In light of the extraordinary circumstances at present WTS Klient Hungary can prepare expat returns without personal contact, and all the technical conditions are in place to file properly completed returns electronically with the Hungarian tax authority by the 20 May deadline. In this article we outline the basic details surrounding the obligation of foreigners to file personal income tax returns in Hungary.
We have written several articles on the subject of foreign postings of varying lengths becoming more and more common at international companies. Although in legal terms, foreign, i.e. expat workers most often do not become employees of the Hungarian company, thanks to their work they more or less integrate into the host company’s work processes during the time of their stay here. Since such an expat worker does not have Hungarian employer, no M30 employer certificates are issued, so the host company employer, its HR department or the expat worker have to pay attention to meeting tax payment obligations in Hungary. Let us take a look at what needs to be observed in order to complete the personal income tax returns correctly for expat workers posted to Hungary.
Tax residence for expat worker
Firstly, you always need to determine where the tax residence of the expat worker is. Generally, this is defined by the domestic laws of the posting country and the host country (in this case Hungary); however, if the worker is considered a tax resident in both countries based on their laws, then the provisions of the convention on avoiding double taxation concluded between the two countries (if such exists) must be examined. These conventions generally define the country of tax residence as the one where the private individual has their permanent address, where the centre of vital interests lies (family and business ties), and where their habitual abode is (where they actually spent more days) in the given calendar year. If, based on a given factor, the person has residence in both countries, then you can move on to the next item on the list above. If the worker starts their posting mid-year, it can happen that their tax residence is “divided”, meaning that they will have Hungarian tax residency only for part of the year.
Where should the income from the posting be taxed?
When tax residence is established, you need to examine where the income stemming from the non-independent activity and received for the posting should be taxed. According to the basic rule, based on the conventions avoiding double taxation, the country of residence is the country of taxation provided the expat works in this country. If, however, work is carried out in a different country than the one the expat is resident in, the tax payment obligation arises in the country of work.
It is important to note that by meeting certain special conditions all at once, the income of an expat worker resident abroad but working in Hungary may remain taxable in the posting country.
It is crucial to examine the factor also considered by the Hungarian tax authority (NAV), and that is which country the worker gets instructions from, who actually controls the work. Depending on which country the expat is more aligned with from this respect, the “economic employer” of the worker will be either the posting or the hosting company. Accordingly, if the Hungarian hosting company is the economic employer of the expat worker sent to Hungary, then there is a good chance that the worker’s income stemming from the posting will be taxable in Hungary, if it is only a short, two or three-month posting.
Renting an apartment? Trading on the stock exchange? Receiving dividends?
Beyond the elements of income related to the posting (monthly wage, “moving allowance”, bonus), the situation is often more complex and the expat has income of other kinds too. If the Hungarian hosting company rents an apartment for the worker, or reimburses the rent paid by the expat, this can even be tax-exempt for the private individual.
For income, interest or dividends stemming from stock exchange transactions, tax residence is the decisive factor, these special types of income are generally taxed in the country of tax residence. For dividend income, however, the paying state (not the one where the person is resident) can deduct withholding tax from the payment, which in most cases can be offset against the tax payable in the country of tax residence.
Use the available allowances!
In Hungary the most often claimed allowance is the family allowance, which an expat worker may also claim if they raise children or meet other conditions. In the case of foreign tax residence, it is important to consider other rules when examining the claim for allowances (such as the rule that 75% of the income of the expat worker in the tax year must come from Hungary). If the worker has just got married for the first time, they are eligible for a special allowance too.
The Hungarian tax payment obligation may be further reduced by 20% of any payments made to special pension savings accounts (Hungarian abbreviation: NYESZ) or voluntary savings funds during the year. In such cases the Hungarian tax authority credits these to the accounts held by the taxpayer at the service provider or fund.
Filing obligations, draft returns available
The deadline for submitting the 19SZJA form for 2019 is 20 May 2020. If the expat worker is registered on the government portal (and obviously has a tax identification number) and received income from a Hungarian paying agent, then the NAV has already prepared the draft form and made it available on the person’s government portal account from 15 March 2020, so it might just be enough to check and finalise the form.
WTS Klient Hungary has substantial expertise with regard to the taxation of expat workers. In light of the extraordinary circumstances at present we can prepare expat returns without personal contact, and all the technical conditions are in place to file properly completed returns electronically with the Hungarian tax authority by the 20 May deadline. Please feel free to contact our colleagues.