Working with independent contractors is the most flexible and optimized manner to build the best remote team you need as you can choose the very right persons you need on a project wherever they are with no labor constraints & related local compliance needed. This said, a certain number of local laws and rules that and ones using the services of independent contractors must be aware of to avoid significant financial risks. For example, in Europe, the principle of joint liability between a client and its direct contractors is enforced by law. If a contractor fails to pay their taxes or social contributions, the authorities will claim this money.
This article aims to guide you through the European Union regulation concerning the responsibility of an independent contractors' client unable to pay their taxes or social debt.
Please bear in mind that this article doesn't substitute legal advice. Information in this article was collected from European Union government websites and other online resources.
Principle of joint liability
An independent contractor must pay taxes and social debts. Governments are searching for more guarantees in case of fraud or when the contractor doesn't pay these debts. With the principle of joint liability for fiscal and social debts, the contractor isn't the only one liable for the payment of their taxes and social debts: their client shares the liability with them and must pay if the contractor isn't able or fails to pay the debt.
Similar to that, if a contractor is subcontracting non-declared or illegal workers, the client’s criminal responsibility can be engaged as well.
In Europe, some countries voted a joint and several liabilities between subcontractors and direct-contractors to fight against fraud. Now, if one contractor fails to pay their tax or social debt, the tax and social authorities will be able to claim the amount from the contractor's client.
Withholding principle: direct liability
If you hire contractors, you should check if they paid their social and fiscal debts when you sign the contract. Besides the withholding principle, you and your contractor are jointly liable for the tax and social debt.
Article 205 of the VAT Directive of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value-added tax paragraph 238 is a European Union law that defines joint liability as to the guarantee obligation imposed on the recipient of the goods and services for the VAT due by its supplier. It proves that the joint liability of the contractor is an obligation in Europe.
Belgium voted laws in order to complement this European Union regulation (see above for more information).
Waterfall principle: subsidiary liability
The waterfall principle enlarges the withholding principle in some countries (as Belgium and Norway). Tax authorities are allowed to follow the contractual chain to track someone who will cover the amount the contractor had to pay.
In the European Union, eight states have legislation about the joint liability of the contractor: Italy; the Netherlands; Austria; Belgium; Finland; France; Spain; Austria and Germany. However, regulation isn't the same everywhere. Thus, in Belgium, Germany, Italy, and Spain, it applies exclusively to the construction sector.
Laws in Belgium
Joint liability in Belgium
In Belgium, article 30bis of the Act of 27 June 1969 explains that if you pay a contractor who has social debts when you sign the contract, you are jointly liable for the payment of their taxes. However, this law only concerns construction works, cleaning jobs, guard companies, and meat works.
This direct joint liability is enlarged by the Program Law introduced on August 10, 2015 (published on 18 August 2915): waterfall principle leads to giving this liability to all the contractual chain.
To make sure that you won't pay for your contractor, you should follow the following advice.
Make sure that your contractor doesn't have any fiscal nor social debts when signing the contract
If the contractor didn't pay their social debts at the time of signing the contract, the NSSO (National Social Security Office) will flag them. If you hire a said contractor, the NSSO will directly come to you for the payment because of the joint liability principle. This liability is restricted to the value of the benefits provided in the contract, excluding VAT.
If the contractor has fiscal debts, the FPS Finance (Federal Public Service Finance) will flag them. If you hire them, you (as the client) will have to pay up to 35% of the amount without VAT to the FPS Finance because of joint liability.
Note that the joint liability regarding fiscal debts isn't relevant if you already pay the social debts of your contractor: you won't have to pay both social and fiscal debts of your independent contractor.
Make sure that your contractor doesn't have any fiscal nor social debts when paying invoices
If the contractor didn't pay their social taxes when offering services and before sending out the invoice, the NSSO will flag them. If you hire them, you will have to pay 35% of the amount without VAT to the NSSO. If you don't pay this to the NSSO, your debt will increase.
If the contractor didn't pay his fiscal taxes at due time for bills payment, the FPS Finance will record them. If you hire them, you will have to pay 15% of the amount without VAT to the FPS Finance. If you don't pay this to the FPS Finance, your join debt will increase.
Laws in Finland
In Finland, the Liability Act, which is the most important text about the principle of joint liability of the contractor, applies if the duration of temporary work exceeds a total of 10 days.
This principle of joint liability in Finland also concerns foreign contractors working. There is only a direct liability, no subsidiary liability.
Laws in France
In France, no chain liability applies. Joint liability also concerns foreign contractors when they ere active in France.
The employer is punishable by two years imprisonment and a fine of €30,000.