Social security and the EU
For those who are unfamiliar with the topic, it may be news that in less than three months time new social security legislation, namely EEC Regulations 1408/71 and 574/72, will become directly effective in Poland. This will introduce a number of new rules, principles and concepts into the Polish social security environment. Some of these can be applied directly while others will require implementation through domestic law. Unlike other accession states such as the Czech Republic, where the local legislation has already been amended to bring it closer in line with EU requirements, the Polish ZUS Social Security Law still remains untouched. What is even more worrying is that when consulted over the telephone, the ZUS authorities give evasive answers on the likelihood of introducing changes to the current Polish regulations.
So, what will be the most likely scenario after May 1, 2004?
Polish social security will apply to a large group of EU expatriates, who have not paid Polish contributions to date. There is no guidance, however, as to who (individual or foreign/Polish employer) will be required to meet the new payment and reporting obligations, or how this will work exactly (currency, proportion, with/without a respective declaration).
Expatriates who are exempt from Polish social security based on bilateral Totalization Treaties (i.e. Belgium, France, Spain, Austria, Luxembourg, Greece, the Czech Republic, Slovakia and Hungary) will no longer be covered, as these treaties will be superseded by EU law. Coverage may only continue after May 1, 2004 in cases where Poland has negotiated to recognize the bilateral treaty provisions with the respective country in the agreed transition period. Currently, such an agreement has only been reached with Germany. The same applies to Poles working in the EU.
So, what are the main principles on which EU states base their social security policies?
One of these principles states that, when working, an individual can be subject to the social security jurisdiction of only one state, thus excluding the possibility of paying social security contributions in two EU states simultaneously in respect of the same remuneration. The general rule, referred to technically as lex loci laboris, is that the country in which the work is physically performed has the right to decide whether to apply its social security legislation in every case. Essentially, this means that the individual pays social security in the EU member state where he works. Overall, this ensures that individuals working in different EU member states do not find themselves in a less advantageous social security position to those working only in their home country.
There are, of course, exceptions to the above general rule.
Example 1. A Polish citizen lives in Poland and works for a Polish company one day a week. He spends the remaining time working for a UK company. In this case, work is performed both in Poland and the UK but the individual resides in Poland and, therefore, is subject to Polish and not UK social security regulations.
Example 2. A Polish citizen living in Poland is employed by a company with its head office in France and carries out work in both France and Germany. This individual will be liable for social security contributions in France, which is where the company's headquarters are located.
A special set of rules applies to 'seconded employees,' i.e. workers delegated to work from one EU member state to another. Such individuals are exempt from the payment of social security charges in their host country, provided that a number of conditions are met.
Firstly, the length of the foreign assignment may not exceed 12 months and the individual cannot be seconded as a replacement for another seconded employee. In certain extraordinary circumstances, the initial period may be extended for a maximum of a further 12 months provided that the relevant social security authority of the host state has agreed to this. Secondly, there must be a strong 'connection' between the seconded employee and the home country employer who has delegated the individual to work in EU member state B on its behalf. This is evidenced by the preservation of the legal relationship throughout the duration of the assignment. In cases where the individual has terminated his/her contract with the home country employer, it would be practically impossible to claim the social security exemption for 'seconded employees' in the host country.
The employment arrangements are usually closely scrutinized by the host country's social security authorities to assess the level of 'dependency' between the employee and his/her employer. For instance, it must be clear that the employer has control over the employee's work and can be held liable for any compensation claims by the employee. Should it transpire that the employee can have a valid compensation claim against the employer in EU member state B, in effect this means that the actual 'control' has been shifted from the home to the host country employer. In other words, the individual fails to meet the dependency criterion to qualify as a 'seconded employee.'
When analyzing the terms of the secondment, the authorities would normally consider the substance of facts and circumstances over the form of presentation. In this regard, the place where an enterprise does in fact carry out the major part of its business is also considered in the context of seconded employees. For instance, provided that the company is registered in the UK but most of its actual business activity is undertaken in Poland, UK citizens assigned from the UK to Poland will not be treated as 'seconded employees' for social security purposes. Henceforth, irrespective of the length of their stay in Poland (even if under 12 months), they will be required to adhere to the provisions of Polish social security legislation.
All in all, the new rules highlighted above make it possible to consider just how to respond to these changes (e.g. by attempting to read the small print of thousands of pages of EU legislation) and how to assimilate and integrate them with existing employee assignments. This is an excellent time to review foreign mobility policies and practices as well as the packages offered to employees in order to ensure that they meet the current legal requirements as well as your company's remuneration policy.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
So, what will be the most likely scenario after May 1, 2004?
Polish social security will apply to a large group of EU expatriates, who have not paid Polish contributions to date. There is no guidance, however, as to who (individual or foreign/Polish employer) will be required to meet the new payment and reporting obligations, or how this will work exactly (currency, proportion, with/without a respective declaration).
Expatriates who are exempt from Polish social security based on bilateral Totalization Treaties (i.e. Belgium, France, Spain, Austria, Luxembourg, Greece, the Czech Republic, Slovakia and Hungary) will no longer be covered, as these treaties will be superseded by EU law. Coverage may only continue after May 1, 2004 in cases where Poland has negotiated to recognize the bilateral treaty provisions with the respective country in the agreed transition period. Currently, such an agreement has only been reached with Germany. The same applies to Poles working in the EU.
So, what are the main principles on which EU states base their social security policies?
One of these principles states that, when working, an individual can be subject to the social security jurisdiction of only one state, thus excluding the possibility of paying social security contributions in two EU states simultaneously in respect of the same remuneration. The general rule, referred to technically as lex loci laboris, is that the country in which the work is physically performed has the right to decide whether to apply its social security legislation in every case. Essentially, this means that the individual pays social security in the EU member state where he works. Overall, this ensures that individuals working in different EU member states do not find themselves in a less advantageous social security position to those working only in their home country.
There are, of course, exceptions to the above general rule.
Example 1. A Polish citizen lives in Poland and works for a Polish company one day a week. He spends the remaining time working for a UK company. In this case, work is performed both in Poland and the UK but the individual resides in Poland and, therefore, is subject to Polish and not UK social security regulations.
Example 2. A Polish citizen living in Poland is employed by a company with its head office in France and carries out work in both France and Germany. This individual will be liable for social security contributions in France, which is where the company's headquarters are located.
A special set of rules applies to 'seconded employees,' i.e. workers delegated to work from one EU member state to another. Such individuals are exempt from the payment of social security charges in their host country, provided that a number of conditions are met.
Firstly, the length of the foreign assignment may not exceed 12 months and the individual cannot be seconded as a replacement for another seconded employee. In certain extraordinary circumstances, the initial period may be extended for a maximum of a further 12 months provided that the relevant social security authority of the host state has agreed to this. Secondly, there must be a strong 'connection' between the seconded employee and the home country employer who has delegated the individual to work in EU member state B on its behalf. This is evidenced by the preservation of the legal relationship throughout the duration of the assignment. In cases where the individual has terminated his/her contract with the home country employer, it would be practically impossible to claim the social security exemption for 'seconded employees' in the host country.
The employment arrangements are usually closely scrutinized by the host country's social security authorities to assess the level of 'dependency' between the employee and his/her employer. For instance, it must be clear that the employer has control over the employee's work and can be held liable for any compensation claims by the employee. Should it transpire that the employee can have a valid compensation claim against the employer in EU member state B, in effect this means that the actual 'control' has been shifted from the home to the host country employer. In other words, the individual fails to meet the dependency criterion to qualify as a 'seconded employee.'
When analyzing the terms of the secondment, the authorities would normally consider the substance of facts and circumstances over the form of presentation. In this regard, the place where an enterprise does in fact carry out the major part of its business is also considered in the context of seconded employees. For instance, provided that the company is registered in the UK but most of its actual business activity is undertaken in Poland, UK citizens assigned from the UK to Poland will not be treated as 'seconded employees' for social security purposes. Henceforth, irrespective of the length of their stay in Poland (even if under 12 months), they will be required to adhere to the provisions of Polish social security legislation.
All in all, the new rules highlighted above make it possible to consider just how to respond to these changes (e.g. by attempting to read the small print of thousands of pages of EU legislation) and how to assimilate and integrate them with existing employee assignments. This is an excellent time to review foreign mobility policies and practices as well as the packages offered to employees in order to ensure that they meet the current legal requirements as well as your company's remuneration policy.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
