As a result of the restrictions introduced in the wake of the 2020 coronavirus pandemic, many Hungarians working abroad and foreigners posted to Hungary have returned home. While the state of emergency triggered by the pandemic was in place, expat employees working from home or remotely could not return to their Member State of work as a result of the quarantine measures implemented by the Member States.
Employees working in a different country to the one where the registered office of their employer is located raises several taxation issues. Both the OECD and the European Commission have published guidance for managing these unprecedented situations. In our article, we will take a look at the most important questions raised by expat employees working from home.
Personal income tax: general rules
It often happens that an employee of a company is sent abroad for varying lengths of time to work there. If a given posting is long-term, employees often terminate their permanent address in the posting country and take their family to the host country too. This way they transfer their tax residence to the host country.
According to the OECD convention for the avoidance of double taxation, a person is considered resident if they have a permanent home in the given country. If a person qualifies as resident in more than one country according to the domestic laws of the given countries, then the following aspects must be considered when defining residency:
- permanent home;
- if the person has a permanent home in both states, then the centre of vital interests;
- if it cannot be established where the centre of vital interests is, then the habitual abode.
If the person has a habitual abode in both states, or does not have one in either state, then citizenship is the defining aspect.
Personal income tax of expats during the pandemic
The taxation of income derived from non-independent activity would change significantly as a result of the above rules in the event of expat employees working from home. However, on 3 April 2020 the OECD published guidance on the impact of the COVID-19 crisis. According to this guidance it is unlikely that residency can be defined based on permanent home in line with the criteria above in the unprecedented situation created by the virus, assuming that the private individual has a permanent home in the host country. If they have a permanent address both in the host and the posting country, an employee’s residency should be defined based on the centre of vital interests. If the centre of vital interests does not give a straightforward solution because the centre of vital interests is in one country based on the individual’s personal and social relationships but in another country based on their economic (work) background, the residency of the employee must be defined based on habitual abode.
In accordance with the OECD guidance issued in April, “despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position”. This means that when establishing residency for the transition period caused by the coronavirus, the authorities should consider the employee’s normal living conditions. So as expat employees working from home their residency would not change during the given period, i.e. the time spent in a country other than their country of work.
Employees living in border towns and villages often commute and work in neighbouring countries.
If the working hours of a (Hungarian) employee working abroad did not reach 25% in Hungary before the pandemic, their social security obligation arose in the Member State of work, so they were insured in that country. As a result of the quarantine measures implemented due to the global pandemic, the increase in working hours spent involuntarily at their place of residence in Hungary often resulted in cases where the 25% limit was exceeded.
The guidance issued by the European Commission on 30 March 2020 formulates a recommendation for such cases. According to this recommendation, in cases which could lead to changes in the employee’s Member State of insurance, the Member States should apply the exception defined in the coordination regulation so the social security entitlement of the affected employee remains unchanged. To apply such an exception, the employer has to submit a request to the Member State whose social security system it wants to be subject to.
Do expat employees working from home create permanent establishments?
The third important question is whether the commuters or expat employees working from home create permanent establishments, and consequently tax payment liabilities for the employer, in another state.
Based on the OECD Model Convention for the avoidance of double taxation, a permanent establishment is a fixed place of business at which the company conducts its business in part or in full. If the employees of a company work for lengthy periods in another country, based on the above article it is possible that a permanent establishment and therefore a tax payment liability is created in the other country.
Based on the OECD guidance issued in April, a permanent establishment must have a certain degree of permanence and must be available for the company to be named a place of permanent business where the company’s activities are conducted in part or in full.
For an employee’s home to be regarded as a permanent establishment, business activities should be conducted there continuously, and the company should require business activities to be conducted from there.
During the coronavirus pandemic, commuters and expat employees working from home were forced to do so in order to comply with government guidelines and due to force majeure, not to comply with the requirements of the employer. Taking into account the unprecedented nature of the coronavirus pandemic – and assuming this does not become regular practice later on – expat employees working from home do not create permanent establishments for the employer since “home offices” are not permanent offices.
WTS Klient Hungary has substantial expertise with regard to the taxation of expat workers. If you have a question regarding this topic, you can count on a full analysis and professional answers from our colleagues. Please feel free to contact us.