When an investor ventures into foreign markets, besides the local recruitment of workers they usually send some employees from their own organisation to the target country, who handle business management or key tasks at the new location during certain periods of the manufacturing. This is no different for business entities operating in Hungary: foreign nationals regularly arrive here to take up jobs.
When these foreign nationals meet tax consultants they typically ask the same or very similar questions. What do they ask about most often, what interests them the most?
“Will I have to pay taxes in two countries then?”
Postings are a frequently used arrangement adopted by many companies. For postings to Hungary, the original (e.g. German) employment contracts of foreign nationals are left unchanged or include slightly amended conditions. The activities carried out in Hungary are governed by a posting agreement between the posting entity and the host entity. Following the first meeting we generally have enough information to know whether or not the posted employee needs to pay taxes in Hungary on their wages for the duration of the posting. If the answer is yes, we need to notify the client that in the event no paying agent is involved, the individual has to pay the taxes in the form of tax advances during the years subject to taxation. “Will I have to pay taxes in two countries then?” – comes the usual question. Fortunately, this happens only in the rarest of cases. For employees arriving from countries that have a convention on double taxation in force with Hungary, the ways of avoiding double taxation are set forth by said convention. In the event that no such convention exists, the Hungarian rules provide a basis for credit method the majority of the tax paid abroad against the Hungarian tax base.
Important! It often happens that the accountant of the German employer, for instance, does not change the accounting process after the posting begins, meaning they keep deducting the entire German tax advance from the wages that are now fully taxable in Hungary. So the German company deducts the German tax on our German employee, who then needs to settle the Hungarian tax advance too. Reclaiming the German tax can be time-consuming, so our client has to pay the Hungarian tax from their net wages. If you can, involve a German tax consultant who can offer solutions for such situations. This means that in certain cases they can fine-tune German payroll practices and in so doing minimise the otherwise unnecessary German tax deduction.
“The German bank already deducted the tax along with the interest payment. What can I do?”
In line with the Hungarian-German convention, interest income is taxed based on tax residency. If all the necessary conditions (permanent address, centre of vital interests, etc.) have been thoroughly examined and we conclude that our German client is a Hungarian tax resident, the current convention enables Hungary to tax the interest income. It is possible in principle to reclaim the deducted German withholding tax, what is more, our experience shows that in certain cases you may be able to convince the bank not to deduct any withholding tax in the future by sending them the appropriate certificates (on tax residency for example).
Important! Always examine the relevant convention for the avoidance of double taxation. Although interest income may well be taxable in the state of tax residency, and the convention prescribes the tax base exemption method for the other state involved, there are conventions where credit method needs to be applied.
“Can I receive a housing allowance from my company for the duration of my stay here? If yes, is this amount taxable?”
According to Hungarian legislation, housing allowance related to a posting does not qualify as income for the posted employee. In harmony with the guidelines of the Hungarian National Tax and Customs Authority, this rule is applicable for Hungarian employees posted abroad as well as for foreign nationals posted to Hungary. The answer from the tax authority to a question we submitted earlier reveals that the exact content of housing expenses can mostly be defined by common sense: they may include anything besides rent that is considered an expense related to a normal way of living. According to the Hungarian tax authority this does not include laundry services for instance; however, renting a storage unit or a garage connected to the apartment can constitute part of housing expenses too.
Important! In the event of a posting it is recommended to review the relevant contracts thoroughly. We believe, for example, that in situations where the gross wage of a posted employee increases during the posting because of the extra anticipated costs (e.g. rent), the above-mentioned cost accounting rule is difficult to apply. It is especially difficult to interpret a situation when these rent components are not indicated item by item in the contract, and only background deals and calculations – not included in the contract – underlie and drive the wage increase.
For many years now, WTS Klient Hungary has kept abreast of the legislative changes affecting the work of foreigners as well as international developments and applies these in its day-to-day work. We regularly publish articles, which aim to use practical hints to inform expats in Hungary about authority matters concerning taxes other than personal income tax. If you do not want to miss these news, please feel free to sign up for our newsletter!