The deadline for submitting personal income tax returns is drawing near and because an increasing number of enterprises have foreign employees, it can often be difficult to judge whether these individuals have to pay taxes or submit personal income tax returns in Hungary. It is frequently not even clear what administrative tasks the HR department has in respect of income tax on foreigners’ income in Hungary. In our series of articles we would like to give you some pointers here.
Tax residency in Hungary
When assessing a potential tax liability, the first thing that comes to the mind of most employees who have worked abroad is the 183-day rule: if I worked at least 183 days in a given country, I have to pay taxes there. Unfortunately, the situation is not quite as simple.
When the taxation of foreigners’ income crops up in Hungary, the first step should be to check the employee’s tax residency. Tax residents under Hungarian legislation are considered to be, among others, Hungarian citizens, foreign private individuals who using their right to stay here freely for more than three months have spent at least 183 days in Hungary, or those individuals who only have a residence in Hungary. Resident individuals are subject to an unlimited tax liability.
However, it can easily happen that a foreign employee of a corporation has an unlimited tax liability abroad as well, in Germany for example, if the individual has a permanent home there.
Tax residency in treaties
What should HR do if it turns out that several countries intend to tax a given employee’s income under an unlimited tax liability? You can find guidance on the taxation of individual types of income in the double taxation treaties. Hungary currently has valid double taxation treaties with 80 countries.
The treaties help to decide in which country the private individual qualifies as a tax resident. To this end, you have to carry out the test specified by the given treaty in each case. Most treaties link tax residency to the person’s permanent home, centre of vital interests or habitual abode.
Taxation of individual types of income
The treaties clearly specify the country that may levy tax on individual types of income, such as interest income, dividends, income from employment, etc. The treaties provide guidance on how the given countries should avoid the double taxation of the income in question.
Let’s continue with the German example. If a German employee joins the company and his family comes with him, but they keep their home in Germany, then based on domestic regulations both Hungary and Germany will consider the employee as a resident, but based on the treaty we find that he should be considered resident in Hungary. If the private individual receives interest from Germany, this will be taxable in Hungary, and the private individual has to inform his German bank about it and also has to request the suspension of tax deductions. However, in the case of any tax payment in Germany, this income may have to be taken into account when determining the tax rate.
Income from employment
Special rules apply to the taxation of income derived from non-independent activities. In addition to the country of residence, the country of employment, the person paying the salary, the period spent in the country of employment and the notion of the economic employer have to be taken into account as well.
It is evident from the above that the taxation of foreigners’ income can pose many problems, and we have to answer several questions in order to draw the right conclusions.