When do seconded staff pay tax on their income in Hungary?
Tax treaties concluded by Hungary apply rules that are similar to those for the taxation of income earned by foreign tax residents working in Hungary: in simple terms, income earned in Hungary for work performed in Hungary shall not be taxable in Hungary if both of the conditions below are met simultaneously:
- the worker stays less than 183 days in Hungary in the given fiscal year (or in a given period of 12 months); and
- the remuneration is not paid by or on behalf of a domestic employer (and the costs are not borne by a domestic permanent establishment).
If either of the two conditions is not met, the income earned from work shall be liable to taxation in Hungary. Based on our experience, examining the first condition related to the 183-day-period does not generally cause a problem for our clients. However, the NAV information published on 6 November warns that due care should be taken when examining the second condition (the employer cannot be a domestic employer).
Previous information published on 31 October 2012 by the NAV2 underlined that while the posting company is formally considered the employer in the case of secondments, in certain cases the domestic company receiving the individual can also be considered the employer in economic terms. In the case of a domestic economic employer the worker shall be liable to taxation in Hungary irrespective of the length of the period spent in Hungary.
The present NAV information continues this line of thought, applying the rules to workers sent to Hungary under temporary agency frameworks.
When does a company qualify as an “employer in economic terms”?
To establish whether a company is an employer in economic terms or not, the primary question to answer is whether the Hungarian company bears the responsibility or risk derived from the output of the worker’s performance. If so, further criteria must be examined:
- who is authorised to give instructions to the employee as regards working methods,
- who is authorised to exercise control and is obliged to undertake responsibility for the place of work,
- whether the formal employer can shift the responsibility for the employee’s remuneration directly to the company where the employee actually works,
- who provides the necessary equipment and materials for the employee,
- who is in a position to determine the number and qualification of the employees carrying out the activity,
- who is authorised to select the employee for the job and terminate the contract concluded with said employee for this purpose,
- who is authorised to apply sanctions against the employee,
- who determines the rules for leave and work schedules.
According to the NAV information, in the context of temporary agency work the domestic company hiring or receiving the employees shall be considered the employer in economic terms, i.e. the conditions for exemption are not met; the income earned from the work shall be taxable in Hungary irrespective of the period spent in Hungary, the worker must request a tax identification number as well as pay tax and submit a tax return.
Which employees are affected?
Taking into account that employees seconded for longer than 183 days are liable for taxation in Hungary anyway, the taxation of the following categories of workers should be revised:
- foreign temporary agency employees who have not paid tax in Hungary due to the length of their stay, which was shorter than 183 days;
- short-term seconded employees (less than 183 days) not working as temporary agency employees.
Based on the NAV information, a Hungarian tax liability is highly likely to apply for foreign temporary agency workers, whereas in the case of other employees seconded for a short-term period, a more detailed analysis is necessary to establish the tax liability. Given that the first NAV information regarding the employer in economic terms was published on 31 October 2012, detrimental taxation consequences may only affect workers seconded as of 1 November 2012.