US / Czech Social Security Accord Ends Double-Taxation of Self-Employed, Extends coverage
The US and Czech Republic just enacted a 2007 agreement on the totalisation of social security retroactively to 1.1.2009. The agreement enables workers to count service in both countries towards calculation of their retirement benefit – and enables them to draw on this benefit in either country. This agreement shall work in tandem with similar agreements concluded by the participants with other nations. Significantly, it also removes the “social security penalty” paid by self-employed workers who until the enactment of the law were required to pay into both systems on the same earnings.
Also significant is what the agreement does not cover – US employees covered under this agreement in the Czech Republic will still be liable to pay Medicare / Supplemental security income and Czech Health insurance contributions. It remains to be seen how the two countries will resolve this dispute.
Generally, you are covered by the nation where you have residence and you and your employer will pay social security to that nation. Under the new agreement, if your employer sends you from one country to work for that employer or an affiliate in the other country for five years or less, you will continue to be covered by your home country and you will be exempt from coverage in the other country. For example, if a U.S. company sends an employee to work for that employer or an affiliate in the Czech Republic for no more than five years, the employer and the employee will continue to pay only U.S. Social Security taxes and will not have to pay in the Czech Republic. See the table below for a quick comparison.
|EMPLOYEE Work Status||Coverage and taxes|
|Working in the CR for a US employer who|
|· Sent you to work in the Czech Republic for five years or less||US|
|· Sent you to work in the Czech Republic for more than five years||US|
|· Hired you in the Czech Republic||Czech Republic|
|Working in the CR for a non-US employer||Czech Republic|
|Working in the CR for the US government and you are|
|· US citizen||US (either Social Security or federal retirement program)|
|· Czech citizen||Czech Republic|
|Working in the US for a Czech employer who|
|· Sent you to work in the U.S. for five years or less||Czech Republic|
|· Sent you to work in the U.S. for more than five years||US|
|· Hired you in the U.S.||US|
|Working in the US for a non-Czech employer||US|
|Working in the US for the Czech government and you are a|
|· Czech citizen||Czech Republic|
|· US citizen||US|
|SELF EMPLOYED||Work Status Coverage and taxes|
|· You work only in the US||US|
|· You normally work in the U.S. but transfer your business activity to the Czech Republic for five years or less.||US|
|· You work only in the Czech Republic||Czech Republic|
|· You normally work in the Czech Republic but transfer your business activity to the U.S. for five years or less.||Czech Republic|
|If this table does not seem to describe your situation||Contact an accounting and tax management expert or write to the addresses below|
|· Working in the U.S.||Social Security Administration|
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741, USA
· Working in the Czech Republic
|Ceská správa sociálního zabezpecení|
(Czech Social Security Administration)
225 08 Praha 5, CZECH REPUBLIC
NOTE: As the table indicates, a US worker employed in the Czech Republic can be covered by US Social Security only if he or she works for a US employer. A US employer includes a corporation organized under the laws of the United States or any state, a partnership if at least two thirds of the partners are US residents, a person who is a resident of the US or a trust if all the trustees are US residents. The term also includes a foreign affiliate of a US employer if the US employer has entered into an agreement with the Internal Revenue Service under section 3121(l) of the Internal Revenue Code to pay Social Security taxes for US citizens and residents employed by the affiliate.
To take advantage of the agreement, individuals must obtain a certificate of coverage issued by one country that serves as proof of exemption from Social Security taxes on the same earnings in the other country.
Certificates for employees
To establish an exemption of coverage under the Czech system, your employer must request a certificate of coverage (form USA/CZ 1) from the US. There is no special form, but the request must contain several specific details about the employer-employee relationship.
Your employer must indicate whether you are to remain an employee of the US company while working in the Czech Republic or if you will become an employee of the US company´s affiliate in the Czech Republic. If you become an employee of the affiliate, your employer must indicate if the US company has an agreement with the Internal Revenue Service under section 3121(l) of the Internal Revenue Code to pay US Social Security taxes for US citizens and residents employed by the affiliate and, if yes, the effective date of that agreement.
To establish an exemption of coverage under the US Social Security system, your employer in the Czech Republic must request a certificate of coverage (form CZ/USA 1) from the Czech Republic
Certificates for the self-employed
If you are self-employed, until the enactment of this treaty you needed to pay Social Security taxes to both the US and Czech systems. Now you can establish an exemption from one of the taxes. To do so, you must obtain a certificate of coverage from the program under which you are eligible and desiring to be covered. The information is nearly the same as that required of employees.
Effective date of coverage exemption
Each certificate of coverage bears the effective date of your exemption from paying Social Security taxes in the other country. This will usually be the date you began working in the other country, but no earlier than the effective date of the agreement. That means that payments made into the system before the grant of exemption will not be recoverable.
Certificates of coverage issued by one country should be retained by the employer in the second country in case of an audit by the tax service of the second country. Copies are not required to be provided in a return unless requested. Self-employed persons must attach a photocopy of the certificate to his or her tax return to the second country each year as proof of the exemption from the second country´s social insurance program. It is the responsibility of the employer and employee to present the certificate to the Czech authorities when requested to do so. To avoid complications, your employer (or the self-employed person) should request a certificate as early as possible, preferably before your work in the other country begins.
1. Employers and self-employed in cross-border circumstances need to evaluate whether they are eligible to obtain a certificate of coverage
2. File applications with the relevant authority to obtain certificates of coverage.
3. Evaluate any remediative steps to take from January until date of coverage.
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The comments in this article are not intended to constitute an opinion regarding any specific tax issues because additional tax issues may exist that could affect the tax treatment of the tax issues addressed in this memo. This memorandum does not consider or reach a conclusion with respect to those additional issues and was not written and cannot be used for the purpose of avoiding penalties under law.
For further information, please refer to our web site at http://www.cfo2goeurope.com/ or contact us at prague[at]cfo2goeurope.com.