Applying the 183-day rule

183-day ruleAn increasing number of Hungarian companies are affected by tax issues related to postings. Almost every large business has already had, or currently has, foreign private individuals working with them for varying lengths of time, and many have posted their employees abroad. Employees usually remain employed by the posting company, they just perform their tasks in a different country, and they remain tax residents in their home country.

Assessing tax payment liabilities in these cases sometimes proves difficult too.

Treaties to avoid double taxation

Given that two countries are involved in the assessment of tax payment obligations in these cases, treaties between the two countries for the avoidance of double taxation (if there are any) have to be reviewed.

If an employee works in a country other than their country of residence, according to the treaties they have to pay taxes on their employment income in the country they work in, as a general rule.

This seems simple enough, doesn’t it? Unfortunately, however, tax rules concerning salaries are far more complicated than that. If the salary of an employee is not paid by the host country employer, it is not charged to the permanent establishment of the posting company in the foreign country, and the employee does not spend more than 183 days in the host country, they still pay tax in their country of residence.

The 183-day rule

The simplest case is when the salary is not paid by the host country employer and related expenses are not charged. In this situation, applying the 183-day rule is enough.

It is certainly important though to know the exact wording of the treaty. Under older treaties the 183 days were calculated within a financial or calendar year. Newer treaties, however, consider any 12-month period either starting or ending within a fiscal year as relevant.

Example: Hungarian-German treaty

The new Hungarian-German treaty is one of the latest treaties.

Any 12-month period starting or ending in a fiscal year shall be calculated from a given day of a given month until the given day of the 12th month thereafter. So if a Hungarian company sends an employee to Germany on 1 November 2017, the period to be reviewed will last until 31 October 2018, but the previous 12 months need to be checked too.

Suppose that the given employee returns to Hungary on 15 May 2018. They will not spend 183 days in Germany, either in 2017 or in 2018. However, since the employee will spend more than 183 days in Germany in the 12-month period starting on 1 November 2017, their salary for the period between 1 November 2017 and 15 May 2018 is subject to taxation in Germany.

When reviewing the 183-day rule it is important that all days of presence are taken into account, including weekends and paid holidays. So if the employee spends the weekends in Germany, this time must also be considered for the calculation outlined above.

What happens if the employee comes home to Hungary for Christmas? If the person leaves Germany on 22 December 2017 and only returns on 8 January 2018, the time spent in Germany will amount to just 180 days. Consequently, the salary received for the entire period of the posting will be taxable in Hungary.

If the employee returns to Germany again in August, even if only for a week, the posting will reach the threshold and pursuant to the 183-day rule they will be liable to pay taxes in Germany.

Taxation of the salary package

It is also important to define which parts of the employee’s salary package will be subject to taxation in Germany. If an employee receives a daily foreign allowance with regard to their posting to Germany, this will be taxable based on German laws since it was received for work carried out in Germany. The employer might support the accommodation costs of the employee during the posting abroad. Based on Hungarian legislation, accommodation costs related to business trips are tax-exempt benefits, but German regulations might not be so favourable. As accommodation for the employee is only reimbursed by the employer because they are working abroad, the housing allowance will also be taxable in Germany – provided no exemption rules apply there.

The examples above clearly show that all aspects of a posting have to be analysed, and only a meticulous and comprehensive review can reveal exactly which country may impose taxes on the employment salary. It is important to note that the number of days spent in the given foreign country must be precisely documented and registered as this can be decisive when assessing tax payment liabilities.

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