While many organisations strive to avoid creating a PE at all costs, the reality is that even the most sophisticated strategies have their limits. Certain business models inevitably require registration and management of permanent establishments to ensure compliance and accurately reflect economic activities. Properly structured, a PE can even unlock new opportunities, such as facilitating local sourcing, reducing indirect tax burdens, and opening doors to new markets.

The latest brochure of WTS Global provides practical guidance for navigating this complex landscape. It offers an accessible starting point for assessing cross-border activities and understanding the implications of PE from both a tax and corporate law perspective. Hungary is among the more than 70 jurisdictions covered by the study, ensuring that businesses with operations in Central Europe receive relevant insights.

Although international developments, such as OECD’s Pillar I discussions, aim to reshape taxing rights, the PE concept remains deeply rooted in global tax systems. This guide is designed to help enterprises and tax professionals take the first steps toward informed decision-making in an increasingly interconnected world.

The brochure can be downloaded via the link below or by clicking on the image:
Download PE STUDY 2025

If you need expert support related to the publication or have other questions regarding permanent establishments, WTS Klient Hungary – in cooperation with the team of WTS Global International Corporate Tax Global Service Line – is ready to assist you in over 100 countries worldwide.

A PE Study of WTS Global released bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

If your company is registered outside the European Union – such as in Asia, North America, or other non-EU countries – and you plan to sell goods, import products, or provide services in Hungary or to EU customers from Hungary, your first and most crucial step is to appoint a fiscal representative in Hungary.

Why is fiscal representation mandatory in Hungary?

Under Hungarian VAT law, fiscal representation is not only advisable but legally required for businesses without a permanent establishment or branch in Hungary that carry out VAT-liable activities within the country. Without a fiscal representative, your company cannot legally sell, import, or provide services in Hungary or from Hungary to other EU Member States.

How can WTS support you as your fiscal representative in Hungary?

WTS provides comprehensive fiscal representation in Hungary, ensuring full compliance with local VAT obligations on your behalf:

• VAT registration in Hungary
• ongoing tax advisory to ensure compliant and optimised operations
• preparation and submission of VAT returns
• management of tax payments
• direct communication with the Hungarian authorities
• full representation at the Hungarian authorities

Legal requirements for fiscal representatives from 2025

Did you know? Starting 1 January 2025, only companies meeting the following criteria are allowed to act as fiscal representatives in Hungary:

• must be incorporated as a private limited company (Kft.) or a public/private limited liability company (Zrt.)
• must have a minimum registered capital of HUF 150 million, or be able to provide an equivalent bank guarantee
• must not have any outstanding public debt registered with the Hungarian tax authority (NAV)

WTS FRS Ltd. (fiscalrep.hu) is an officially registered fiscal representative in Hungary. We support companies based in:

• Asia (including China and Japan)
• North America (especially the USA and Canada)
• non-EU countries in Europe, such as the United Kingdom, Switzerland, and Norway

Our services enable smooth and compliant business operations in Hungary for companies outside the EU.

With a strong international background and in-depth local expertise, WTS offers reliable fiscal representation tailored to the specific needs of third-country companies. We understand that fiscal representation is a matter of responsibility and trust, and our English-speaking tax advisers are happy to answer any questions you may have.

This article is for general information purposes only and should not be considered as advice.

A Fiscal representation in Hungary for non-EU businesses bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

If your company purchased goods or used services in other EU countries in 2024 and local VAT was charged on those transactions, do not miss this deadline!

Who is eligible to reclaim 2024 foreign VAT?

Hungarian businesses may reclaim foreign VAT if:

• they are eligible to deduct VAT in Hungary (e.g. they are not qualifying as tax-exemption businesses),
• the foreign VAT was incurred in connection with the company’s taxable business activities, and
• they do not have a registered seat or a permanent establishment in the respective Member State through which they generate revenue. (In such cases, VAT should be settled via local VAT returns.)

How to submit the application?

The refund application must be submitted via the Hungarian tax authority’s ÁNYK (General Form Completion Program) using form ELEKAFA. The deadline for submitting the claim for 2024 foreign VAT is 30 September 2025.

Important: The deadline is peremptory. If missed, the tax authority will not accept any justification, and there will be no further opportunity to reclaim the 2024 foreign VAT. While recent decisions by the European Court of Justice have slightly relaxed the previously strict practice regarding the deadline for providing missing information, meeting the peremptory 30 September deadline remains crucial.

Common mistakes to avoid

• Ensure you are using the latest version of the ELEKAFA form. Outdated versions may result in your application being rejected by the Hungarian tax authority.
  
• Before submitting the ELEKAFA form, it is recommended to check the entire form using the green check mark in the upper right corner of the program (“Check all forms”) to filter out any errors or warnings related to the form. It is also strongly recommended that you check the warnings marked in yellow to ensure that the submitted form is accepted and forwarded to the tax authority of the Member State concerned. An example of such an error would be if the country code in the address is not written in two capital letters. For example, if you enter the country code “De” for an address in Germany, at first glance it will appear as “DE” on the form, but the system of the Hungarian tax authority may still indicate an error that could result in the application being rejected. The successful submission of your application is confirmed by the KKI receipt issued by the Hungarian tax authority.

Reclaiming the 2024 foreign VAT may seem straightforward, but the process is riddled with administrative pitfalls. Even minor errors can lead to rejection by the tax authority. Especially for larger amounts, it is highly recommended to seek professional assistance. As in previous years, the experienced tax advisers of WTS Klient Hungary are ready to support you with your 2024 foreign VAT refund.

This article provides general information and does not constitute advice.

A Deadline for reclaiming 2024 foreign VAT: 30 September bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Who needs fiscal representation services in Hungary?

Navigating the business world is not always an easy task, especially when engaging in cross-border activities. In this complex environment, the fiscal representative plays a key role.

As we have previously written in our series of articles on fiscal representation services, to mandate a fiscal representative is mandatory for companies established outside the European Union (e.g. China, United States of America, United Kingdom, Switzerland, etc.) that wish to perform business activity in Hungary, but do not have a fixed establishment in the country. More precisely, companies established outside the European Union, and which do not have a location in any Member State of the European Union should mandate a fiscal representative in Hungary. According to the Hungarian VAT Act, these companies must appoint a fiscal representative in order to be able to fulfill their tax obligations in Hungary. It is important that the fiscal representative should be reported to the Hungarian tax authority and the fiscal representative must be also indicated on the issued invoice.

Thus, fiscal representation services are is especially important:

• for third country companies that sell products or services in Hungary and
• in the case of businesses that remotely provide electronic services to Hungarian individuals or companies.

For companies within the European Union, using fiscal representation services is not mandatory, but they can choose this option.

Why should a company outside the EU mandate a fiscal representative?

Since the convention on legal assistance between Member States is not applicable outside the European Union, companies established outside the EU are required to use fiscal representation services, i. e. appoint a fiscal representative. The fiscal representative shares joint and several liability for the activities and tax obligations of the businesses they represent in Hungary and is also responsible for any potential consequences.

The company providing fiscal representation services acts as the client’s permanent representative when fulfilling all tax-related obligations. This means that as long as the fiscal representation services exist, only the fiscal representative can act on behalf of the foreign company. The foreign enterprise may not act either personally or through another representative.

Thus, the fiscal representation service is a relationship of trust and responsibility between the business and the service provider.

Requirements for the fiscal representative

Fiscal representation services can only be provided by companies that operate as a limited liability company (LLC) or a joint-stock company (JSC) in Hungary and are listed in the Hungarian tax authority’s database as free of public debt.

In addition, the spring-summer 2023 tax package introduced in Hungary a tightening in the area of fiscal representation services, according to which companies must have a registered capital of HUF 150 million instead of HUF 50 million, or an equivalent amount of bank guarantee in the name of the fiscal representative only, in order to qualify as a fiscal representative. The fiscal representative must prove the existence of these conditions to the Hungarian tax authority at the time of the declaration of acceptance of the representation and annually thereafter during the continuous exercise of the activity.

The new conditions had to be met by 1 January 2025 by taxpayers who were already registered as fiscal representatives at the Hungarian tax authority when the amendments entered into force.

What are the tasks of a fiscal representative?

• participating in the Hungarian tax registration process
• opening a bank account for the represented company (since the Hungarian tax authority transfers VAT refunds to foreign businesses exclusively to this account)
• reporting the represented foreign company to the Hungarian tax authority’s key taxpayers directorate (in Hungarian: NAV Kiemelt Adózók Adóigazgatósága)
• managing tax returns
• maintaining communication with the authorities
• providing advice on various aspects of taxation

The tax consulting team at WTS Klient Hungary has considerable expertise and many years of experience in the field of fiscal representation. We can also assist you with acting as a permanent representative before the Hungarian tax authority, preparing VAT returns, supporting compliance with special invoicing regulations in Hungary or performing VAT analysis and consulting on international and domestic transactions. Please contact our experts.

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Remote working is a topical issue in Poland also due to changes to the Labour Code introduced in April 2023, where for the first time the remote work performed by employment contract holders has been precisely regulated.

Post-pandemic approach to home office: PE or not? 

It is important to note, that there are no specific regulations or binding guidelines of the Polish Ministry of Finance regarding the impact of remote work on PE issues in the post-pandemic environment.

In accordance with the standard wording of Double Taxation Treaties, profits of a company of a contracting state are taxable only in that state if the company continues with business in the other contracting state through a PE situated therein. If the company conducts business in this way, the profits of the company may be taxed in the other state to the extent that they are attributable to a PE.

One of the ways in which the PE can be created is by the existence of a so-called ‘fixed place of business’. In this case, a PE arises if the following conditions are cumulatively met:

1) there is a place used to conduct business, and
2) the place is fixed and
3) the place is used to conduct business activity that is not of a preparatory or auxiliary character.

Private rulings 

There are several private rulings, which present the following interpretation of PE conditions in connection with remote working:

• Regarding condition (1), the prevailing view in current tax office rulings and decisions of Administrative Courts in Poland is that any place where remote work / home office work is performed can be considered a ‘place of business’. In this respect, it is sufficient for work to be carried out by an employee using equipment provided (or which is remunerated/compensated) by the employer.

• Regarding condition (2), for the recognition that a ‘place of business’ is fixed, the intention of use is decisive (whether the employer envisages or agrees that the ‘place of business’ is to be used on a permanent basis). In practice, it is also taken into account whether the form of employment (legal form, duration of contract) indicates the permanent nature of the work performed.

• Regarding condition (3), it is verified whether the work performed in Poland is part of the company’s core business or if it coincides with the objective of the company as a whole.

In practice, every case must be analysed individually to assess the possible tax consequences of having employees in a home office in Poland.

Consequences of creation of a PE in Poland

If a PE in Poland arises, it particularly involves the following consequences:

• the requirement to allocate income (revenues and expenses) to the activity of the PE,
• registration for tax purposes in Poland,
• obligation to file CIT returns, calculate and pay CIT advances and/or annual tax in Poland,
• verification of Transfer Pricing obligations,
• PIT and social security consequences regarding employees residing in Poland,
• other potential legal obligations.

The existence of a PE is important as its creation may have legal and tax consequences from the first day of activity in Poland. Thus, the optimal approach is to assess the tax aspects of hiring employees in their home offices before they commence employment.

If you would like to know more about creation of permanent establishment, other tax issues related to remote working in Poland, or need any tax advice regarding the country please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland and contact their experts.

A Impact of remote work on PE issues in Poland bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

1. Where did the transaction take place?

The deadline for reclaiming foreign VAT applies mainly to VAT charged in European Union countries, because this is essentially what can be reclaimed if the VAT on the service or product is deductible under the laws of that country.

However, Hungary has reciprocity agreements with several non-EU countries, which also allow us to reclaim value-added tax charged in Norway, Liechtenstein, Switzerland, Turkey, Serbia and in the United Kingdom.

2. What conditions must be met?

The main point is that the Hungarian company should not engage in any business transaction in the given foreign country that would result in a permanent establishment in that country. Since in this case, it may be necessary to establish a business presence in the foreign country, even in the form of a tax establishment, a branch or a subsidiary. This always depends on the local tax regime and legal system. This would mean that the given company would have to reclaim the VAT charged in the foreign country in a local VAT return.

3. Most typical transactions

Reclaims can be submitted for all foreign transactions where the Hungarian company received a local VAT invoice, i.e. the place of performance for VAT purposes was the foreign country. This can be the purchase of a product in a given country, if the product was not subsequently sold or transferred to another country, or used in any business transaction in that country. The tax may also be linked to services used abroad by a posted employee (taxi, accommodation, possibly meals, fuel).

4. Deadline for reclaiming foreign VAT and relevant period

The deadline for reclaiming foreign VAT in the case of European Union countries is 30 September (for countries with reciprocity arrangements, the deadlines may differ), and there is no right of redress. Invoices for 2022 can be submitted to the authority in 2023, and the reclaim period cannot be shorter than three months or longer than one year.

5. How and where to submit

Reclaims by Hungarian companies must be sent to the Hungarian tax authority electronically using the ELEKÁFA form (a separate application for each country). For an annual application, the amount requested must be at least 50 euros.

Generally speaking, the Hungarian tax authority will forward the application electronically to the tax authority of the country concerned, which will then assess the merits of the application. If you exercise your right to reclaim based on a reciprocity arrangement, reclaim requests should be sent directly to the tax authority of the foreign country.

The tax authority in the country of the reclaim will issue a decision within four months of the deadline for reclaiming foreign VAT, and communication between the foreign tax authority and the Hungarian company is now entirely electronic. The tax authority may request additional documents and information no more than twice in this procedure (copies of invoices do not usually have to be attached to the original application).

+1: What have I got to lose?

In short: nothing. If the claim is unfounded, the tax is not refunded. There is no penalty for an incorrect application. However, there may be a risk if the Hungarian company is involved in a transaction in which the tax authority determines – based on the invoices and declarations it receives – that the company should register as a taxable entity in the foreign country and file a tax return. In this case though, the tax may also become refundable in the foreign tax return.

If you need help in managing the procedure and meeting the deadline for reclaiming foreign VAT, please do not hesitate to contact us. Our tax department will be happy to help you with submitting your applications.

A If it’s September, then it’s the deadline for reclaiming foreign VAT! bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

• In which country do you need to pay taxes on the revenue generated from using real estate located abroad?
• What tax obligations arise?
• Is a permanent establishment created for the lessor company in the country where the real estate is located?

We will answer these questions in our article, and highlight what a foreign company should pay attention to if it plans on renting out real estate located in Hungary.

VAT fixed establishment when renting out real estate

Renting out real estate in a country other than where the company carries out business activities, or using such property, does not necessarily create a VAT fixed establishment for the lessor.

In one of our earlier articles we explained the definition of a fixed establishment in detail based on the Hungarian Act on VAT and the implementing regulation of the VAT Directive. Pursuant to the directive, a fixed establishment is created for a company using real estate in the state the property is located if it has a geographically defined place at a fixed location where it carries out the business activity for a prolonged period, and where all the material and personnel conditions required to conduct the business activity independently are actually available on site. According to the implementing regulation of the VAT Directive, a fixed establishment is created if the service provider possesses a suitable organisation with a sufficient degree of permanence in terms of human and material resources to enable the provision of the services in the state where the real estate is located.

Based on the two rules, it is clear that in addition to the fact the rented out property is located in Hungary, the presence of the human resources and material conditions required for supplying services in the country of the real estate must be investigated further.

One important aspect is to what extent is renting out real estate a determining part of the lessor’s business activity, and does it in fact have the organisational framework enabling the supply of services connected to use of the real estate. If a detailed investigation finds that the above conditions are not met, no fixed establishment is created for the lessor foreign company in Hungary.

However, given that renting out real estate qualifies as a service related to real estate according to the implementing regulation of the VAT Directive, where the place of performance is the country the real estate is located in, then as a general rule, the value added tax incurred must also be paid in the country of the real estate. So for lack of a fixed establishment, the foreign lessor is only exempted from the obligation to register for VAT and pay VAT in Hungary if the lessee is a Hungarian taxpayer to whom the foreign company can issue an invoice subject to the rules on reverse charging.

If, however, the foreign company sets up a permanent establishment in Hungary as a result of renting out real estate, the foreign taxpayer must register and fulfil its tax payment liability in Hungary under the general rules. This entails substantial additional administration.

What about corporate tax?

While – from a VAT perspective – more careful consideration is required to determine whether renting out real estate gives rise to a fixed establishment, for corporate tax purposes the situation for taxpayers is relatively easier.

When assessing the creation of a corporate tax permanent establishment, both the provisions of the Act on Corporate Tax and the convention on avoiding double taxation concluded with the country of the foreign taxpayer must be examined.

Under the conventions on avoiding double taxation, revenue from real estate is generally taxable in the country where the real estate is located. Pursuant to Hungarian legislation, using real estate, transferring or selling rights and concessions in relation to real estate in exchange for compensation, as well as the in-kind contribution and sale of real estate create a permanent establishment.

From the combined interpretation of the above legislation, if a leased property is situated in Hungary, a permanent establishment is created for corporate tax purposes for the foreign lessor in Hungary, irrespective of the duration of the rental. The corporate tax must be paid in compliance with the Hungarian legislation, for which the taxpayer must register in Hungary.

Local business tax in brief

Given that used (rented out or leased) property, among other things, is considered a permanent establishment under the Act on Local Taxes, a permanent establishment is created for the foreign taxpayer in Hungary upon renting out real estate, so it is obligated to pay local business tax.

As revealed by our article, it is highly important to thoroughly investigate the renting activity if a company decides on renting out real estate located in a country other than where it conducts its business activities. However, if the renting activity is incorrectly classified, the given real estate is not considered a permanent establishment and the foreign taxpayer fails to fulfil the related registration and tax payment obligation, the tax authority can subsequently impose severe penalties on the entity. WTS Klient Hungary has decades of experience in international taxation and planning the tax arrangements of foreign companies, so feel free to contact us if you need tax advice and/or tax planning in connection with utilising a foreign company’s real estate situated in Hungary.

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Safe harbour rule in Slovakia

One of the most important changes to the Income Tax Act of Slovakia is the specification of the determining method of the economic ties between close persons (e.g., husband and wife). The new method has to be applied from 1 January 2023. Furthermore, the legislator clarified the definition of a controlled transaction when a dependent activity is not considered as a controlled transaction.

In this context, following the example from other countries, a safe harbour rule is being introduced in the Income Tax Act of Slovakia. The rule exempts taxpayers from the obligation to document the valuation method and conditions in controlled transactions. The safe harbour includes controlled transactions from which taxable income earned or tax expense deducted is not exceeding EUR 10,000 or EUR 50,000 in the case of the loan principal.

Furthermore, the procedure for calculating the difference by which the prices or conditions in controlled transactions differ from the prices or conditions that would be used between independent persons, is specified. This procedure shall be in accordance with the OECD Transfer Pricing Guidelines.

Changes related to PEs and APAs

From 2023, the rules for determining the tax base in the case of existence of a permanent establishment (PE) in the Slovak Republic have also been clarified, as in the case where a non-resident taxpayer does not have a permanent establishment, but the income earned within the territory of the country is also taxable in the country according to international law. When determining the tax base of a permanent establishment, it is also recommended to respect the procedure in accordance with the OECD Transfer Pricing Guidelines.

At the same time, the tax administrator’s procedure is specified in cases, where the prices in controlled transactions do not correspond to the arm’s length principle. From the new year, the Ministry of Finance of the Slovak Republic can also issue a decision in advance pricing agreement (APA) for more than five tax periods, and at the same time, taxpayers can also submit the transfer pricing documentation in a foreign language.

Other changes to the Income Tax Act of Slovakia

The Income Tax Act of Slovakia will be amended with the possibility of legal write-off of the receivable in the case, if the receivable has ceased to exist as a result of forgiveness during preventive restructuring. Also, the creation of adjustments to receivables against the debtor in preventive restructuring will be a tax-deductible expense.

The last significant change to the Income Tax Act of Slovakia effective from 1 January 2023, is the new procedure of taxpayer’s registration, where the tax administrator will register the taxpayer ex offo on the basis of data from publicly available registers. The tax administrator will announce such fact on the website of the Financial Directorate of the Slovak Republic.

As the result of the transposition of the ATAD directive, a rule is also being introduced to limit the tax deductibility of net interest costs if their amount exceeds EUR 3,000,000. The aforementioned rule will take effect on 1 January 2024, the aim is to prevent the artificial erosion of corporate tax bases through debt financing. The tax base will be increased by interest, that exceeds 30% of the tax EBITDA indicator. At the same time, the tax administrator allows the transfer of unused interest to future tax periods.

If you want to know more about the latest amendments to the Income Tax Act of Slovakia or other tax issues in the country, we recommend you visit the website of Mandat Consulting, k.s. and contact the local WTS experts in Slovakia.

A Amendments to the Income Tax Act of Slovakia from 2023 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

What is the point of reclaiming foreign VAT?  

Reclaiming foreign VAT happens when taxpayers established in Hungary do not receive a VAT-free invoice on services used abroad and goods purchased abroad in certain cases, but one that includes the local VAT (e.g. VAT on accommodation, food, taxi fares, tool costs). In such cases, Hungarian taxpayers may reclaim the foreign VAT included on the invoice (to the extent the supply of goods or services was used for the purpose of their taxable business activities). However, this foreign VAT is not reclaimed in the Hungarian VAT return, but by filing a separate application.

For which countries is it possible to reclaim local VAT? 

Hungarian taxpayers can apply (on a reciprocal basis) for a refund of the above-mentioned local VAT charged in the following countries, in addition to the Member States of the European Union: Norway, Switzerland, Liechtenstein, Serbia, Turkey and, following Brexit, the United Kingdom.

Where should applications be submitted, and by when?

It is important to note that while applications for VAT refunds from EU Member States must be submitted electronically to the Hungarian tax authority (on form “ELEKAFA” – separate application required per country), which forwards them to the competent tax authority of the refund country, applications made on the basis of reciprocity must be submitted directly to the competent tax authority of the country concerned, according to the rules of that country.

The deadline for submitting applications for refunds from EU Member States is 30 September of the year following the refund period.

The deadline may differ from 30 September for refunds from countries outside the EU.

What conditions must Hungarian taxpayers comply with when reclaiming VAT from EU Member States?

The basic condition for a refund is that the taxable person must not have a registered seat or permanent establishment during the refund period from where its economic transactions are carried out in the Member State of the refund. In the absence of a registered seat and permanent establishment, the taxable person must not have their residence or habitual abode in the territory of the Member State of the refund during the refund period.

Another condition is that during the refund period (apart from a few transactions), the taxpayer must not have supplied any goods or services that are deemed provided in the territory of the Member State where the refund is requested.

Useful information on applications 

Council Directive 2008/9/EC contains provisions on the reclaiming of foreign VAT charged in the Member States of the European Union. Thus, among other things, this directive provides for the content of applications too.

The provisions of the above directive have been transposed into national law by the Member States, but the local rules on applications and the documents to be attached may differ from one Member State to another (not all Member States require a copy of the invoice to be attached if the tax base is equal to or higher than EUR 1,000, or its value in the national currency). It is therefore advisable to check the local rules in the Member State of the refund before submitting your application.

The refund period specified in the applications must not exceed one calendar year, and must not normally be less than three months. These applications also come with minimum refund amounts. The refund amount cannot be less than EUR 50 for an annual application, and EUR 400 for a three-month application.

Adjudication of applications 

Applications submitted to the tax authority of the Member State where the entity is established are forwarded by the tax authority to the tax authority in the Member State of the refund, which sends an electronic response to the applicant confirming the acceptance of the application.

The tax authority in the Member State of the refund then normally has four months to examine the application and make a decision. If additional information or documents are needed to make a decision, the tax authority will ask for them from the applicant by means of a rectification request. The deadline for this is one month, which generally cannot be extended. The tax authority may request additional documents and information twice, in which case it must adopt its decision on the request within eight months of the date the tax authority receives it. The applicant must be paid the accepted amount within ten working days.

We will be happy to assist you with reclaiming foreign VAT and with subsequent procedures in the case of both domestic and foreign refund requests, and we will gladly provide further information regarding the detailed rules as well.

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Definition of service permanent establishments

Based on the Hungarian definition, you might first think that a corporate tax permanent establishment means a permanent business establishment, equipment and accessories used by the taxpayer in whole or in part for business activities.

However, under the amended legislation, from 2021 a corporate tax permanent establishment may also be created for foreign service providers who, in the absence of a physically identifiable place of business in Hungary, only carry out their activities through their employees or natural persons with whom they have some other legal relationship.

Yet another condition in Hungarian law for setting up service permanent establishments in Hungary is that the duration of the service provision in Hungary, whether continuous or interrupted, should exceed 183 days in any 12-month period. In addition, when calculating the service period, related and associated services must be taken into account together.

Hungarian definition and international conventions

For tax issues arising in international transactions, where two countries are involved in determining the tax liability, the bilateral tax conventions in force should always be examined. And the principle of the primacy of international conventions must always be taken into consideration during this review.

As discussed in our previous article, the Hungarian definition of a corporate tax permanent establishment is basically consistent with the OECD Model Tax Convention. However, there are deviations in several cases from the Tax Model Convention in the conventions for the avoidance of double taxation signed and adopted by the Contracting States.

It is important to clarify that if two states have an agreement in force on the avoidance of double taxation, service permanent establishments may only be created in Hungary if the convention concluded with the state where the service provider is resident sets forth the rules for such an arrangement.

However, only a limited number of conventions existing with Hungary provide for the creation of a permanent establishment for service provision. Apart from relatively recent conventions with more distant countries (such as the United Arab Emirates, Qatar or Saudi Arabia), there are hardly any conventions with countries geographically closer to Hungary that have been in force for a lengthy period (e.g. Slovakia, Czech Republic) in which such a provision can be found.

Moreover, contrary to the Hungarian definition of a permanent establishment, in some international conventions a service provision of a shorter duration (e.g. three or four months in the case of Indonesia or Armenia) may allow for the creation of a permanent establishment, rather than 183 days.

For states with which there is no convention in force for the avoidance of double taxation, the definition of the Hungarian Corporate Tax Act applies; in these cases, the provision of services for a period exceeding 183 days may give rise to a corporate tax permanent establishment.

Administrative obligations and other taxes

Service permanent establishments may result in a registration obligation in Hungary as well as corporate tax return and payment obligations. It often happens that the service provider and the recipient are related companies. In such cases, it must be examined separately whether there are any obligations on transfer pricing records under Hungarian rules. Justifying compliance with transfer pricing guidelines can be a challenge, especially when pricing cross-border management services.

In Hungarian law there are different definitions for the permanent establishment in the Companies Act, in the Local Tax Act, and even in the VAT Act, therefore the possibility of setting up a permanent establishment must be examined separately for the various tax types.

Practical examples

In the case of service arrangements with multiple parties it is not always easy to determine which business is likely to be exposed to the risk of service permanent establishments and to the associated administrative burden. To understand this, let’s look at the short example below.

A German parent company hires an independent Slovak company to provide consultancy (or management, as the case may be) services for a Hungarian subsidiary at a fixed location. The question arises as to whether the German, the Slovak, or even both companies can set up a permanent establishment in Hungary.

Under the arrangement, the Slovak company provides the service through its own employee to the German company as the client, which then acts as an intermediary for the Hungarian subsidiary. If the activities carried out in Hungary last for a total of at least six months in a 12-month period, the Slovak company must establish a corporate tax permanent establishment in Hungary under the convention with Slovakia. However, the German company should not be exposed to this risk, as it does not provide services through its own staff or through a natural person with whom it has another legal relationship.

If the same service is provided by a German company by authorising a Slovak private individual, then based on the provisions of the convention concluded with Germany, the risk of service permanent establishments in Hungary does not arise for the German company (nevertheless, personal income tax and employer registration issues may emerge).

In all cases, the risk of service permanent establishments therefore depends on the type of service, the circumstances in which it is provided, and the different provisions of the various conventions and local legislation. For these reasons, care should be taken when entering into a cross-border service contract to avoid tax risks.

If you need support regarding the tax treatment of complex cross-border service arrangements, assessing the risk of service permanent establishments or, where appropriate, the entire administration related to permanent establishments, you can rely on our colleagues. The tax advisory team at WTS Klient Hungary has significant expertise in the taxation of various international transactions. Feel free to contact us.

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