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.

Corporate tax

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.

Social security

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. However, there is a multilateral international agreement with EU countries, thus we have to take the provisions of the related Cooperation Agreement and of Act CXXII of 2019 on the Eligibility for and Funding of Social Security Benefits (“Social Security Act”) into consideration. According to legal regulations, 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. It is important to note, though, that the 24-month period cannot be extended, in contrast with the rules in the EU Coordination Regulation.

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.

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Source of uncertainty regarding Brexit effects on social security

The first and most important change regarding a disorderly Brexit effects on social security is that if the withdrawal agreement is not approved, then upon leaving the European Union the United Kingdom will become a third country in terms of social security issues with immediate effect, as the social union regulations will no longer be applicable.

No social security agreement has been reached between Hungary and the United Kingdom that – similarly to the Coordination Regulation (2004/883/EC) – would provide for applicable social security rules for the contracting countries, for example rules determining the social security (contribution payment) obligations related to postings between the two countries.

This raises the question of what procedure should be applied for postings starting after Brexit, and what social security rules should be followed if a posting has started before a disorderly Brexit takes place.

Postings starting after Brexit

Since the United Kingdom would be considered a third country if it is no longer an EU Member State, the so-called two-year rule governing postings and set out in Section 11 (2) a) of Act LXXX of 1997 on the Eligibility for Social Security Benefits and Private Pensions and the Funding for these Services would need to be applied.

Namely, social security would not cover employees and they would be exempted from the social security payment obligation if the following conditions are met:

• the employer is not registered in Hungary,
• the employee is employed in the territory of Hungary,
• the employee classified as a foreign employee according to the Social Security Act is a citizen of a third country (e.g. the United Kingdom),
• the duration of the posting or employment does not exceed two years,
• three years have elapsed from the conclusion of the previous work performed in Hungary.

Pursuant to Section 5 (2) d) of Act LII of 2018 on Social Contribution Tax, foreign employers are not obliged to pay social contribution tax.

According to the law, when assessing the three-year condition for employment in Hungary, postings that started before the Brexit date should be ignored until 31 December 2020. 

Postings already in progress

Postings that started earlier, before Brexit, either in Hungary or the United Kingdom, should be regarded as postings until the date known as of the start date, but until no later than 31 December 2020. Consequently, until the above date British employers would be exempted from the obligation to pay social security contribution for postings in progress on the day of the Brexit.

The ultimate aim of the approved law is to reduce the uncertainty related to the social security effects of a disorderly Brexit. The amendment to the Hungarian regulation ensures the governing rules in accordance with the previously applied provisions on social security systems can still be applied – temporarily, until 31 December 2020 – even if the United Kingdom leaves without a deal.

If you would like more detailed information on how the Brexit effects on social security may affect your company, please get in touch with the tax experts at WTS Klient Hungary.

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This is because the tax implications of Brexit will not be negligible, since fundamental processes in the fields of logistics, transportation, product sales and services will change. In this article we summarise the key information regarding future changes in taxation, which are anything but certain. In other words, we examine which tax implications of Brexit seem to be the most important. 

Where to find information on the changes?

The National Tax and Customs Administration (NAV) published its information on tax and customs administration with regard to Brexit in November 2018 and on 31 January 2019 as well, which was supplemented with further important documents (available in Hungarian) on 11 February. The Directorate-General of the Taxation and Customs Union of the European Commission published a statement according to which the preparations for Brexit, not surprisingly, are the issue of the day not only for the EU and national authorities, but for private individuals as well, as the tax implications of Brexit will affect them too.

As the information reveals, in light of the significant uncertainties regarding the content of the withdrawal agreement, taxable entities must be reminded of the legal consequences that will have to be considered when the UK becomes a third country. 

What are the plausible scenarios? 

If the withdrawal agreement is accepted, the period between 29 March 2019 and 31 December 2020 will be a transition period, when the United Kingdom is still considered an EU member, but will not be allowed to participate in the day-to-day operations of EU institutions. The transition period may be extended once by mutual agreement between the EU and the United Kingdom.

If the withdrawal agreement is rejected, the United Kingdom will cease to be a Member State of the EU as of 30 March 2019. Let us take a look at what needs to be considered if this worst-case scenario materialises.

Customs 

Any goods transported from the United Kingdom into the customs territory of the EU, and hence into Hungary, or from the EU to the United Kingdom, will be subject to customs supervision, and pursuant to Regulation (EU) No 952/2013 on the Union Customs Code may be subject to customs controls. Among other things, this means that customs formalities will need to be applied, customs declarations need to be submitted, and customs authorities may request security for potential or existing custom debts. Goods transported from the United Kingdom into the EU’s customs territory will fall under the scope of Council Regulation (EEC) No 2658/87 of 23 July 1987 on the tariff and statistical nomenclature and on the Common Customs Tariff. As a result, the appropriate customs tariffs shall be applied on such goods. All licences and permits issued by the customs authority of the United Kingdom and providing authorised economic operator status as well as other permits simplifying customs administration will lose their validity. 

Tax implications of Brexit: indirect taxation 

The transportation or sending of goods from the United Kingdom into the value added tax regions of the EU, or from the EU to the United Kingdom, shall be considered product imports and product exports pursuant to Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. This means that import VAT will be charged on goods entering the region, while exports to the United Kingdom will be exempt from Hungarian VAT provided certain other conditions are met as well.

Qualifying movements of goods as exports and imports will have an effect on the use of the EKAER system too (EKAER will not be necessary for exporting to and importing from the UK, i.e. no EKAER ID number shall be requested for the movement of goods).

Taxpayers based in the United Kingdom who purchase or import goods subject to Hungarian VAT, and who want to reclaim the Hungarian VAT, may no longer submit their claim electronically as per Council Directive 2008/9/EC, but may do so in compliance with Council Directive 86/560/EEC. Based on this latter directive, Member States may refund subject to reciprocity.

Taxpayers based in the UK, and who are registered for VAT or have a place of business in Hungary, will need to designate a tax representative (fiscal representative). Under the tax implications of Brexit, registered taxpayers who so far have had no fiscal representation will need to examine what steps are now required.

Aside from the above, one cannot forget that specific rules may take effect from a VAT perspective for services provided by Hungarian companies for private individuals resident in the United Kingdom. These are just some of the issues, and if the UK obtains a status identical to that of a third country, this may impact further on VAT rules for Hungarian companies (e.g. the rules of VAT deductions for loans provided to taxpayers in third countries could be altered).

What will happen to the convention for the avoidance of double taxation? 

The provisions relating to direct taxation described in Act CXLIV of 2011 between the Republic of Hungary and the United Kingdom of Great Britain and Northern Ireland on preventing fiscal evasion and avoiding double taxation with respect to taxes on income and capital gains (double tax treaty) shall remain effective, regardless of whether Brexit happens or not. This way, an adequate system of rules will be in place for employees and companies performing cross-border activity. Bear in mind, however, that in a worst-case scenario Brexit will have an impact on the multilateral convention too.

Implications for employee social security 

Everyone would be happy if the current system of A1 forms was left untouched, similarly to the Swiss model. (Although Switzerland and EEA countries are not members of the European Union, the same social security rules apply for them in terms of job postings as for EU Member States.) If the worst happens, the lack of a convention on social security between Hungary and Great Britain will only make the situation graver.

To sum up the above, we can safely say that in an ideal scenario we have nothing to do. However, we must also prepare for the worst-case scenario, and for that, nearly every procedure needs to be scrutinised as the tax implications of Brexit may affect anything from simple postings abroad to the transportation of goods.

If you would like more detailed information on how the 2019 tax implications of Brexit may affect your company, please get in touch with the tax experts at WTS Klient Hungary.

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