Cross-border employment is a key issue in terms of taxation as well since it is important to define the country where the income of workers is taxable.
Foreign workers – how to define tax residence?
When examining the income tax payment obligations of foreign workers in Hungary, the first step is to define their tax residence. To this end we have to examine the Hungarian regulations, but generally the provisions of the convention for the avoidance of double taxation concluded with the country concerned and overriding national law will be more helpful (if there is such a convention between the two countries). In the majority of these conventions, the following aspects can be used to define tax residence:
- permanent address
- centre of vital interests
- habitual abode
This list is also an order, which means that the permanent address is the first step of the examination. If we can clearly define tax residence based on a permanent address, there is no need to investigate any further.
According to Hungarian law, permanent address is an address where private individuals settle for a long-term stay, regardless whether they are the owner or tenant of this property. Another characteristic of a permanent address is that it is continuously available for the person concerned.
Centre of vital interests
If the tax residence of foreign workers cannot be determined unambiguously based on a permanent address, the next step is to examine which country the person’s centre of vital interests is in, i.e. in which country we find their closest personal, family and economic relations. This is not an easy task as there are a number of factors to be considered at the same time. If a foreign individual accepts an assignment in Hungary and is accompanied by their family, then Hungary is likely to be the centre of vital interests in terms of family relations. When considering economic relations, then among other things the place where the person earns and spends their income needs to be taken into account, as well as the countries where they have bank accounts.
The third step in defining tax residence is habitual abode. Under habitual abode, the tax residence of foreign workers is assigned to the country where the given person spent more days compared to the other country.
Once the tax residence is determined, we need to define the countries where the various types of income are liable for tax. If there is a convention for the avoidance of double taxation between Hungary and the other country concerned, the convention will prescribe the country where the income is subject to tax. National rules are applicable if there is no convention between the countries.
Income from employment
Income earned from employment is taxable in the country of residence if the foreign workers perform the work in that country. If the work is performed in a country other than the country of residence, the income is normally subject to tax in the country where the work is performed, but under certain conditions, taxing rights remain in the country of residence.
In terms of foreign workers’ capital gains, income from interest and exchange gains is normally subject to tax in the country of residence according to the conventions.
Income from dividends belongs to a special category. These incomes are normally subject to tax in the country of residence too, but up to a certain level (10 or 15% depending on the convention) the source country may also impose a tax. The tax deducted in the source country is taken into account under the conventions. For example, if a German citizen working and resident in Hungary receives dividend income from Germany, and a tax amounting to 15% is deducted according to the relevant convention, then no tax is payable in Hungary in relation to this dividend income because the relevant tax rate in Hungary is also 15% (the person still has to submit a tax return though).
Income from real estate utilisation
In line with the conventions, the right to impose tax on income from real estate belongs to the country where the real estate is located.