Freedom to provide services in the European Union
September 5, 2015
In the framework of transnational provision of services a company may require to post their workers to another EU Member State. Doing so, a company shall comply with the regulations of that Member State, including regulations concerning minimum rates of pay. Said requirements are introduced with the Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services, hereinafter — the Directive.
Within the given context it is the judgment No. A420573911 as of 28.04.2012. by the Administrative district court of the Republic of Latvia, hereinafter — the Judgment, that came our attention. In force since 19.05.2013 it concerns the definition of a "posted worker" introduced by the Directive, hereinafter — the "posted worker". In the course of adjudicating the matter the court established that employer had been sending workers to Sweden, thus applying the Cabinet regulations No.219 "Procedures for Reimbursement of Expenses Relating to Official Travels", hereinafter — Cabinet Regulations.
Pursuant to the law on Personal Income Tax and the Law on State Social Insurance, the reimbursement of expenses related to official travels are not subject to tax and mandatory social insurance contributions. Accordingly, the employer did not pay taxes in relation to such reimbursements paid to employees. State Revenue Service (hereinafter — SRS), however, had its own thoughts about it. SRS persuaded that the employer wrongfully applied Cabinet Regulations because in this particular case the posting of workers cannot be deemed an Official Travel.
The Judgment remained in force the decision by SRS imposing obligation on the employer to pay to income tax, social insurance contributions, late payment interest and a fine, which altogether constituted more than 700 000 euro.
Although we only could give a more detailed assessment of the situation and penalty imposition by SRS upon having the case files in hand, it is the conclusions of the court what is most interesting about this matter. To determine whether employer had the right not to pay taxes in respect of the employee reimbursements, the court was required to establish whether or not posting of workers to Sweden was an Official Travel.
The Judgment clarifies that a distinction between an Official Travel from posting of workers in the framework of services provision is based on the permanent place of work, and namely, in case of an Official Travel the place of work is located in Latvia, but in case of posting of workers — in another Member State. So the court concluded that employer had been posting workers, but not sending into Official Travels, thus employee reimbursements are subject to taxation".
It further concludes that an "Official Travel" and "posting of workers" are not identical definitions, and states that "presence of workers in Sweden is to be considered as "posting of workers" and because "posting of workers" is not an Official Travel, hence the employer didn't have the right to pay per diems to the employees".
This interpretation of the law is doubtful. Contrary to the opinion of the court, definitions "Official Travel" and "posting of workers" shall not be considered conflicting due to several reasons. It shall be noted that introduction of both definitions had been caused with absolutely different circumstances. Moreover, both definitions are aimed to regulate completely different legal relations.
An Official Travel means a journey of an employee for a specific time to another populated area in the Republic of Latvia or to foreign states in order to perform the work or service tasks. In return, within the meaning of the Directive a "posted worker" means a worker who, for a limited period, carries out his work in the territory of a Member State other than the State in which he normally works. Therefore, a worker travelling abroad for work purposes at the request of the employer falls under both definitions, that of the "Official Travel" and of a "posted worker".
It is vitally important to understand the reasons behind the appearance in Latvian laws of the two definitions. An "Official Travel" is introduced with the Cabinet regulations, which prescribe the procedures for reimbursements relating to official travels, the norms for the compensation of official travel expenses, as well as the norms for the compensation for expenses relating to work travels. It therefore appears that an "Official Travel" was specifically introduced to regulate reimbursement of expenses of the employees during work travelling.
Taking a closer look at the Directive it will appear that the main reason behind it was the need to ensure healthy competition between entities from different EU Member States and guarantee the rights of workers.
It follows from the foregoing that both definitions were implemented to regulate two completely different areas and, therefore, they cannot exclude one another. The court's opinion that Cabinet regulations may not be applied to a "posted worker" is not one to be agreed to.
Following the court's logic "posting of workers" will always exclude the application of an "Official Travel" whenever employer decides to send workers for work to another EU Member State in the framework of transnational provision of services. This would also mean that such employees posted to another Member State are robbed of their rights to reimbursement of expenses, which they incur during their stay in another country.
Although the above interpretation by the court is questionable, the decision in question was not appealed against and thus came into force.