Clarifying Amendment of the Czech-Japanese Social Security Agreement Will Improve Business Relations

For many years, Japan has invested heavily in the production of automobiles and electronics in the Czech Republic. According to the Czech Ministry of Industry and Trade in 2017, Japan was the second largest foreign investor in the Czech Republic, with investments in over 250 Japanese companies amounting to U.S. $3.7 billion. 

The strong trade relations between the two countries involve frequent temporary assignments of Japanese workers to the Czech Republic. In the past, in the absence of any agreement in the area of social security, Japanese assignees were often obliged to pay Czech social security contributions for the duration of their stay, while often continuing payments to the Japanese social security system (and vice versa the Czech assignees to Japan). This was in keeping with the usual basic rule of social security (lex loci laboris), whereby workers are subject to the social security legislation in the country where the work activity is physically performed.

The absence of any social security agreement resulted in administrative and financial burden for the posting entities and was a source of frustration for businesses frequently assigning their employees between the two countries.

Czech-Japanese Social Security Totalization Agreement

The unfavorable double insurance situation, where the employee contribution of Czech social security is also borne by the employer, was to a large extent rectified in 2008, when Japan and the Czech Republic signed a bilateral social security “totalization agreement” regulating the applicability of legal social security regulations in the respective countries, which covered pension insurance, resulting benefits/payments and, partially, health insurance. This agreement allowed Japanese employees temporarily working in the Czech Republic—if the appropriate certificate of coverage was issued by the relevant local social security authority—to remain insured in the Japanese social security system and avoid double social security payments into the Czech system.

However, even with the bilateral social security totalization agreement in place, one inconvenient issue remained: the condition of having to maintain a Japanese employment contract. This condition was in place to satisfy the criterion of maintaining close links with the Japanese employer throughout the assignment and assure the temporary nature of the stay abroad, but it sometimes clashed with the immigration approach.

For example, it is comparatively less administratively demanding to obtain a Blue Card type work permit, which requires a local (Czech) employment contract. Thus, the Japanese employees sent to work in the Czech Republic often concluded local employment contracts with the Czech subsidiary of the parent company after their Japanese contract was suspended.

In such a case, when the Japanese employment contract was suspended, and the local Czech employment contract concluded for the period of the assignment—even if the work under the Czech contract was carried out under the direction of the Japanese parent entity—local Czech social security contributions were due by both the Czech employer and the Japanese assignees. The fact that the employment was meant to be temporary did not play a role in establishing the local Czech social security system liability. In other words, the standard assignment or detachment exception could not be applied, since the conditions for temporary “detachment” were not satisfied if a local contract was concluded.

The only option Japanese assignees had, in this instance, was to try to obtain a special exemption via an administratively cumbersome and often lengthy bureaucratic process with no guarantee of success.

Clarifying Amendment of the Czech-Japanese Social Security Totalization Agreement

Both parties recently agreed on a Protocol to the totalization agreement that clarifies the definition of the category of a temporarily assigned worker. As of August 2018, Japanese workers who conclude a local Czech contract are to be considered temporarily assigned workers if they remain under the direction of the home country entity and will thus remain insured in the Japanese social security system only throughout the duration of their work stay in the Czech Republic. This must be certified by the duly issued certificate of coverage. The same rules apply reversely for Czech workers assigned to work in Japan under similar conditions.

Mutual Agreement Bringing Clarity

This clarification brings important certainty and clarity in the application of social security rules, and will undoubtedly have a positive impact on the quality of mutual trade relations between the Czech Republic and Japan.

In general, bringing clarity into any area of inter-state cooperation—not only when it comes to social security rules—undeniably always contributes to improved business relations.

For any further questions, please contact Zuzana Jasenovcova at [email protected].