If a private individual earns income abroad, in order to determine the tax liability the issue of tax residence must be assessed along with which country is entitled to tax the income. To answer these questions we can generally rely on the provisions of international treaties on the avoidance of double taxation, alongside the relevant domestic regulations.
According to the rules, income received from dependent work in a country other than the country of residence is taxable in the private individual’s country of residence, provided all of the following 3 conditions are met, namely:
• the private individual does not spend more than 183 days in another country,
• his remuneration is paid by an employer that is not a resident in the other country,
• the remuneration is not borne by a permanent establishment which the employer has in the other country.
If any of these conditions is not met then the income of the private individual is taxable in the country where the work is performed.
Consequently, precisely defining the number of days spent abroad is crucially important from the perspective of taxation. When examining the 183-day rule, the default situation in the OECD Model Tax Convention bases the assessment on any 12-month period. The new tax treaty between Hungary and Germany entered into in 2011, replacing the previous treaty signed in 1977, adopted the same formula (the new UK-Hungary treaty follows the same principle). The former treaty took the length of the fiscal year (calendar year) as the basis for calculating the days, but the new rule specifies any 12-month period that starts or ends in the fiscal year.
In practice this means that the days spent resident in the country where the work is performed must constantly be aggregated, regardless of the end of the calendar year. Let’s look at an example. If a person works abroad starting on 15 September and ending on 30 July of the following year, then the number of days spent abroad is 108 in the first year and 181 in the second year. As the person spent 283 days abroad in a 12-month period – which is significantly more than the 183-day threshold – this income is subject to taxation in the country where the work was performed in both of the fiscal years.
The provisions of the new Hungarian-German treaty must be applied for amounts paid on or after 1 January 2012. In this case, however, the question arises of whether days in 2011 should also be examined by the taxpayer when determining the 183 days. Official information from the National Tax and Customs Administration provides a clear answer to this: “the 183 days residence of a private individual must be examined for any 12-month period starting or ending in the given fiscal year, and therefore when assessing the tax liability on income obtained in 2012, the individual’s place of residence must also be reviewed for the 2011 period, taking into account the days spent in the given country in 2011.” 1
In light of this information, when compiling personal income tax returns for 2012 it may be necessary for private individuals to quantify the number of days spent abroad in 2011 in order to arrive at an accurate assessment for the place of taxation.