variety of business start-ups and operations throughout the UK and Europe.
If you wish to find out more feel free to Contact Us
Disclaimer: The information contained in this factsheet is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts Involved. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in information contained in this factsheet. Accordingly, the information on this factsheet is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a CPM professional.