Interpretation of the individual legal terms in the area of insurance or taxes tends to be unclear in some cases and in practice, diverse assessments of tax liabilities or obligations relating to social and health insurance levies may thus occur. If the diverse view of the given interpretation on the taxpayers’s side is an intentional disguise of the actual situation or a matter of mere lack of knowledge and acting in good faith, is somewhat disputable. Many times, the exact interpretation and meaning of terms is only clarified by a final judgment of a court of justice, which then becomes decisive for other analogical cases as well.

Regional court in Hradec Králové has also dealt with a case of similar nature, the object of which was a conflict of views of the administrative authority and a taxpayer relating to assessment of (non)participation of employees in the Czech system of social security. The entire dispute concentrated around the consideration of whether it is necessary to subordinate the relation between a company as the plaintiff and employees, who performed activity for the employer in the Czech Republic, under the relation of contractual employer and contractual employee in the way these terms are defined in the act on sickness insurance, or whether it fulfils the definition of a foreign employee and employer.

The case concerned ten employees, who previously worked in a Czech company (at the plaintiff) in Hradec Králové in managerial posts, and from a certain date, without their job position or content of work having changed in any significant way, they became employees of a foreign company with registered office in a so-called “non-contractual foreign country” – on the island of Jersey. At the same time, the foreign company entered into a contract with the plaintiff on provision of managerial services. The employment contracts, based on which employees were posted for performing work in the Czech Republic, had been closed in compliance with the Czech Labour code. Employees continued to be integrated in the organisational structure of the Czech company and managed by the general manager of the Czech company (the plaintiff). Some of the employees even operated in the Czech company as members of the statutory body.

Within the specification of the case, it also cannot be omitted that the employees, with one exception, were citizens of the Czech Republic with long-term residence on the territory of the Czech Republic, and also that the foreign company was probably established more or less artificially with registered capital reaching EUR 1. Moreover, in the year 2016, respectively 2017, all employees entered into employment contracts with the Czech company (the plaintiff) . These facts also illustrate the actual state of the case and as a whole they have an influence on the final judgment of the regional court of justice.

According to the act on sickness insurance, a so-called contractual employee is understood to mean “an employee of an employer, whose registered office is on the territory of a country, with which the Czech Republic has not entered into an international treaty on social insurance, if active in the Czech Republic at a contractual employer”. In the case of employment of contractual employees, the contractual employer is obliged to pay social security insurance for these employees. If the performance of work activity of an employee active on the territory of the Czech Republic were in favour of a foreign employer, the employee would be considered a so-called foreign employee, where participation in insurance is voluntary, meaning that it is left to the decision of the employee, if he is or is not interested in being insured.

During the dispute, mainly the interpretation of the expression “at a contractual employer” was thus significant, which the social security administration (ČSSZ) perceived as a local criterion. Based on the physical presence of the employee at another employer in the Czech Republic, ČSSZ assessed the above-mentioned employees as contractual employees and derived their obligatory participation in sickness insurance in the Czech Republic from it.

The plaintiff, on the other hand, argued with an analogy to the definition of the so-called international hiring out of labour, which is, however, mainly relevant in the area of taxation. According to him, it should have been important who and in what way assigns tasks to and controls the employee. He was of the opinion that if an employee is directed by the foreign employer, he shall be considered a foreign employee regardless of the premises, where the work is performed. The plaintiff did not manage to prove this subordination in the course of the proceeding either, though, and the regional court acknowledged in keeping with the view of ČSSZ that it is not possible in the long term for managers, who hold top posts in the management of a company and its statutory bodies to be directed only from abroad by their foreign employer within provision of management services without any control by the company they operate in.

The regional court moreover inclined to the opinion of ČSSZ that the essential thing for differentiating between a contractual and a foreign employee is, at whose premises the work is performed, regardless of the organizational structure of the contractual employer or actual subordination. Unlike international hiring out of labour, according to the court, it does not follow from the definition of the sickness insurance act, that it should be decisive, who directs and controls the employee and gives him or her instructions etc.

ČSSZ further investigated, in what way the employees are remunerated and which company covers the wage costs, because this fact is also one of the basic criteria for fulfilling the definition of a contractual employer. According to the sickness insurance act, a contractual employer is a person with registered office on the territory of the Czech Republic and in which employees of a foreign employer active in the Czech Republic are considered contractual employees, “if, according to the contract made with the foreign employer the income of contractual employees is paid by the contractual employer or it is paid by the contractual employer to the foreign employer”. Based on the examination performed, invoicing between the companies on the basis of the agreement on provision of managerial services was relatively non-standard, because it included not only standard remuneration for services, but also calculation of specific monthly wage costs per employee, mark-up and flat-rate costs for using offices and other benefits of the employees.

In its judgment, the regional court thus reached a clear conclusion that in the assessed case, these were contractual employees with obligatory participation in the Czech insurance system. According to the court, the mentioned change in the contractual set-up was in reality only a formal one and disguised the actual facts. Neglect of obligatory participation of the employees in the Czech social security system led to financial savings on the side of the Czech companyand, moreover, the mentioned employees were, at the same time, exposed to considerable risk that in case of a social event, they will not be supported by benefits from the social security system.

The judgment of the regional court has been challenged by a cassation complaint and a final clarification of the terms of a contractual and a foreign employee should thus be brought by the already expected decision of the Supreme Administrative Court. 

Soňa Hanigovská and Šárka Veselá