Pilots and international taxation and social security
In this article, I discuss the complex tax and social security rules for pilots. Because pilots often work internationally and also because there are so many different situations, the application of the rules almost always needs to be considered in light of the specifics of the individual case. Here I can only give a broad outline. While the title may give the impression that this article is relevant only to pilots, it also applies to other flight crew members (the co-pilot, cabin attendants and pursers), and to passenger and cargo flights.
While this article addresses some of the issues, it is always necessary to consider the specific details of the many situations that occur within the industry. Please note that this article does not purport to provide an exhaustive overview.
Firstly, it is relevant whether the work is carried out within or outside the European Union. In this article, I am assuming that the work is carried out within the European Union. The next question is whether there is a social security treaty between the country of residence and the country of employment. Since this is rarely the case, the information that follows assumes that there is no such treaty. It also assumes that the pilot is not substantially employed in their country of residence and works for one employer.
Under certain conditions, pilots can be insured under the ‘old’ applicability rules established by European Regulation 1408/71 (adopted in 1971) up to ten years after the introduction of a new Regulation (see below). The Regulation adopted in 1971 made no specific provision for pilots. Under this Regulation, pilots are subject to the same rules as other employees. These rules can continue to apply until 28 June 2022.
European Regulation 883/2004 entered into force for EU countries on 1 May 2010. This Regulation contains a separate provision on social security rules for pilots. Under this later Regulation, many pilots are now insured in the Member State in which the employer’s business is established, irrespective of their country of residence.
On 1 April 2012 this Regulation became applicable in Switzerland and on 1 June 2012 it became applicable in Norway, Iceland and Liechtenstein.
On 28 June 2012, the applicability rules changed: from that date on pilots are subject to the social security laws of the Member State in which the employer’s base is located. The employer’s base is where the pilot generally starts and ends a duty period: in other words, it is where the pilot takes off and lands.
Therefore, when it comes to social security, the rules that apply in a particular case depend on when the pilot started working for their employer. There have been several changes in the law and there are various transitional regulations that may apply. So it is important to ascertain which social security legislation applies during the period in question.
In discussing taxation, I am assuming that the pilot lives in the Netherlands (the country of residence) and works in another country (the country of employment) for an employer established in that country. Cross-border situations are provided for by the tax treaty between the Netherlands and the country in question. These treaties determine which country has the right to collect tax (the country of residence or the country of employment).
Tax treaties are based on the OECD Model Tax Convention, which includes an article that applies specifically to pilots as distinct from other employees. The Model Tax Convention assigns taxation rights to the country where the employer’s business is established. However, the Netherlands has also negotiated treaties (with Luxembourg, France, Italy, the UK and Spain among other countries) that deviate from of the Model Tax Convention and assign taxation rights to the pilot’s country of residence. So it is always important to examine the terms of the relevant treaty carefully.
Needless to say, the country in which tax is payable can make a big difference to the amount of tax. In Spain, for example, pilots’ salaries are largely tax-exempt. The tax treaty between the Netherlands and Germany is also worth mentioning in this respect. The two countries started negotiating a new tax treaty in the 1980s. The treaty that eventually entered into force on 1 January 2016 assigned the right to collect tax on income earned by pilots to the country of residence. However, Dutch pilots employed by Lufthansa found this so detrimental to their interests (read: German taxation on their income is lower) that they mounted a successful lobby. The treaty was subsequently amended for pilots and now assigns the taxation right to the country of employment (in this case Germany).
Declaration of income
The information that follows assumes that the pilot lives in the Netherlands. Pilots living in the Netherlands are required to declare their global income in the Netherlands as their country of residence. If the treaty between the Netherlands and the country where the employer’s business is established assigns the taxation right to the country of employment, the Netherlands will usually grant double-taxation relief for this income (subject to a progressive tax rate) based on the exemption method. This method may lead to a tax advantage if the tax relief provided in the Netherlands exceeds the tax payable by the pilot in the country of employment.
Some treaties stipulate that double taxation must be eliminated by means of the imputation method. This system essentially means that the pilot pays tax at the highest rate (in the Netherlands or the country of employment). However, pilots can sometimes invoke the use of the exemption method if the less favourable imputation method applies.
If the taxation right is assigned to the country of employment, the pilot cannot directly claim tax deductible expenses allowed in the Netherlands, such as pilot training costs and interest on mortgage payments on their home.
If the tax treaty assigns the taxation right to the Netherlands as the country of residence, income earned abroad is treated in accordance with the criteria that apply in the Netherlands. For example, is an allowance issued in another country treated as a tax-deductible allowance in the Netherlands or is it treated as taxable income?
And are (social security and pension) premiums withheld in the country of employment tax-deductible in the Netherlands as is sometimes the case? This may result in a significantly lower tax bill in the Netherlands.
Two example cases
The cases described below illustrate the complexity of the issues involved. Both were prompted by the emergence of budget airlines such as EasyJet. EasyJet has its headquarters in the UK but employs pilots in virtually all European countries who work in those countries.
The change in the OECD Commentary on the provisions of the Model Tax Convention that apply to pilots was relevant in both cases. In 1977, the concept of ‘international traffic’ was defined as follows: ‘any transport by a ship or aircraft operated by an enterprise that has its place of effective management in one of the contracting states’.
The first case is that of a pilot who lives in the Netherlands. In 2009, he started working for EasyJet, whose place of effective management is in the UK. The pilot is stationed in France. The 1973 tax treaty between the Netherlands and France assigns the right to tax income earned by pilots to the country of residence.
The pilot filed an appeal invoking the change in the Commentary on the OECD Model Tax Convention in 1977 and asked that the taxation right be assigned to France and that the Netherlands grant double taxation relief.
The views expressed in the literature and the courts (of appeal) were very divided, but on 22 April 2016 the Netherlands Supreme Court ultimately ruled that a ‘dynamic’ interpretation of the treaty was not warranted. The treaty is clear and so is the intention of the contracting states: the Netherlands has the right to tax the pilot’s income.
The second case also involves an EasyJet pilot who lives in the Netherlands and has been working in Italy since 2010. The 1993 tax treaty between the Netherlands and Italy assigns the right to tax income earned by pilots to the country of residence. You might think that since this pilot also lives in the Netherlands, the Netherlands would have the right to tax his income.
Yet this argument did not hold. The tax court assigned significance to the change to the OECD Commentary in 1977, which was known when the tax treaty between the Netherlands and Italy was negotiated.
Because EasyJet’s place of effective management is in the UK and not in the Netherlands or Italy as the contracting states, the article of the treaty that applies to pilots does not apply in this case.
Instead, the rules of the treaty that apply to other employees are the rules that apply. In 2010, EasyJet had an office in Italy that employed 20 people and had 16 aircraft stationed there. The pilot was able to present a plausible argument that there was a permanent establishment in Italy. Because his income is paid by this permanent establishment in Italy, Italy has the right to tax his income. On 15 December 2016, the Netherlands Supreme Court issued a statement that was released for publication. The pilot won the case. The Netherlands was ordered to grant double taxation relief on the pilot’s earnings in Italy.
The remarkable thing about this case was the fact that the inspector and the pilot were both of the view that the work was carried out in Italy. It could conceivably have been argued that much of the work was carried out outside of Italy. Had this view been adopted, the outcome might have been different.
As is clear from the cases described above, it is always necessary to examine both the facts and the terms of the relevant tax treaty closely.
The complexity of the issues involved also makes it necessary to seek expert advice. We will of course be happy to help!
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