In an earlier article on the income taxation of foreigners we outlined that if there is a double taxation treaty between Hungary and the other country concerned, then with the help of this treaty we can establish the country employees have to pay personal income tax in for their incomes earned abroad.
For the various types of income, the treaties determine precisely which country is entitled to tax the income – the source country or the country of residence. Among the most frequent types of income we reviewed capital gains and income from the use of immovable property in the aforementioned article; now, we are focusing on one of the most significant items, income from employment.
In which year and where should the income from employment be taxed?
Special rules apply to income derived from employment activities. Income from employment and similar benefits is essentially taxable in the country of residence. The situation is different if the employee works in a country other than the country of residence, because he then has to pay taxes as a general rule in the country of employment.
If the salary of the foreign employee arriving at the company is not paid by the Hungarian company, it is not charged to the Hungarian permanent establishment of the foreign company, and the employee does not spend more than 183 days in Hungary, he pays tax in his country of residence. For the 183-day rule it is important to have accurate information about the wording of the treaty. Some of the treaties link the period to be reviewed to the fiscal or financial year, while others tie it to the calendar year. For newer treaties, any period starting or ending in the given year must be taken into account.
So for example, if an employee came to Hungary in October 2016 and stays until May 2017, whether he will have a tax liability on his salary in Hungary depends on which treaty has to be taken into account. In the case of the German-Hungarian treaty, the salary for the Hungarian activity will be taxed in Hungary in both 2016 and 2017 because there is a 12-month period starting in 2016 and ending in 2017 in which a German tax-resident employee spent more than 183 days in Hungary. So although it seems that the employee only spent a short period in Hungary in 2016, and therefore no Hungarian tax arises, he still has to file a Hungarian tax return and pay Hungarian taxes based on the special provision of the treaty. However, if the person is resident in France, he will have no tax payment liability on his salary in Hungary in either 2016 or 2017, since based on the French-Hungarian treaty, the fiscal year has to be reviewed, and his stay in Hungary did not exceed 183 days in either of the affected years.
When reviewing the 183-day rule it is important that not only working days have to be taken into account but all the days of present, including weekends and paid holidays. However, the days when the employee qualifies as a Hungarian resident do not have to be considered.
On the working days when our French-resident employee works abroad, in France or even in Spain, the income from employment will be taxable in France.
Who qualifies as the economic employer?
In addition to the above, the “economic employer” has to be scrutinised too. This is because, in an economic sense, it can happen that it is not the company that qualifies as the employer of the private individual with whom the labour contract was concluded. To determine who the economic employer is an “integration test” has to be performed to identify the extent to which the seconded employee was integrated into the host company’s organisation. During this test various criteria have to be examined, including, who is authorised to define the employee’s work procedures or approve paid holidays, who can give instructions regarding the employment, who bears the responsibility and risks connected to the employee’s work, etc.
If it is found based on the integration test that the host company qualifies as the economic employer of the employee, the employee will have to pay taxes on his salary in the country of employment even if he receives his salary from the country he came from and does not spend more than 183 days in the recipient country.