The need to pay salaries in foreign currency, or at least to peg wages to the euro, primarily arises for employees of Hungarian subsidiaries of foreign companies, but now also for an increasing number of Hungarian employers because of the volatility of the forint exchange rate. Is this possible under the current regulation? Has the situation changed with the large-scale amendment of the Hungarian Labour Code adopted in December?
Accounting, taxation, dividends: all possible in foreign currency too
Inflation and the fluctuation of the forint exchange rate have an impact on all economic actors in Hungary. Companies in Hungary often choose accounting in a foreign currency to avoid unfavourable exchange rate changes. If possible, businesses tend to determine figures in their contracts in a foreign currency, which they then convert into forints upon the performance date, or, by agreement, they invoice in the foreign currency to their Hungarian or foreign clients.
Given the state of emergency, as a special measure the government allowed payments of corporate tax in US dollars or euros. Businesses have to report such changes to the tax authority by the first day of the month preceding the first day of the first fiscal year after 30 September 2022. The amounts of corporate tax or corporate tax advances paid in US dollars or euros are credited to the company’s tax account in HUF on the day the company’s domestic bank account is debited, at the exchange rate of the National Bank of Hungary on the given day. Companies can change their selection up to the last day of the fiscal year if they want to pay corporate tax or corporate tax advances in HUF again.
As of 1 January 2023, in addition to corporate tax, local business tax can also be paid in US dollars or euros in Hungary.
Your company can pay private individual owners dividends or interim dividends as approved by the members’ meeting or general meeting by converting such into a jointly agreed currency, such as from HUF to EUR. What about salaries and wages? Can paying salaries in foreign currency be a viable solution for employers faced with the challenges of wage inflation? Did the situation change with the amendment of the Hungarian Labour Code in December 2022?
Salaries in foreign currency only for executives?
Pursuant to Article 154 of Act I of 2012 on the Hungarian Labour Code (Labour Code), salaries must be determined and paid in HUF in order to protect salaries. Deviating from this is only possible if working abroad, or if otherwise provided by law.
For executive employees, for example, a derogation is authorised under Article 209 of the Labour Code, based on which it is possible to determine and pay salaries in foreign currency too. In practice, this means that executives, company directors, managers, branch managers or other employees classified as managerial staff can have their salaries set in euros. However, since many aspects have to be taken into account (such as wage protection in light of currency fluctuations) and understanding the legislation is not a simple task either, you should not delve into amending work contracts before consulting with an expert.
It is important to know, however, that taxes and contributions deducted from salaries and paid on top of salaries must always be determined, deducted, declared and paid in HUF, even if the salaries are paid in foreign currency. For this conversion, the business entity must use the exchange rate published by the National Bank of Hungary on the 15th day of the month preceding the month of payment, in accordance with the Act on Personal Income Tax. These rules are not affected by the amendment to the Labour Code adopted in December 2022, so they will remain in force this year.
So the situation has become somewhat contradictory: while a salary determined in euros would currently protect wages better, it is the rule on wage protection that is preventing this.
Instead of paying salaries in foreign currency, employers have no choice for non-executive employees but to compensate for wage inflation in the form of bonuses or other benefits, in forints of course.
The payroll team at WTS Klient Hungary has been carrying out payroll activities for large international companies for nearly 25 years, and has huge experience with taxation and accounting issues related to foreign employment too. If you have any questions regarding payment of salaries in foreign currency or any benefits, or if you would like to entrust us with the entire payroll activity for your company, please contact us for a proposal.