Social Security Agreements
I-307
Vikram Shroff is the head of Nishith Desai Associates’ International Human Resources Law
(Employment & Labour) practice group. He focuses on various aspects including employment
and labour laws, employment agreements, compensation and benefits, training bonds, non-
disclosure and inventions assignment agreements, company policies and employee handbooks,
employee stock option/share purchase plans, expat structuring and secondment arrangements,
termination, severance and release arrangements, employment litigation and employment
immigration laws.
Veena Gopalakrishnan is a member of the Human Resources (Employment & Labour) Law team.
Synopsis
Particulars Page
No.
1. Introduction ...............................................................................................308
2. Social Security ..........................................................................................308
3. Social Security Legislation in India ......................................................308
4. The Employees’ Provident Fund and Miscellaneous
Provisions Act, 1956 (“EPF Act”) ..........................................................309
5. The EPF Act and International Workers .............................................310
6. SocialSecurity Agreements (“SSA”) and Certicate of
Coverage (“COC”) ....................................................................................311
7. International Worker and an Excluded Employee ............................312
8. India’s SSAs with other countries .........................................................313
8.1 SSA with Belgium ....................................................................................313
8.2 SSA with Germany ..................................................................................314
8.3 SSA with Switzerland .............................................................................. 315
8.4 SSA with Denmark ..................................................................................315
8.5 SSA with Luxembourg ............................................................................316
8.6 SSA with France .......................................................................................316
8.7 SSA with the Republic of Korea ........................................................... 316
8.8 SSA with Netherlands .............................................................................316
9. Negotiations with USA and UK............................................................317
10. Conclusion .................................................................................................317
Social Security Agreements
Veena Gopalakrishnan and Vikram Shroff
Chapter 13
International Taxation — A Compendium
I-308
1. Introduction
Social security is an important consideration while structuring
international assignments for employees. At times, secondment
arrangements are structured to ensure that the expatriate employee
continues to derive social security benefits in the home country
duringtheperiodofassignment.Anysocialsecuritybenetpayable
in the host country may become an added cost to the employer,
especially in situations where there are restrictions for withdrawal.
It is in this context that social security agreements (“SSAs”) executed
between countries come into perspective and they need to be
carefullyevaluatedto help reduce the nancial implications.
2. Social Security
TheInternationalLabourOrganisationdenes‘socialsecurity’
as the protection which society provides for its members, through
a series of public measures, against economic and social distress
that otherwise would be caused by the stoppage or substantial
reduction of earnings resulting from sickness, maternity, employment
injury, unemployment, invalidity old-age and death; the provision
of medical care; and the provision of subsidies for families with
children.
3. Social Security Legislation in India
Social security legislation in India originate from the Directive
Principles of State Policy as contained in the Constitution of India
(“Directive Principles”). The Directive Principles require the State
to, inter alia,
(a) secure a social order for the promotion of welfare of the
people
1
;
(b) within the limits of its economic capacity and development,
make effective provision for securing the right to work, to education
and to public assistance in cases of unemployment, old age, sickness
and disablement, and in other cases of undeserved want
2
; and
(c) make provision for securing just and humane conditions of
work and for maternity relief
3
.
1. Article 38 of the Constitution of India
2. Article 41 of the Constitution of India
3. Article 42 of the Constitution of India
Social Security Agreements
I-309
While the Directive Principles are not directly enforceable in a
court of law, the principles are considered to be fundamental in the
governance of the country.
The key social security statutes in India with respect to
employees are:
(i) The Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952;
(ii) The Employees’ State Insurance Act, 1948;
(iii) The Employees’ Compensation Act, 1923;
(iv) The Maternity Benet Act, 1961; and
(v) The Payment of Gratuity Act, 1972
4. The Employees’ Provident Fund and Miscellaneous
Provisions Act, 1956 (“EPF Act”)
The EPF Act is India’s most significant social security
legislation. It has been enacted so as to provide for the institution
of provident funds, pension fund and deposit-linked insurance fund
for employees in factories and other establishments. The EPF Act is
administered by the Government of India through the Employees’
Provident Fund Organisation
4
(“EPFO”). An establishment in India,
employing a minimum of 20 employees is required to register with
the EPFO and make provident fund (“PF”) contributions for eligible
employees. Establishments employing less than 20 persons may
voluntarily register with the EPFO and upon voluntarily registration,
the EPF Act shall apply as if the registration were mandatory.
Certain large organizations that have their own mechanism to
provide PF benets to their employees can seek an exemptionfrom
complying with the provisions of the EPF Act. Such exemptions
are ordinarily granted if the company’s internal PF mechanism
is commensurate with or more beneficial to employees than that
stipulated under the EPF Act.
Indian nationals working in India, who earn a salary of
up to INR 6,500 per month or who have, at any time during their
employment become a member of the EPFO (including with previous
employers) and continue with such membership , are entitled to the
4. http://www.epndia.com/
International Taxation — A Compendium
I-310
benets under the EPFAct. Excluded employees are also eligibleto
avail of the benets under the EPF Act on a voluntary basis. The
statute contemplates a statutory social security scheme whereby both
the employer and the employee are required to contribute 12% of the
basic wages, dearness allowance, retaining allowance to the EPFO.
It is the employer’s obligation to deduct the contributions
from the employee’s wages and remit the same to the EPFO within
the specified time frame. Employers are also required to make
periodic lings with theEPFO. The PF contributions made are split
by the EPFO towards a provident fund scheme, pension scheme
and deposit-linked insurance scheme. The Government of India also
makes a contribution towards the pension scheme envisaged under
the EPF Act.
5. The EPF Act and International Workers
The Government of India, in October 2008, amended
5
the
schemes under the EPF Act to bring international workers or
expatriates (“IW”) within the ambit of the statute. Pursuant to the
amendment, expatriate employees working in India are required
to make PF and pension contributions in India, of 12% of the IW’s
total salary, with the exception of exclusions under social security
agreements and bilateral economic partnership agreements (that have
been executed before October 1, 2008). A matching contribution is to
be made by the employer for each IW.
The total salary for the purpose of computing the contribution
comprises of the following components actually drawn during the
whole month whether paid on daily, weekly, fortnightly or monthly
basis:
• Basic wages;
• Dearness allowance (i.e., a cash payment made to an
employee on account of a rise in the cost of living);
• Retaining allowance; and
• Cash value of any food concession.
Based on certain circulars and clarifications issued by the
EPFO in recent times, it is being argued that certain allowances of a
xed nature (such as conveyanceallowance, special allowance, etc.)
5. http://epndia.nic.in/Circulars/notication_schemes.pdf
Social Security Agreements
I-311
that form part of the total salary, may also have to be included for
the purpose of computing provident fund contributions.
As per the Frequently Asked Questions
6
issued by the EPFO,
the requirement to contribute arises irrespective of where the salary
is paid. In case of a split payroll, the contribution shall be paid on
the total salary earned by the employee in the establishment covered
in India.
Also, IWs are allowed to withdraw the provident fund
accumulations only:
• upon retirement from service in the establishment at any
time after the attainment of 58 years of age;
• upon retirement on account of permanent and total
incapacity for work due to bodily or mental incapacity;
and
• in respect of the member covered under an SSA, on such
groundsasspecied in such agreement.
6. Social Security Agreements (“SSA”) and Certificate of
Coverage (“COC”)
An SSA (also known as Totalisation Agreement) is a bilateral
instrument to protect the social security interests of workers posted
in another country. Indian employees, who are posted to other
countries by their Indian employers, without terminating the contract
of employment, continue to make social security contribution in
India as per Indian law. On account of the assignment undertaken
in the other country, they may also be required to make social
security contribution under the host country’s laws. Ordinarily,
such employees do not derive any benet from such contributions
made outside India on account of restrictions on withdrawal and
stipulations pertaining to duration of stay. Being a reciprocal
arrangement, an SSA is intended to provide for avoidance of double
coverage i.e., coverage under the social security laws of both the
home and host countries. Ordinarily, an SSA addresses 3 issues, i.e.:
(i) Detachment: An exemption, allowed to employees sent on
an assignment to another country, from social security contribution
6. http://epndia.nic.in/IntWorkersNew/UpdFAQ_IntWorker_25052012.pdf
International Taxation — A Compendium
I-312
in the host country, provided they are complying with the social
security system of the home country.
(ii) Exportability of Pension: A provision allowing employees
sent on assignment to another country, and who are making social
security contributions under such host country’s regime, to export
the benefits to their home countries or to beneficiaries in a third
country, on completion of their assignment or on retirement.
(iii) Totalisation of Benefits: The period of service rendered by
an employee in a foreign country is counted for determining the
eligibility for benets, but the quantum of payment is restricted to
the length of service, on pro-rata basis.
A certificate of coverage or a detachment certificate is a
documentthatmustbeobtainedbyanIWsoastoavailthebenets
under the applicable SSA. A COC is issued in the employee’s
home country by the social security authority in accordance with
the provisions of the relevant SSA. The COC acts as a proof of
detachment, pursuant to which, exemptions from the applicable
social security compliances at the host country are allowed.
7. International Worker and an Excluded Employee
The amendment to the EPF Act in 2008 introduced the term
IW. An IW, as per the EPF Act, may be either an Indian worker or
a foreign national. An IW is:
(i) An Indian employee having worked or going to work in a
foreign country with which India has entered into a social security
agreement and being eligible to avail the benefits under social
security programme of that country, by virtue of the eligibility
gained or going to gain, under the said agreement; or
(ii) An employee other than an Indian employee, holding other
than an Indian Passport, working for an establishment in India to
which the EPF Act applies.
Certain expatriate employees are exempted from PF
contributions in India and such employees have been referred to as
‘excludedemployees’under the EPF Act. An excluded employee is:
(i) An International Worker, who is contributing to a social
security programme of his/her country of origin, either as a citizen
or resident, with whom India has entered into a social security
agreement on a reciprocity basis and enjoying the status of detached
workerforthe period and terms as specied in such agreement; or
Social Security Agreements
I-313
(ii) An international worker, who is contributing to a social
security programmed of his country of origin or residence, with
whom India has entered into a bilateral comprehensive economic
agreement prior to 1 October 2008, containing a clause on social
security and which specifically exempts natural persons of either
country to contribute to the social security fund of the host country.
For example:
• A company is sending employee A for durationof 1 year
to Belgium. India has an SSA with Belgium and Employee
Ashalltherefore qualify as an ‘international worker’.
• Employee B, a Belgian national, is sent to India by his
company on an assignment for a period of a year. In
the absence of the India-Belgium SSA, Employee B and
his Indian employer would have had to comply with
the EPF Act and contribute 12% each, of the total salary.
Since India has in effect an SSA with Belgium, it would
be possible for Employee B to qualify as an ‘excluded
employee’ by obtaining a certicate of coverage from the
social security authorities at Belgium and thereby avoid
incurring social security expenses in India.
8. India’s SSAs with other countries
Currently, SSAs with the following countries are in effect:
# Country Effective Date
1. Belgium 1 September, 2009
2. Germany 1 October, 2009
3. Switzerland 29 January, 2011
4. Denmark 1 May, 2011
5. Luxembourg 1 June, 2011
6. France 1 July, 2011
7. Republic of Korea 1 November, 2011
8. Netherlands 1 December, 2011
Set out below are key features of the aforementioned SSAs.
8.1 SSA with Belgium
The SSA with Belgium was signed on 3 November, 2006 and
came into effect on 1 September, 2009. The salient features of the
SSA are:
International Taxation — A Compendium
I-314
(i) The employees of the home country deputed by their
employers, on short-term assignments for a pre-determined period
of up to 60 months, need not remit social security contribution
in the host country. For example, if an Indian employer sends an
employee to work for an employer in Belgium for less than 5 years,
the employer and the employee will continue to comply with the
Indian social security laws and will not have to make contributions
in Belgium.
(ii) Export of pension due under the legislations of one country
to the other country, where the member might choose to live, is
possible.
(iii) Totalisation of the contribution periods earned while in
service in both the countries for the purpose of deciding eligibility
tobenetsis possible under certain circumstances.
(iv) The employers are saved from making double social security
contributions for the same set of employees, thereby enhancing the
competitiveness of the products and services.
8.2 SSA with Germany
The SSA with Germany was executed on 8 October, 2008 and
came into effect on 1 October, 2009. This agreement however covered
only the detachment provisions, as per which, individuals on short
term contract up to 48 months (extendable to 60 months with the
prior consent of the appropriate authority) can avail detachment from
host country social security. Since this agreement did not address
exportability of pension and totalisation of contribution periods, the
Governments of India and Germany have negotiated and signed a
comprehensive social security agreement on 13 October, 2011. This
agreement is to subsume the SSA signed on 8 October 2009, however
anoticationbringingintoeffectthenew agreementis stillawaited.
The new comprehensive agreement with Germany envisages the
followingbenetsto Indian nationals working in Germany:
(i) The employees of the home country deputed by their
employers, on short-term assignments for a pre-determined period
of less than 5 years, need not remit social security contribution in
the host country, For example, in case of deputation of an Indian
employeetoGermanyvideashorttermcontractofuptoveyears,
no social security contribution would need to be paid under the
German law by the employee provided he continued to make social
security payment in India.
Social Security Agreements
I-315
(ii) The benefits under the SSA shall be available even when
the Indian company sends its employees to Germany from a third
country.
(iii) Indian workers shall be entitled to the export the social
securitybenetifthey relocatetoIndiaafterthe completionoftheir
service in Germany.
(iv) Self-employed Indians in Germany would also be entitled to
exportofsocial security benet on their relocation to India.
(v) The period of contribution in one contracting state will be
added to the period of contribution in the second contracting state
fordeterminingtheeligibilityforsocialsecuritybenets(totalisation).
8.3 SSA with Switzerland
The SSA signed between India and the Swiss Federal Council
on 3 September, 2009 was brought into effect from 29 January, 2011.
The SSA includes within its scope posted persons, self-employed
persons, public employees, travelling personnel employed in
international transport and persons with diplomatic missions. As
per the SSA, an individual ordinarily employed in Switzerland with
a Swiss employer and seconded to India to provide services for
the same employer, shall be subject only to the social security laws
of Switzerland for a period of 72 months. Similarly, in case of an
Indian employee seconded to Switzerland, the employee shall be
eligible to remain on the social security system of India. This SSA
also provides for refund of contributions at the time of relocation i.e.,
a Swiss national who is subject to the social security laws in India
shall, at the time of relocation, be entitled to either cash payment of
the benetsor payment in Switzerland or elsewhere, in accordance
with Indian law.
8.4 SSA with Denmark
The SSA signed between the Government of India and the
Government of Denmark on 17 February, 2010 came into effect on
1 May, 2011. As per this SSA, an Indian national who is deputed to
Denmark to work for the same employer, for a period of less than
5 years, shall be subject to India’s social security laws and need
not make contributions in Denmark. A Dutch national, deputed to
India for axed term of less than threeyears willonly be required
to adhere to Denmark’s social security laws. The SSA includes
exportability of social security benets under certain conditions and
totalisation of periods of contribution.
International Taxation — A Compendium
I-316
8.5 SSA with Luxembourg
The SSA signed with the Government of Luxembourg on
30 September, 2009 came into effect on 1 June, 2011. As per this
SSA, employees posted from either India to Luxembourg or vice
versa, for a period of up to 5 years (extendable with the consent of
the appropriate authority) to work for the same employer, shall be
subject only to the social security laws of the home country. The
SSA includes exportability of social security benets under certain
conditions and totalisation of periods of contribution.
8.6 SSA with France
The SSA signed with the French Government on 30
September, 2008 came into effect on 1 July, 2011. As per this SSA,
employees posted from either India to France or vice versa, for a
period of up to 5 years to work for the same employer, shall be
subject only to the social security laws of the home country. The
SSA includes exportability of social security benets under certain
conditions and totalisation of periods of contribution.
8.7 SSA with the Republic of Korea
The SSA with the Republic of Korea was executed on 19
October, 2010 and came into effect from 1 November 2011. This
SSA provides a detachment benet of up to ve years in addition
to exportability of social security benefits and totalisation of
contribution period, subject to certain conditions. This SSA also
provides that in case of independent professionals, the provisions
of the Comprehensive Economic Partnership Agreement (CEPA),
executed in January 2005, between India and Republic of Korea shall
apply and that the provisions of SSA shall be applicable in case of
any other category of workers. However, with the recent amendment
ofthedenitionof‘excludedemployee’
7
, the provisions of the CEPA
shall extend to all IWs.
8.8 SSA with Netherlands
The SSA signed between India and Netherlands on 22
October, 2009 came into effect from 1 December, 2011. The SSA
provides a benet of detachment of up to 5 years, i.e., employees
posted from either India to Netherlands or vice versa, for a period of
7. EPF (Third Amendment) Scheme, 2012
Social Security Agreements
I-317
up to 5 years to work for the same employer, shall be subject only to
the social security laws of the home country. While this SSA includes
exportability of social security benets under certain conditions, it
does not provide for totalisation of periods of contribution.
The SSAs with Hungary, Czech Republic, Finland and
Norway have been signed but are not yet effective. Based on news
reports, it appears that the Indian Government is negotiating SSAs
with countries like Sweden, Australia, USA and Canada.
9. Negotiations with USA and UK
India is persistently pursuing with USA to execute an SSA,
keeping in mind that several Indian companies have been sending
their employees there on secondment/deputation assignments.
The current social security laws in the US, including the Employee
Retirement Income Security Act of 1974, allow an employee to
withdraw pension on only after a minimum qualifying period
i.e. 10 years while the visa regime does not ordinarily permit the
employee to stay beyond 10 years. Therefore, Indian employees
who travel to USA for a period less than 10 years forego their
social security contributions when they return. This has ended up
being a signicant issue on account of the large number of Indian
employees in USA. It however seems that the US is hesitant in
executing the agreement since it believes that India is likely to gain
disproportionately from such an agreement.
We understand from news reports that the United Kingdom
has refused to enter into an SSA with India anticipating an
additional burden on their exchequer
8
, particularly because there are
signicantlymoreIndianemployeesintheUKthanBritishnationals
in India.
10. Conclusion
India’s sudden move to require IWs to contribute to the
Indian social security system has been perceived internationally as
a negative step, mainly because of the likely increase in the cost of
deploying employees in India. That said, the step has encouraged
many countries to negotiate and execute SSAs with India. The SSAs
significantly benefit Indian workers employed abroad, especially
those on short-term contracts.
8. http://www.indianexpress.com/news/citing-fund-crunch-uk-says-no-to-
social-security-pact/765462/
International Taxation — A Compendium
I-318
Application and interpretation of SSAs and the social
security law in India with respect to expatriates is still nascent and
evolving. There are open questions when it comes to secondment
and deputation arrangements, especially in light of possible tax
implications. Under certain circumstances, it is difcult toascertain
if relationships in the nature of employment and assignment and
structures where employment in the home country is suspended and
not terminated will trigger provisions of the EPF Act and the SSAs.