A1 Certificate tax implications

Within the European Union, employees and entrepreneurs who temporarily work outside their home country can obtain an A1 certificate, which confirms which national social-security system applies to them. The certificate ensures that individuals are subject to only one EU member state’s social-security legislation at a time and prevents dual contributions.

This article explains the practical implications of holding an A1 certificate, including how it affects social taxes, income taxes, payroll obligations, risk of permanent establishment, and payments such as dividends, directors’ fees, service fees, and salary.

A1 Certificate and social security

An A1 certificate establishes that the worker remains subject to the social-security system of the A1-issuing country, even while temporarily performing work in another EU/EEA state. As long as the certificate is valid:

· The employer continues paying social contributions in the A1-issuing country (e.g., 33% Estonian social tax for Estonian employers).

· The worker continues to accrue pension pillar I, health insurance, and other national social benefits in that country.

· The host country must accept the certificate as proof that its own social-security rules do not apply for the duration of the posting.

Income Tax considerations

Even with a valid A1 certificate, income tax may still be due in the host country. Taxation depends on:

· The double tax treaty (DTT) between the home and host countries

· The length of physical presence in the host country (commonly the 183-day rule)

· Whether the host country treats the local entity or market as the economic employer

Often, for short postings (<183 days), income tax remains in the home country. For longer stays, the host country may acquire the right to tax employment income.

Employers should therefore assess their obligations carefully and determine whether they must:

1. Evaluate permanent establishment (PE) risk – whether sustained activity abroad could trigger corporate-tax obligations

2. Register for payroll in the host country

3. Withhold local income tax if required by host-country law

4. File posted-worker notifications and comply with labour-law reporting requirements

Managing these obligations proactively helps avoid unexpected tax exposures, penalties, or company-registration requirements abroad.

Validity and duration of the Certificate

A1 certificates for posted workers are issued for up to 24 months, with possible extensions under specific conditions and upon mutual agreement between countries.

Daily allowances (päevaraha) also require attention: in Estonia, allowances for foreign business travel are tax-exempt up to statutory limits. However, host countries may treat allowances as taxable income, depending on local rules.

Taxation of dividends for non-resident recipients

Estonia taxes companies only when profits are distributed, not when they are earned. When dividends are paid, the company pays corporate tax at 22% of the gross distribution, calculated as 22/78 of the net amount paid out. Monthly dividend payments are not permitted; dividends are typically distributed after approval of annual accounts, although interim dividends are allowed when legal conditions are met.

For shareholders working abroad, Estonia usually does not levy additional withholding tax on dividends paid to non-resident natural persons when the standard 22% corporate tax has already been paid. If a double tax treaty applies, or if the shareholder resides in an EU/EEA country, withholding tax is generally reduced or eliminated.

Management Board and Supervisory Board remuneration

Directors and supervisory board members working abroad can also hold an A1 certificate. In such cases, social security is paid in the A1-issuing country. The directors’ fees of Estonian companies are always taxed in Estonia, without regard for the A1 certificate.

Service fees paid to sole proprietors abroad

When an individual is registered as a sole proprietor (e.g., freelancer or self-employed person) in their home country, payments from the host company are typically treated as business-to-business (B2B) transactions. Estonian sole proprietors pay taxes on their worldwide income only in Estonia, unless they have a permanent establishment abroad. The criteria to establish if there is a permanent establishment / fixed base are enshrined in tax treaties, rather than the simple 183 days rule used for salaries taxation.

Accounting for gross salary liabilities

Some companies record a gross salary liability in Estonia while the individual pays tax exclusively in their country of residence (e.g., when the employment income is taxable abroad under the double tax treaty and Estonia applies the exemption method).

· It is not sufficient to simply “agree” that the individual will handle their own taxes.

· Misclassification (e.g., treating salary as a service fee) can trigger retroactive tax assessments.

Companies should therefore confirm their payroll obligations with respect to each category of payment.