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.

A Taxation of securities from employers bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Value added tax

Quick fixes for legal harmonisation

On 4 December 2018 the Council of the European Union adopted a new directive on so-called quick fixes for value added tax, which is aimed at improving the harmonisation of VAT rules between Member States and preventing VAT fraud in Community transactions. To implement the directive in Hungary, the following changes took effect as of 1 January as part of the tax law amendments for 2020:

•   Changes to call-off stock rules
The previous conditions of the call-off stock simplification rule are now more stringent, so among other things, from this year:
» the seller must know who the potential customer is and what their tax number is at the time of the goods transfer;
» the fact of the goods transfer must be indicated in the EC sales list, while both the entity transporting the goods and the potential buyer must have detailed records on the goods;
» the customer has to call off the goods within 12 months of delivery.

•   Changes to managing chain transactions
In chain transactions the intra-Community movement of the goods may only be assigned to one of the supplies, and the tax exemption for the intra-Community supplies may only be related to said supply. The general rule is that these are deemed goods supplies to intermediate entities. What is different from this year is that the intermediate entity can decide to take part in the chain as a vendor, and all that is required here is to provide its tax number for the Member State of departure.

•   Changes to the conditions of tax-exempt intra-Community goods supplies
» From this year onwards the existence of a VAT ID number will no longer just be a formal condition but also a material condition for tax-exempt Community supplies. This means that a Community supply is tax exempt if the customer is a registered taxpayer obliged to pay tax in another Member State, and they have a tax number issued in another Member State which is disclosed to the vendor.
» Furthermore, a new condition is that the vendor must submit an EC sales list. If the vendor submits the EC sales list incorrectly, then they must prove that this failure, error or shortcoming was made in good faith, and the correct data must be submitted to the tax authority as soon as possible.

•   Verification of intra-community supplies
From 2020 the European Union introduced standard forms to prove tax exemption.

VAT rate for commercial accommodation services

The VAT rate for commercial accommodation services has fallen from 18% to 5%.

Irrecoverable debts

From 1 January 2020 it is possible to reduce the tax base in self-revisions using irrecoverable debts if certain conditions are complied with.

Tax-exempt services related to imports

One of the tax law amendments for 2020 fills a gap by including the following in the VAT Act: for services directly related not only to exports but also to imports, one condition for the tax exemption is for such services to be provided directly to the person carrying out the tax-exempt transaction related to the import.

Export

It is now possible to have exports of goods to outside the Community verified for the taxpayer by the customs office of export, not by the customs office of exit.

Special tax reimbursement

Starting from this year, the taxpayer may request the refund of the amount in question directly from the tax authority, provided that the taxpayer verifies entitlement to the reimbursement based on the principle of tax neutrality, and that there was or is no other way of handling the reimbursement. A further condition is that the tax may only be reimbursed if it was paid to the budget.

Online data reporting obligation, invoice issuing

•   From 1 July 2020, data reporting at invoice level shall cover all invoices issued on transactions in Hungary for taxpayers registered in Hungary, which means the rule that data only has to be provided on charged tax in invoices above a certain threshold no longer applies. Consequently, all invoices subject to data reporting must include the first eight digits of the Hungarian-registered tax-paying partner.

•   There is a transitional rule that states which invoices fall under the rules for the old data reporting framework (data reported for invoices with charged tax equal to or more than HUF 100,000 – roughly EUR 300).

•   From 1 July 2020 also the invoicing obligation will be extended to certain tax-exempt transactions. Such categories affected by the obligation to issue invoices are found in other education, private health-care, dental services and property sales for example, alongside various other services. The deadline for issuing the invoices will be reduced from 15 days to 8 days.

•   From 1 January 2021 the data reporting obligation shall cover invoices issued to non-taxpayers, as well as invoices issued on intra-Community tax-exempt goods supplies to taxpayers. However, data does not have to be provided on invoices issued to non-taxpayers regarding transactions having a place of performance in other Member States, and where the taxpayer satisfies its tax payment obligation within the “one-stop-shop” administration system. The data reporting on invoices issued to individuals not paying tax does not include the name and address of the customer or user.

Personal income tax

From 1 January 2020 mothers raising or having raised at least four of their own children or adopted children in their own household are entitled to lifelong exemption from personal income tax on their working income.

Corporate tax

Allocation threshold raised

As of 24 July 2019 the corporate tax advance top-up obligation was abolished; as a consequence, the allocation threshold in the case of monthly and quarterly tax advances rose from 50% to 80%.

Specification of the rules on tax groups

From 1 January 2020 entities launching activities during the year can ask to start their corporate taxpayer status as a member of a corporate tax group. Moreover, the interest deduction limitation for members of corporate tax groups has been changed, and the legislator has clarified that transfer pricing rules do apply to the members of corporate tax groups for their transactions outside the group. The requirement for group members to use the same bookkeeping currency has been abolished.

Transfer pricing

Transfer pricing rules are applicable in the event of non-cash contributions not just for existing controlling members, but also for members (shareholders) becoming controlling members (shareholders) with non-cash contributions.

International taxation

Exit taxation

The provisions related to exit taxation were supplemented, while provisions were introduced on tax evasion stemming from different legal classifications of the same situation (hybrid structures).

Mandatory exchange of information on cross-border arrangements

Due to implementation of the DAC 6 Directive, from 1 July 2020 a new reporting obligation on cross-border arrangements will come into force in Hungary. The reporting obligation does not apply to VAT, excise tax and contributions. A default penalty of up to HUF 500,000 (roughly EUR 1,560) can be imposed upon failure to comply with the reporting obligation, or in the case of delayed, incorrect, false or incomplete execution thereof. The penalty can total up to HUF 5 million (roughly EUR 15,600) if the obligation is not met, or not lawfully met, by the deadline given by the tax authority in Hungary for the reporting. The first reporting deadline is 31 August 2020 (for the period between 25 June 2018 and 1 July 2020).

Social security contribution

•   One of the most favourable elements of the tax law amendments for 2020 is that from 1 July 2020 the pension contribution, the in-kind and cash health insurance contribution and the labour market contribution will merge into the 18.5% social security contribution, thereby substantially reducing administration. This will be paid by the insured person on all income subject to contribution payments that is earned from a legal relationship subject to the payment of social security, and will include former individual contributions.

•   In some insurance categories, payment of the social security contribution will be imposed as a new obligation, for example in other legal relationships for work purposes, which provide eligibility for benefits.

•   The income-generating activities of those drawing a direct pension are exempt from insurance and payment of contributions.

•   The definition of income subject to contribution payments is to change too. According to the new rule, if Hungary does not have the right to impose taxes pursuant to international agreements, then the basic wage will be the income subject to contributions, which shall not be less than the average national gross wage published by the Hungarian Central Statistical Office for full-time employees in July of the previous year.

Social contribution tax

The social contribution tax fell from 19.5% to 17.5% from 1 July 2019.

Health service contribution

The amount of the contribution changed from 1 January 2020 from HUF 7,500 (EUR 23) a month (HUF 250 – EUR 0.77 – a day) to HUF 7,710 (EUR 24) a month (HUF 257 – EUR 0.80 – a day).

Local business tax

Since 1 January 2020, it is only possible to submit a return via the NAV in Hungary if the taxpayer’s return is correct, i.e. if any errors indicated automatically by the system used to complete the return are corrected by the taxpayer. The top-up obligation for local business tax will remain in force.

Innovation contribution

Similarly to corporate tax advances, the top-up obligation for the innovation contribution is also abolished.

Advertising tax

Another change that took effect last year will remain unchanged, namely the one temporarily reducing the rate of advertising tax to 0%.

Accounting

By using accruals and deferrals the legislators aligned the accounting of sales revenue with the related costs and expenses in accordance with their actual performance, regardless of their invoicing or the invoicing method.

EVA

From 1 January 2020, the simplified entrepreneurial tax (EVA) is discontinued.

KIVA

The rate for small business tax (KIVA) and related tax advances has been reduced from 13% to 12% from 1 January 2020.

EKHO

From 1 January 2020 employees of international sports organisations can choose the simplified contribution to public revenues (EKHO). Allowances granted as part of sports diplomacy also became exempt from tax.

The tax law amendments for 2020 affect most taxpayers in Hungary. If you have any questions regarding the amendments or their impact, then our tax specialists will gladly help with the answers.

A Tax law amendments for 2020 in Hungary bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

By 1 January 2019 several important changes to the Estonian Income Tax Act are to be expected. Although the exact wording of the new law is not yet agreed, we can provide some insight into the draft law published in April this year.

In April 2018, the Estonian Ministry of Finance published its plans for changes to the Estonian Income Tax Act with the purpose of introducing measures against aggressive tax planning as proposed by EU Directive 2016/1164. This brings the following well-known concepts to Estonian tax laws: taxation of excessive borrowing costs (thin capitalisation), CFC and exit tax. Amendments are also being made to the general anti-avoidance regulation (GAAR), enabling the tax authorities to more easily set aside different legal structures (such as debt pushdown) and follow the principle of substance over form in a more resolute manner.

As the exact wording of the new regulation is not yet agreed, we can only provide some insight into the current version of the draft bill. Nevertheless, changes to the Estonian Income Tax Act will surely be implemented by 1 January 2019.

Thin cap according to the planned changes to the Estonian Income Tax Act

A well-known problem has been that profit generated by profit centres is shifted to some other entity through excessive interest costs. To give an example, an Estonian profit centre that receives a loan must pay loan interest. According to the planned changes to the Estonian Income Tax Act, loan interest is deemed to be not economically justified (not related to the business of the borrower) when it exceeds certain thresholds. As a result, excessive interest payments will attract corporate income tax. This targets Estonian entities with a high ratio of interest costs and which are profitable. Real estate developers may be one focus group for this regulation.

The following three criteria are taken into account in assessing whether loan interest is excessive or not:

• Excessive borrowing costs exceed EUR 3,000,000. Excessive borrowing costs means the amount by which the borrowing costs of an entity exceed the profit it makes from interest and equivalent sources. In addition to ordinary loan interest, a variety of payments with similar economic content will be taken into account as well (eg payments from convertible bonds, financing costs of a finance lease). Earning high interest income enables the entity to stay below the threshold. As the threshold is quite high, the new rules are designed not to affect smaller entities.
• Excessive borrowing costs exceed 30% of EBITDA. The law provides a formula for calculating EBITDA. This excludes income which would be tax-exempt upon distribution (eg participation exemption dividends which can be paid tax-exempt under section 50 sub-section 11 of the Estonian Income Tax Act).
• Profitability of the entity paying interest. If an entity paying interest has negative profitability and excessive borrowing costs that exceed EUR 3,000,000 and 30% of EBITDA do not exceed losses, there will be no need to pay tax. However, if the borrowing costs exceed losses, income tax liability may kick in to the respective extent. If the entity has been profitable, income tax falls due on excessive borrowing costs over EUR 3,000,000 and 30% of EBITDA.

Exceptions

A taxpayer that is a member of a consolidated group for financial accounting purposes can apply one of the following exceptions if it is more tax efficient compared to the above:

• Excessive borrowing costs are not taxed if the taxpayer can demonstrate that the ratio of its equity over total assets is equal to or higher than the equivalent ratio of the group (a 2% difference is allowed). This applies if the whole group is financed heavily with loans and there is no reason to assume that the purpose of financing the Estonian entity is to shift profits. To apply this exception, the assets and liabilities must be assessed based on the same methods for the whole group.
• This exception enables application of a higher monetary threshold to excessive borrowing costs as described above. This is calculated based on excessive borrowing costs related to third parties, group EBITDA and EBITDA of the entity.

Click here and read the full article about the planned changes to the Estonian Income Tax Act, including exit tax, CFC and GAAR on the homepage of Sorainen, the exclusive partner of WTS Global in Estonia!

[/et_pb_text][et_pb_text _builder_version=”3.0.106″ background_layout=”light”]

RELATED PUBLICATION:

Tax and Investment Facts in Estonia 2017

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

A Changes to the Estonian Income Tax Act bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.