In our previous article we reviewed the most important aspects of the taxation of foreigners’ income in Hungary. Let us take a look at the details now: which factors enable us to define tax residency in the case of a private individual.
What aspects must be considered?
According to the majority of double taxation treaties, when a private individual qualifies as a resident in several countries at the same time based on their address, the issue of tax residency can be decided based on the following aspects:
- permanent address
- centre of vital interests
- habitual abode
If, after considering the above factors, it still cannot be decided where the employee qualifies as a tax resident, the countries in question have to agree on the issue.
The above list of criteria is a list of priorities too, i.e. if the tax residency can clearly be determined for the private individual based on their permanent address, no further criteria have to be examined.
Based on both Hungarian legal requirements and OECD guidelines, the residence where the private individual settles down for the long term qualifies as a permanent address. This can be an own or rented house or apartment, or even a permanently used room.
The criterion for a permanent address is that it should be available for the private individual continuously, for use at any time.
Let’s take an example. A Spanish person comes to work in Hungary. He has a house in Spain that he keeps and does not rent out, and he rents an apartment in Budapest. In this case, the person will have a permanent address in both countries since there is an apartment in both countries that is available at any time for use in the long run. However, if he rents out the house in Spain and de-registers there, his permanent address in Spain will cease and he will only have residence in Hungary.
Centre of vital interests
If the private individual has a permanent address in several countries at the same time, specifying the centre of vital interests is the next step in determining residency. The centre of vital interests is in the state in which the private individual has the closest personal, family and economic relationships.
Determining the centre of vital interests entails a complex review. If the Spanish employee above brings his wife and three children to Hungary, it is likely that his closest family relations will tie him to Hungary. However, if his family remains at home and the employee visits them every weekend, then his family relations will continue to tie him to Spain.
When identifying economic relations, the place where income is received and spent also has to be taken into account. If the Spanish individual is employed only in Hungary, and receives income from Spain too but only in the form of dividends, this will tip the scale towards Hungary. Based on OECD guidelines, the circumstance to be reviewed in this case is where the private individual manages his assets from.
During an actual audit, the tax authority even took into account the foreign individual’s bankcard use when determining his residency. In the period under review, the private individual used his bankcard mainly in Hungary, and only rarely abroad. In addition, the private individual had full-time employment in Hungary, while he only had investments abroad, which according to the tax authority did not require any personal presence, as opposed to his employment. The income from the investments was transferred to the private individual’s Hungarian bank account. The NAV considered these facts and established Hungarian tax residency for him. A Curia judgment was also issued in that case.
In addition to the above, the private individual’s political, cultural and other activities have to be taken into account as well.
Sometimes the above aspects are not enough to determine whether an employee is a Hungarian or a foreign resident; then, habitual abode has to be examined. On this basis the person will be tax resident in the country where they have spent more days.
After defining residency it can be decided where the individual incomes of the private individual are taxable.