Securities given to employees have today become a common form of remuneration. In such cases, the employer gives its own securities to its employees at a discount or free of charge as an incentive mechanism. However, especially for individuals working in more than one country, determining the income and the associated tax burden from such securities can often be a challenging task.
What exactly do employers give?
It is important to clarify exactly what kind of scheme is involved, what the employee has acquired (e.g. an option or ownership right), as well as any conditions and restrictions on using the acquired rights. The individual schemes in Hungary may vary, and companies design the conditions of each one to ensure that employees are interested in participating.
A share transfer is when the employer transfers the ownership of the securities. So from this point on, employees have the right to utilise the securities and sell them at their discretion.
It becomes more complex when the employer grants an option. In this case, employees as the owner have no authority over the securities when the option is acquired, and they only acquire the securities when the option is exercised. A significant time can elapse between acquiring and exercising the right, as employers typically make exercising the option contingent upon a certain performance or a given length of service, for motivational purposes.
Can taxable income arise at the time of acquisition?
With a share transfer, the situation is relatively simple: when ownership of the securities is transferred, the income becomes taxable.
With an option right, however, it must be examined upon acquiring the option whether the right itself has a market value, whether it is marketable, and whether the employee has acquired income upon the transfer of the right. The inception of the taxable income is then re-assessed when the option is exercised, and the difference between the market price and the value actually paid is determined. When analysing the points of taxation, we need to find out, for example, whether the transferred share or right has a market value, whether the right acquired is marketable.
The legal grounds to the income are determined by taking into account the legal relationship that otherwise exists between the parties, and the circumstances of the acquisition. When determining these grounds, we also seek an answer to whether the employer or the employee is liable for any tax advance payment.
If the employer grants call options and grants these rights exclusively to its employees in Hungary, income may arise based on the difference between the market price and the value actually paid when the option is exercised, which is considered employment income.
What should an employee posted from abroad look out for?
When assessing income from employment, expat employees working in different countries face a difficult task determining the state in which the tax liability arises because of the various double taxation conventions.
This reads even more true for securities acquired with an option, since there is a so-called reference period to be considered, which is generally the period between acquiring and exercising the option. During this period, the tax residence status and the tax liability of the wages must be examined, and where appropriate, any income realised on acquiring securities at below market price should be divided between the countries concerned.
Another point of taxation: sale of securities
The gain on the sale of acquired securities constitutes a capital gain at the time of sale. This can be both an exchange gain and income from a stock exchange transaction. Different taxes must be paid depending on the type of capital gain.
In both cases, the income is the difference between the sale price and the value of the acquisition, less the specified ancillary costs. Importantly, when calculating the acquisition value, the difference between the purchase price and the market value must be taken into account alongside the purchase price actually paid. This ensures that the same capital gain is not taxed twice.
In addition to the personal income tax on capital gains, income from exchange gains may also give rise to a social contribution tax liability in Hungary, if the employee does not verifiably pay contributions in another country.
What to look out for with foreign securities?
Capital gains are generally taxable in the country of residence. With dividend income, the source country normally retains the taxation right to a certain extent, but exchange gains and gains from stock exchange transactions are, as a rule, taxable in the country of residence.
That said, many countries levy special taxes on capital gains. Such taxes can include a capital appreciation tax. In practice, this means that a tax liability may be imposed on certain types of capital appreciation even if the owner of the securities has not yet realised any income from them (i.e. has not yet sold the securities).
In many countries, capital appreciation tax is linked to certain events, such as a change of residence. In this case, an exit tax is payable in the source country, provided certain conditions are met. Since Hungarian legislation does not currently apply this form of taxation, there may be differences compared to the laws of the source country as to which events can trigger a tax liability and on which dates. However, double taxation conventions typically also allow capital gains taxed in this way in the source country to be exempt from tax in the other country.
The most important thing to remember is that income does not only arise when you realise income in a tangible way.
Both different local laws and different international conventions have a significant impact on the treatment of income from different securities. This requires a great deal of care on the part of individuals in terms of tax planning and the administration that goes with tax, including the accurate completion of tax returns. WTS Klient Hungary has considerable expertise and experience regarding the taxation of foreigners working in Hungary. If your company also employs posted workers, don’t hesitate to get in touch with us.