It has been nearly two years since our analysis summarised the tax consequences of Brexit, which at the time was planned to take place on 29 March 2019. Although the United Kingdom officially exited the European Union as of the end of January 2020, not many things changed during the transitional period that lasted until 31 December 2020. So as experts, we are essentially facing the real tax consequences of Brexit only now, in the early days of January 2021. Let us take a brief look at what to expect for the most important tax types.
Tax consequences of Brexit on VAT in Hungary
Until the end of 2020, we had to treat the United Kingdom as any other EU Member State for the purposes of VAT. This meant that if a company from the United Kingdom concluded an economic transaction with a place of performance in Hungary (except for transactions where reverse charge scheme was applicable), the company had to be registered in Hungary for VAT. Here, an economic transaction means for example a domestic supply of products that does not result in the creation of a fixed establishment in Hungary for tax purposes, fixed establishment transactions or special provision of services. This simple registration process did not require a fiscal representative.
Now, from January, one of the most significant changes associated with the tax consequences of Brexit is that similar to other non-EU states (third countries), engaging a fiscal representative is unavoidable even for the registration (VAT registration) in Hungary of companies with a registered office in the United Kingdom. Having a fiscal representative is mandatory, with all its complexity and conditions, so a company going down this path is required to have registered capital / a bank guarantee of HUF 50 million (roughly EUR 140,000) and there is joint and several liability in respect of the foreign company’s tax liability.
It is important that companies in the United Kingdom that already have a tax number in Hungary have to engage a fiscal representative so they can continue their domestic economic activities lawfully, but they do not need to be registered again.
Looking at the tax consequences of Brexit it has to be emphasised that from 1 January 2021, product transactions to and from the United Kingdom will qualify as either imports or exports. For the supply of services, although the partner in the United Kingdom will qualify as a third-country partner, the place of performance for the supply of services will only change in a few cases.
Personal income tax
Private individuals with tax residence in Hungary or the United Kingdom who generate taxable income from another state are in a fortunate situation. In their case there is practically no change and the tax implications of the income generation will still be assessed according to the provisions of Act CXLIV of 2011 (Treaty) still in force between the Republic of Hungary and the United Kingdom of Great Britain and Northern Ireland.
The tax consequences of Brexit will not be seen in corporate tax either. Similar to personal income tax, we need to take the provisions of the Treaty as the basis, i.e. Brexit will not have a substantial effect in this case either. The provisions of the aforementioned Treaty will override the provisions of Hungarian Act LXXXI of 1996 on Corporate Tax.
In addition to the tax consequences of Brexit, we summarised the expected social security implications of Brexit in an article in 2019. We had to apply Regulation (EU) No 883/2004 on the coordination of social security systems so far in respect of social security issues, and there is no bilateral social security treaty concluded with the UK. Thus, we have to take the provisions of Act CXXII of 2019 on the Eligibility for and Funding of Social Security Benefits (“Social Security Act”) into consideration. According to Section 17 of the Social Security Act, third-country citizens (now including the United Kingdom) qualifying as non-residents employed in Hungary by an unregistered foreign employer may be exempt from the insurance obligation in Hungary (i.e. may be exempt from becoming insured) if the work is performed in the context of a posting, secondment or temporary labour for no more than two years.
We frequently see employment arrangements where either a foreign or UK employer pays income (salary) subject to contribution payments to an insured employee. In this case, the foreign employer has to register in Hungary as well as deduct and declare the social security contributions at the tax authority. If the foreign business does not have a statutory representative and fails to fulfil this obligation, the employee will settle the tax liability and bear any legal consequences (with certain exceptions).
The most important tax consequences of Brexit are related to VAT, since the exit will have a substantial effect on the business processes of most taxpayers in this tax type. However, it is worth thinking over the potential comprehensive consequences in detail as soon as possible, even involving a tax consultant. Please do not hesitate to contact the professionals at WTS Klient Hungary.