The tax risks of foreign postings primarily stem from a lack of knowledge about the relevant legal regulations, or interpreting them incorrectly. However, this does not protect anybody from potential penalties in Hungary. Many of you have no doubt heard tax inspectors say that not knowing the law does not exempt you from complying with your obligations and from related penalties. In this article we take a look at what the most typical risks are.
A posted employee is coming – why can the NAV impose a fine?
To map the tax risks of foreign postings, first we should check what kind of mistakes we can make in a case that appears simple when we accept a posted employee. Experience shows that even companies that accept a significant number of posted employees can face problems if the HR department of the host company or its tax team generalises, and treats all – otherwise different – postings in the same way. Conventions for the avoidance of double taxation are largely similar, but it matters here whether we accept a posted employee from France or Germany since the two conventions contain somewhat different rules for determining the country of taxation. All of this can have a serious impact on the proper assessment of taxation.
The situation is rendered even more difficult by the fact that for employees moving within an international group, the contracting conditions underlying the posting are also very varied. By default, an employee sent by a foreign group to Hungary will remain employed by the foreign company and receive their salary from abroad; their work in Hungary can be considered temporary, and its nature can vary a lot (specific job, project implementation, training, exchange of experience, etc.).
Our experience shows that of all the tax risks of foreign postings, the following errors are the most frequent in connection with posted employees arriving in Hungary:
- failure to report the new posted employee (default penalty)
- failure to request a Hungarian tax number in the event of an incorrect interpretation (default penalty)
- lack of Hungarian taxation due to incorrect interpretation of the specific rules of the convention (tax shortfall and tax penalty)
- due to the incorrect determination of residence, failure to report certain types of income (tax shortfall, tax penalty) or unnecessary double taxation
- correct tax assessment procedure, but Hungarian tax advances not paid on time (default interest)
- failure to comply with Hungarian deadline for the submission of tax returns, failure to submit a verification request or omitting to submit a Hungarian tax return due to the incorrect interpretation of the rules (default penalty)
- incorrect establishment of ratios in the case of tax payment liabilities arising in both countries affected (tax shortfall, tax penalty)
- incorrect consideration of tax allowances (too much, or potentially not using tax allowance up to full amount)
- for employees posted from a third country to Hungary, neglecting the Hungarian tax offsetting rules (90% rule; risk of double taxation)
- in the case of postings subject to EU coordination regulations, a missing A1 form (double contribution payment, risk of Hungarian social contribution tax and contribution shortfall, with related default penalties)
- risk of incorrect tax rating of cost reimbursements related to posting (incorrect treatment of home rent, car rent, meals and hotel costs)
It is important to emphasise that the above list does not contain all the tax risks of foreign postings, and it cannot be applied for all posting situations.
Posted employee leaves for abroad – what can cause problems here?
Selfishly, we only reviewed the first point, employees posted to Hungary, from the perspective of Hungarian tax inspections. However, tax risk factors relevant for the posting country may apply in these cases too. For employees posted from Hungary we can say that the stakes rise by a notch since the tax authority of the host country also comes into the picture, and every country has its creative tax inspectors (in their defence, we should add that there are creative taxpayers as well).
The tax risks listed in connection with employees posted to Hungary are also tax risks of foreign postings from Hungary, and a thorough assessment should be conducted to decide which country has a right to levy taxes on what types of income in light of Hungarian taxation and the convention for the avoidance of double taxation, and, in the case of contributions, based on the EU coordination regulations, social treaties and local laws and regulations.
The most frequent problems may include:
- work performed while the A1 form is missing (foreign contribution risk)
- with an A1 form available, it is discovered that the actual employer is the host party (foreign contribution risk)
- in the case of a Hungarian contribution payment liability, the Hungarian contribution base is determined incorrectly (contribution and social contribution tax base too low)
- the posting is only a quasi-posting, it actually satisfies personal needs (tax treatment of accommodation and travel costs related to posting)
Tax risks of foreign postings can result in serious sanctions
It should be noted that a conference abroad lasting a few days, a multi-year foreign posting within an international group, a one-month language course of the managing director overseas or work abroad that can be qualified as a replacement posting all represent different risk levels.
Unfortunately, the mistakes made during postings, i.e. the tax risks of foreign postings, may result in serious sanctions. Interpreting the laws and regulations correctly is vital in each case, and we have to agree with the specification so often formulated in the positions of the National Tax and Customs Administration that every circumstance has to be reviewed carefully in order to establish the correct tax treatment for the given transaction (in our case, the posting).
The team of WTS Klient Hungary has special expertise regarding the taxation and social security payment liability of expats. Our objective is for the tax payment and tax return process to flow as smoothly and flawlessly as possible for the posted employees, despite its complexity. The tax risks of foreign postings can be minimised with our assistance, and there is a greater chance of avoiding sanctions. Please do not hesitate to get in touch.