Risk of double payment of social security contributions due to the retrospective determination of applicable legislation
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EU social security legislation provides that a person who regularly pursues an activity as an employee in two or more states of the EU/EEA or in Switzerland (the “Member States”) shall be subject to the social security legislation of only one Member State.
The social security authorities in the employee’s country of residence, has sole responsibility for determining which country’s legislation shall apply in the case of the employee. This decision is made based on information provided by the employee.
It is possible that the circumstances surrounding an employee working in two or more Member States are not made known to the relevant authorities in a timely manner. This gives rise to the possibility that the relevant authorities only make their determination several years after the individual begins working in two or more Member States. The decision may mean that the employee has previously been subject to the social security legislation of the wrong Member State.
Social security contributions must be paid to the correctly determined Member State for the entire applicable period. A refund can be requested in respect of contributions originally paid to the other Member State but there will be a time delay between making the retrospective contributions to the correct Member State and receiving the refund which will create a cash flow disadvantage for the employee unless the employer provides assistance in this regard (for example, a loan). In some cases, a difference in the length of the statute of limitations in the domestic legislation of the two Member States may result in contributions being paid twice on the same income contrary to a fundamental principle of EU social security law.
For example, the limitation period for payment of social security contributions under Slovak legislation is ten years, but the limitation period for the refund of incorrectly paid contributions under Czech legislation lasts five years only. This clearly results in social security contributions being paid twice for a period of five years.
Where contributions have to be made retrospectively, employers may be faced with contribution-based penalties, even though the late payment may be due to the fact that the employee in question has not informed the employer that he/she has been working in two Member States.
This has been a particular problem for Czech employers with large numbers of international employees (a typical example being public universities).
Comments
Neither Czech nor European law provides sufficient levels of protection for employers against these retrospective decisions, which are generally not subject to appeal. Furthermore, the Czech Social Security Authorities do not verify these retrospective decisions (e.g. the Czech Social Security Authorities do not evaluate whether (i) the decisions on applicable social security legislation are in compliance with the relevant legislation and (ii) based on a true factual basis) and thus fail to adequately protect Czech employers (that are in some cases forced (i) to pay social security contributions twice and (ii) to face penalties as described above) as well as the social security system itself (from which part of the already paid social security contributions must be returned to the employers).
This practice constitutes a direct disadvantage for Czech employers within the free market, as unforeseen and clearly unjustified costs regarding parallel payments are not insignificant. In some cases there are clear doubts whether the decision on applicable social security legislation was correct.
These issues related to the coordination of social security systems have been increasing. This situation is currently being discussed at international level between respective Social Security Authorities. In June 2014 the Administrative Commission for the coordination of social security systems opened discussions on the topic; nevertheless, the result of this discussion remains to be seen and is unpredictable.
Resources
Regulation (EC) No. 987/2009 of the European Parliament and of the Council of 16 September 2009
For further information or to discuss any of the issues raised, please contact Mr Jan Krömer or Mr Daniel Vejsada on +420 221 430 111 at PRK Partners, attorneys at law.
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