TN 33 (10-05)

Citations:

Section 210(a) of the Social Security Act;

Regulation No.4, Sec. 404.1004,

Section 3121(b) and 3121(l) of the Internal Revenue Code

A. Background

To engage in commercial and industrial enterprises outside the U.S., many American employers establish a separate entity abroad. Because the entity is often organized under the laws of the host country, it is not often considered an American employer. Prior to 1955, services performed by U.S. citizens working outside of the U.S. are not covered. To remedy this, the 1954 Amendments provided coverage agreements.

Originally, for service to qualify as employment under Social Security, it was required that the American employer be a domestic corporation and that the foreign entity be a foreign subsidiary corporation. However, these requirements were too limiting. Effective April 20, 1983, Congress changed this requirement so that the foreign entity must be a foreign affiliate of an American employer. (RS 01901.050C.1.)

B. Policy

Employment outside the United States for a foreign affiliate or subsidiary of an American employer is subject to the following coverage rules:

1. Beginning April 20, 1983

Service is covered employment if:

• the service is performed by a U.S. citizen or resident as an employee of a foreign affiliate of an American employer; and

• the service would be covered if performed in the U.S.; and

• the American employer has a coverage agreement with the Treasury Department. (RS 01901.070C.4.)

2. From 1955 through April 19, 1983

Service is covered employment if:

• the service is performed by a U.S. citizen as an employee of a foreign subsidiary of a domestic corporation; and

• the service would be covered if performed in the U.S.; and

• the “domestic” corporation has a coverage agreement with the Treasury Department. (RS 01901.070C.4.)

3. Before 1955

Service for a foreign affiliate or subsidiary of an American employer is not covered employment.

C. Definitions

1. Domestic Corporation

A domestic corporation is any corporation created or organized in the U.S. under U.S., State, or U.S. territorial law.

2. Foreign Affiliate

A foreign affiliate is any foreign entity in which the American employer has at least a 10% interest in the voting stock or profits. This interest must be owned directly or through one or more entities.

3. Foreign Subsidiary

A foreign subsidiary is a foreign corporation partly owned by a domestic corporation.

4. Coverage Agreement

The IRS is responsible for the detailed provisions of filing IRS Form 2032, Contract Coverage Under Title II of the Social Security Act. IRS Form 2032 is for use by an American employer to extend Social Security coverage to U.S. citizens and resident aliens employed by its foreign affiliates. A coverage agreement is authorized under Section 3121(l) of the Internal Revenue Code and may include all affiliates and subsidiaries, but is not required to do so. The agreement may be amended at anytime to include additional affiliates or subsidiaries.

The agreement must cover all U.S. citizens and residents employed by the affiliate or subsidiary unless a totalization agreement provides otherwise.

Effective June 15, 1989, a coverage agreement may not be terminated by the employer. The agreement will terminate for a foreign entity at the end of any quarter in which the foreign entity ceased to be the foreign affiliate at any time in that quarter. Prior to June 15, 1989, however, the employer could terminate a coverage agreement by giving 2 years prior notice after the agreement was in effect for at least 8 years.

D. References

• IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad at http://www.irs.gov/pub/irs-pdf/p54.pdf

• Visit IRS’ website at http://www.irs.gov/pub/irs-pdf/f2032.pdf for a copy of IRS Form 2032.