Focus on the social security status of foreign employees

It is very easy to get lost in the maze of Hungary’s social security system. This is especially true in cases when we, as an employer, employ a foreign private individual. We summarise the main guidelines relating to the social security status of foreign individuals as follows.

Who can be considered a foreigner (non-resident)?

From the perspective of social security, every natural person who does not have to be considered a resident Hungarian national qualifies as a non-resident. This wording seems easy; all we have to consider now is who qualifies as a resident. Based on Section 4 u.) of the Act on Social Security, any person shall be considered a resident whose place of residence is registered within the territory of Hungary, who has a legal status as a Hungarian citizen, an immigrant or as a legal person established in the territory of Hungary, and individuals entitled to free movement and residency.
Based on the above the employer must decide which category the private individual intended to be employed belongs to.

Type of legal status

Subsequent to determining the legal status of the employee, the type of employment must be defined. In today’s economy, businesses tend to employ foreign professionals on postings, or under domestic employment arrangements. The two statuses have a fundamental influence on the employee’s legal status in Hungary. All this essentially means that in the event of a posting, social security status is presumed to exist in the country the person came from, whereas under a domestic employment relationship such may not exist.

Social security status as a posted employee

Since accession to the European Union, the majority of foreign employees to Hungary come from EU countries, therefore, regulations governing the coordination of social security systems must be applied in Hungary too. The purpose of these regulations is to eliminate multiple social security statuses in several Member States, and avoid someone being without social security.

Based on Article 12 of Regulation (EC) No. 883/2004 of the European Parliament, a person shall be considered a posted person who is employed in a Member State on behalf of an employer which normally carries out its activities there and who is posted by that employer to another Member State to perform work on that employer’s behalf, provided that the anticipated duration of such work does not exceed twenty-four months.

In the case of legal status as a posted employee, the foreign employee is insured in the country they came from, however, this fact must be proven to the Hungarian authorities too. Form A1 is used for this purpose, the contents of which certify the following statement from the employer:

–    prior to the first day of the posting, the employee was insured under social security for at least 30 days (not necessarily at the posting employer)
–    the employer shall continue to employ the posted employee for the duration of the posting
–    the employer shall continue to pay social security contributions for the duration of the posting
–    the employer is not sending the employee to replace another employee previously posted
–    the employer shall continue to employ the employee upon the termination of the posting period

In today’s business world it also happens that the employer employs the foreign employee under a Hungarian employment contract, but the private individual is insured in another EU Member State. Pursuant to Article 16 of said Regulation, two or more Member States or the competent authorities of those Member States may by common agreement deviate from the person being insured in Hungary. Applications for exemptions must be submitted (if possible jointly by the employer and the employee) in the Member State in which the given employee intends to remain insured.

It frequently occurs that employees arrive in Hungary from outside the European Union, and therefore their employment is relatively easy. Persons from third countries become insured in Hungary based on their employment (provided there is no social security agreement with the given country), consequently, their social security status is identical to that of employees in Hungarian employment relationships. In the case of persons posted from third countries, it is possible that they do not become insured because the duration of their work does not exceed two years and so they do not qualify as residents pursuant to the Act on Social Security.

Certificates of social security

Form A1 exempts both the employer and the employee from the obligation to pay social security in Hungary, which means only personal income tax must be deducted from the private individual and the employer in Hungary does not have to pay the 27% social tax and the 1.5% vocational training contribution.

Prior to the employment of a foreign individual from a third country, the following actions must be taken: request a social security ID and a “Certificate on the Right to Health Care Services” form from the competent Health Insurance Fund, and register the insurance status with the Tax Authority (NAV) using form 13T1041. As far as the social security payment obligation is concerned, the individual social security contribution of 18.5% must be deducted from the employee’s wages in addition to the personal income tax. The employer must comply with the obligation to pay the 27% social tax and the 1.5% vocational training contribution to the Tax Authority.

If the social security status of the foreign employee can be determined based on the above, close attention must be paid to holding the related certificates in safekeeping. In our experience, the Tax Authority’s inspectors will check the existence of A1 certificates in the course of an inspection.
In the event the employee is employed with a social security ID, it is imperative to register the employee with the Tax Authority immediately upon the start of the employment, because failure or any delay in doing so could result in a fine.

In practice, most cases of social security are quite individual, so it is worthwhile examining all the circumstances carefully. If we take the afore-mentioned guidelines into consideration it may be easier to determine individual statuses, which will ultimately lead to the most optimal solution.

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