We have written several articles on the subject of foreign postings of varying lengths becoming more and more common at international companies. Although in legal terms, foreign, i.e. expat workers most often do not become employees of the Hungarian company, thanks to their work they more or less integrate into the host company’s work processes during the time of their stay here. Since such an expat worker does not have Hungarian employer, no M30 employer certificates are issued, so the host company employer, its HR department or the expat worker have to pay attention to meeting tax payment obligations in Hungary. Let us take a look at what needs to be observed in order to complete the personal income tax returns correctly for expat workers posted to Hungary.

Tax residence for expat worker

Firstly, you always need to determine where the tax residence of the expat worker is. Generally, this is defined by the domestic laws of the posting country and the host country (in this case Hungary); however, if the worker is considered a tax resident in both countries based on their laws, then the provisions of the convention on avoiding double taxation concluded between the two countries (if such exists) must be examined. These conventions generally define the country of tax residence as the one where the private individual has their permanent address, where the centre of vital interests lies (family and business ties), and where their habitual abode is (where they actually spent more days) in the given calendar year. If, based on a given factor, the person has residence in both countries, then you can move on to the next item on the list above. If the worker starts their posting mid-year, it can happen that their tax residence is “divided”, meaning that they will have Hungarian tax residency only for part of the year.

Where should the income from the posting be taxed?

When tax residence is established, you need to examine where the income stemming from the non-independent activity and received for the posting should be taxed. According to the basic rule, based on the conventions avoiding double taxation, the country of residence is the country of taxation provided the expat works in this country. If, however, work is carried out in a different country than the one the expat is resident in, the tax payment obligation arises in the country of work.

It is important to note that by meeting certain special conditions all at once, the income of an expat worker resident abroad but working in Hungary may remain taxable in the posting country.

Economic employers

It is crucial to examine the factor also considered by the Hungarian tax authority (NAV), and that is which country the worker gets instructions from, who actually controls the work. Depending on which country the expat is more aligned with from this respect, the “economic employer” of the worker will be either the posting or the hosting company. Accordingly, if the Hungarian hosting company is the economic employer of the expat worker sent to Hungary, then there is a good chance that the worker’s income stemming from the posting will be taxable in Hungary, if it is only a short, two or three-month posting.

Renting an apartment? Trading on the stock exchange? Receiving dividends?

Beyond the elements of income related to the posting (monthly wage, “moving allowance”, bonus), the situation is often more complex and the expat has income of other kinds too. If the Hungarian hosting company rents an apartment for the worker, or reimburses the rent paid by the expat, this can even be tax-exempt for the private individual.

For income, interest or dividends stemming from stock exchange transactions, tax residence is the decisive factor, these special types of income are generally taxed in the country of tax residence. For dividend income, however, the paying state (not the one where the person is resident) can deduct withholding tax from the payment, which in most cases can be offset against the tax payable in the country of tax residence.

Use the available allowances!

In Hungary the most often claimed allowance is the family allowance, which an expat worker may also claim if they raise children or meet other conditions. In the case of foreign tax residence, it is important to consider other rules when examining the claim for allowances (such as the rule that 75% of the income of the expat worker in the tax year must come from Hungary). If the worker has just got married for the first time, they are eligible for a special allowance too.

The Hungarian tax payment obligation may be further reduced by 20% of any payments made to special pension savings accounts (Hungarian abbreviation: NYESZ) or voluntary savings funds during the year. In such cases the Hungarian tax authority credits these to the accounts held by the taxpayer at the service provider or fund.

Filing obligations, draft returns available

The deadline for submitting the 19SZJA form for 2019 is 20 May 2020. If the expat worker is registered on the government portal (and obviously has a tax identification number) and received income from a Hungarian paying agent, then the NAV has already prepared the draft form and made it available on the person’s government portal account from 15 March 2020, so it might just be enough to check and finalise the form.

WTS Klient Hungary has substantial expertise with regard to the taxation of expat workers. In light of the extraordinary circumstances at present we can prepare expat returns without personal contact, and all the technical conditions are in place to file properly completed returns electronically with the Hungarian tax authority by the 20 May deadline. Please feel free to contact our colleagues.

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Previously we provided information on applying double taxation conventions and on which country to pay tax in during postings, but less attention is probably paid to the social security aspects of postings and what they are based on.

General rule

The general rule is that a person conducting activity in a given Member State is obliged to pay social security in the country in which the activity is performed. However, there are special cases when the country of insurance differs from where the work is actually performed. These include postings for example (temporarily working in another Member State) or working in more than one Member State at the same time. Below we analyse when and under what conditions we can remain insured in Hungary during a period of working abroad, what the related terms are for the issue of an A1 form to guarantee this, and what would the right procedure be for postings of a few days.

Postings (temporarily working abroad)

Posted employees generally remain insured in the country they came from, but such periods of work may not exceed 24 months. The basic condition here is that the posting employer must conduct a significant business activity in Hungary.

This statutory significant activity criterion is fulfilled if the employer agrees that the ratio of people employed in Hungary or the ratio of sales revenue generated from activities in Hungary will be at least 25% in connection with its overall activity in Hungary and abroad. Hungarian law can still be deemed applicable even if these conditions are not met, provided that the circumstances verify a significant activity of the employer in Hungary.

A posted employee may not remain insured in Hungary for example and the parties may not receive an A1 form if

• the people employed in Hungary only carry out administrative tasks,
• the activity carried out in the Member State of the posting and the activity in Hungary fall into different sectors of the economy,
• the employer does not exercise the employer’s rights over the posted employee throughout the entire duration of the posting,
• the employee did not have an uninterrupted entitlement to healthcare services of at least 30 days prior to the posting,
• the employee is posted to replace another employee already in a posting,
• the employee was already posted within the last 60 days for a period determined in the Coordination Regulation or a social security agreement.

What should be done in the case of a conference lasting a few days?

If employees of a Hungarian company take part in a conference for a few days in another European Union Member State, the question arises of whether an A1 form needs to be requested in this instance. Such cases fulfil the criterion of a posting too, so based on the rules of the Coordination Regulation there might even be an obligation to pay foreign contributions. To avoid the risks it can therefore be worthwhile obtaining an A1 form before the start of the conference for these short-term postings too.

Parallel activity in two countries

If an employee works in another Member State subject to the Coordination Regulation or a social security agreement, as well as working in Hungary, what can be done so they remain insured in Hungary throughout the period of parallel work?

Assuming they live in Hungary, having Hungarian insurance is subject to the employee performing the majority of the activity in Hungary (as an employee, the working hours and wage of the activity in Hungary must be at least 25% of the overall working hours and wage). In this case the government office scrutinises the actual and expected data for the activity in Hungary and abroad relating to the last 12 months and the subsequent similar period. The regulatory background is complex, as shown by the fact that other rules are applicable if the former conditions are not complied with; this is why every single case has to be examined thoroughly in the case of activities carried out in parallel.

Official A1 form verifying insurance in Hungary

If the administrative body in Hungary confirms that Hungarian law applies, it will issue a form within 30 days of receiving such a request, stating the terms of the insurance and any expiry date. In all Member States this is known as the A1 form. The form verifies that the employee or self-employed person is subject to social security rules and regulations in Hungary while working in another Member State. If one posting follows another in more than one Member State, the applicable law must be assessed on a case-by-case basis, and so the forms must be issued separately. The competent body must be informed without delay about any changes in the circumstances, who then invalidates, revokes or amends the form.

Exceptions

Article 16 of the Coordination Regulation enables Member States to agree on exemptions from applying the relevant rules of applicable law, for certain groups of people. If a consensus is reached by the Member States in the given case, the validity of the A1 form may not exceed five years.

The team of WTS Klient Hungary has special expertise regarding the taxation and social security payment liabilities of expats. You can rest assured that in consultation with our tax advisers and legal colleagues we can find the answer and solution to any social security issue or problem arising in connection with postings. Please do not hesitate to get in touch.

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