Employees working in a different country to the one where the registered office of their employer is located raises several taxation issues. Both the OECD and the European Commission have published guidance for managing these unprecedented situations. In our article, we will take a look at the most important questions raised by expat employees working from home.

Personal income tax: general rules

It often happens that an employee of a company is sent abroad for varying lengths of time to work there. If a given posting is long-term, employees often terminate their permanent address in the posting country and take their family to the host country too. This way they transfer their tax residence to the host country.

According to the OECD convention for the avoidance of double taxation, a person is considered resident if they have a permanent home in the given country. If a person qualifies as resident in more than one country according to the domestic laws of the given countries, then the following aspects must be considered when defining residency:

• permanent home;
• if the person has a permanent home in both states, then the centre of vital interests;
• if it cannot be established where the centre of vital interests is, then the habitual abode.

If the person has a habitual abode in both states, or does not have one in either state, then citizenship is the defining aspect.

Personal income tax of expats during the pandemic

The taxation of income derived from non-independent activity would change significantly as a result of the above rules in the event of expat employees working from home. However, on 3 April 2020 the OECD published guidance on the impact of the COVID-19 crisis. According to this guidance it is unlikely that residency can be defined based on permanent home in line with the criteria above in the unprecedented situation created by the virus, assuming that the private individual has a permanent home in the host country. If they have a permanent address both in the host and the posting country, an employee’s residency should be defined based on the centre of vital interests. If the centre of vital interests does not give a straightforward solution because the centre of vital interests is in one country based on the individual’s personal and social relationships but in another country based on their economic (work) background, the residency of the employee must be defined based on habitual abode.

In accordance with the OECD guidance issued in April, “despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position”. This means that when establishing residency for the transition period caused by the coronavirus, the authorities should consider the employee’s normal living conditions. So as expat employees working from home their residency would not change during the given period, i.e. the time spent in a country other than their country of work.

Social security

Employees living in border towns and villages often commute and work in neighbouring countries.

If the working hours of a (Hungarian) employee working abroad did not reach 25% in Hungary before the pandemic, their social security obligation arose in the Member State of work, so they were insured in that country. As a result of the quarantine measures implemented due to the global pandemic, the increase in working hours spent involuntarily at their place of residence in Hungary often resulted in cases where the 25% limit was exceeded.

The guidance issued by the European Commission on 30 March 2020 formulates a recommendation for such cases. According to this recommendation, in cases which could lead to changes in the employee’s Member State of insurance, the Member States should apply the exception defined in the coordination regulation so the social security entitlement of the affected employee remains unchanged. To apply such an exception, the employer has to submit a request to the Member State whose social security system it wants to be subject to.

Do expat employees working from home create permanent establishments?

The third important question is whether the commuters or expat employees working from home create permanent establishments, and consequently tax payment liabilities for the employer, in another state.

Based on the OECD Model Convention for the avoidance of double taxation, a permanent establishment is a fixed place  of business at which the company conducts its business in part or in full. If the employees of a company work for lengthy periods in another country, based on the above article it is possible that a permanent establishment and therefore a tax payment liability is created in the other country.

Based on the OECD guidance issued in April, a permanent establishment must have a certain degree of permanence and must be available for the company to be named a place of permanent business where the company’s activities are conducted in part or in full.

For an employee’s home to be regarded as a permanent establishment, business activities should be conducted there continuously, and the company should require business activities to be conducted from there.

During the coronavirus pandemic, commuters and expat employees working from home were forced to do so in order to comply with government guidelines and due to force majeure, not to comply with the requirements of the employer. Taking into account the unprecedented nature of the coronavirus pandemic – and assuming this does not become regular practice later on – expat employees working from home do not create permanent establishments for the employer since “home offices” are not permanent offices.

WTS Klient Hungary has substantial expertise with regard to the taxation of expat workers. If you have a question regarding this topic, you can count on a full analysis and professional answers from our colleagues. Please feel free to contact us.

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A posted employee is coming – why can the NAV impose a fine?

To map the tax risks of foreign postings, first we should check what kind of mistakes we can make in a case that appears simple when we accept a posted employee. Experience shows that even companies that accept a significant number of posted employees can face problems if the HR department of the host company or its tax team generalises, and treats all – otherwise different – postings in the same way. Conventions for the avoidance of double taxation are largely similar, but it matters here whether we accept a posted employee from France or Germany since the two conventions contain somewhat different rules for determining the country of taxation. All of this can have a serious impact on the proper assessment of taxation.

The situation is rendered even more difficult by the fact that for employees moving within an international group, the contracting conditions underlying the posting are also very varied. By default, an employee sent by a foreign group to Hungary will remain employed by the foreign company and receive their salary from abroad; their work in Hungary can be considered temporary, and its nature can vary a lot (specific job, project implementation, training, exchange of experience, etc.).

Our experience shows that of all the tax risks of foreign postings, the following errors are the most frequent in connection with posted employees arriving in Hungary:

• failure to report the new posted employee (default penalty)
• failure to request a Hungarian tax number in the event of an incorrect interpretation (default penalty)
• lack of Hungarian taxation due to incorrect interpretation of the specific rules of the convention (tax shortfall and tax penalty)
• due to the incorrect determination of residence, failure to report certain types of income (tax shortfall, tax penalty) or unnecessary double taxation
• correct tax assessment procedure, but Hungarian tax advances not paid on time (default interest)
• failure to comply with Hungarian deadline for the submission of tax returns, failure to submit a verification request or omitting to submit a Hungarian tax return due to the incorrect interpretation of the rules (default penalty)
• incorrect establishment of ratios in the case of tax payment liabilities arising in both countries affected (tax shortfall, tax penalty)
• incorrect consideration of tax allowances (too much, or potentially not using tax allowance up to full amount)
• for employees posted from a third country to Hungary, neglecting the Hungarian tax offsetting rules (90% rule; risk of double taxation)
• in the case of postings subject to EU coordination regulations, a missing A1 form (double contribution payment, risk of Hungarian social contribution tax and contribution shortfall, with related default penalties)
• risk of incorrect tax rating of cost reimbursements related to posting (incorrect treatment of home rent, car rent, meals and hotel costs)

It is important to emphasise that the above list does not contain all the tax risks of foreign postings, and it cannot be applied for all posting situations.

Posted employee leaves for abroad – what can cause problems here?

Selfishly, we only reviewed the first point, employees posted to Hungary, from the perspective of Hungarian tax inspections. However, tax risk factors relevant for the posting country may apply in these cases too. For employees posted from Hungary we can say that the stakes rise by a notch since the tax authority of the host country also comes into the picture, and every country has its creative tax inspectors (in their defence, we should add that there are creative taxpayers as well).

The tax risks listed in connection with employees posted to Hungary are also tax risks of foreign postings from Hungary, and a thorough assessment should be conducted to decide which country has a right to levy taxes on what types of income in light of Hungarian taxation and the convention for the avoidance of double taxation, and, in the case of contributions, based on the EU coordination regulations, social treaties and local laws and regulations.

The most frequent problems may include:

• work performed while the A1 form is missing (foreign contribution risk)
• with an A1 form available, it is discovered that the actual employer is the host party (foreign contribution risk)
• in the case of a Hungarian contribution payment liability, the Hungarian contribution base is determined incorrectly (contribution and social contribution tax base too low)
• the posting is only a quasi-posting, it actually satisfies personal needs (tax treatment of accommodation and travel costs related to posting)

Tax risks of foreign postings can result in serious sanctions

It should be noted that a conference abroad lasting a few days, a multi-year foreign posting within an international group, a one-month language course of the managing director overseas or work abroad that can be qualified as a replacement posting all represent different risk levels.

Unfortunately, the mistakes made during postings, i.e. the tax risks of foreign postings, may result in serious sanctions. Interpreting the laws and regulations correctly is vital in each case, and we have to agree with the specification so often formulated in the positions of the National Tax and Customs Administration that every circumstance has to be reviewed carefully in order to establish the correct tax treatment for the given transaction (in our case, the posting).

The team of WTS Klient Hungary has special expertise regarding the taxation and social security payment liability of expats. Our objective is for the tax payment and tax return process to flow as smoothly and flawlessly as possible for the posted employees, despite its complexity. The tax risks of foreign postings can be minimised with our assistance, and there is a greater chance of avoiding sanctions. Please do not hesitate to get in touch.

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The deadline (22 May) for submitting personal income tax returns is fast approaching. For certain types of income it is not always easy to decide whether it should be declared in the return, and if yes, then how. This is particularly difficult for foreigners who are also obliged to submit a tax return in Hungary. In this article we will highlight some of the most common errors.

Personal income tax or property tax

In Hungary, as opposed to many other countries, there is no tax on property, you are only liable for tax on income (as well as paying a duty when acquiring certain properties). This means that properties (e.g. real estate) do not need to be included in personal income tax returns, as there is no tax payment obligation on them, or on any increase in their value.

It is a different matter entirely if you generate income using such property. If you rent out a real estate or sell it, and the income from the transaction exceeds the deductible costs and expenses, that income must be reported and taxed. However, you need to take the location of the property into account as well. If you rent out a property that is not located in Hungary, you need to pay the taxes abroad, since, as we mentioned in an earlier article, the conventions for the avoidance of double taxation essentially allow the income derived from real estate located in a country to be taxed in that country (in the absence of such conventions, there may be a risk of double taxation).

Capital income from abroad

What happens if one of your foreign investments yields income? Tax on such income is often already deducted abroad, therefore we naturally assume that we have nothing else to do here. Unfortunately though, this is not the case.

If a taxpayer qualifies as a Hungarian tax resident, income from interest, dividends or stock-exchange transactions are basically taxable in Hungary. This is true for Hungarian and foreign citizens alike.

Awareness of the double taxation convention between the source country and Hungary is vital of course, but generally speaking, interest and capital gains are taxable in the country of residence. For dividends, the source country also has the right to tax the income, but the rate of the deductible tax is limited.

The easiest way to avoid double taxation is to send an appropriate declaration to the competent foreign financial institution in good time. In this case they will not deduct any withholding tax, or only up to the permitted rate. Consequently, it cannot happen that 25% tax plus a solidarity contribution of 5.5% of the paid tax gets deducted from your interest obtained in Germany, before paying a further 15% tax on it in Hungary. In other words, instead of paying only 15% you are charged tax of 40%, which according to the convention can only be reclaimed through lengthy administrative procedures.

Declaring income taxable abroad

It is possible to find that although you are a Hungarian tax resident, some of your income is taxable not in Hungary but abroad, in accordance with relevant double taxation conventions. Nonetheless, you need to include this income in your Hungarian personal income tax returns too.

Private individuals who are tax residents in Hungary have an unlimited tax liability, which means they essentially need to pay tax on their income earned anywhere in the world. If any such income is not in fact taxable in Hungary pursuant to conventions, you still need to declare this income as tax-exempt in Hungary in your personal income tax return. This essentially means no taxes are paid on such income, but you are obliged to declare it to the tax authority nonetheless.

Income from the sale of movable property

Another common mistake is that we assume no tax has to be paid on the sale of movable properties. This is not always the case though. By law, no tax has to be declared or paid if you sell movable property of no more than HUF 600,000 (roughly EUR 1,900) per year. You are also not obliged to pay any taxes if your income from sales does not exceed HUF 200,000 (roughly EUR 640).

So, it is really important to bear relevant Hungarian, foreign and international legislation in mind when preparing your personal income tax returns.

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A Common errors in Hungarian personal income tax returns of foreign private individuals bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Cross-border employment is a key issue in terms of taxation as well since it is important to define the country where the income of workers is taxable.

Foreign workers – how to define tax residence?

 When examining the income tax payment obligations of foreign workers in Hungary, the first step is to define their tax residence. To this end we have to examine the Hungarian regulations, but generally the provisions of the convention for the avoidance of double taxation concluded with the country concerned and overriding national law will be more helpful (if there is such a convention between the two countries). In the majority of these conventions, the following aspects can be used to define tax residence:

• permanent address
• centre of vital interests
• habitual abode
• citizenship.

This list is also an order, which means that the permanent address is the first step of the examination. If we can clearly define tax residence based on a permanent address, there is no need to investigate any further.

Permanent address 

According to Hungarian law, permanent address is an address where private individuals settle for a long-term stay, regardless whether they are the owner or tenant of this property. Another characteristic of a permanent address is that it is continuously available for the person concerned.

Centre of vital interests

If the tax residence of foreign workers cannot be determined unambiguously based on a permanent address, the next step is to examine which country the person’s centre of vital interests is in, i.e. in which country we find their closest personal, family and economic relations. This is not an easy task as there are a number of factors to be considered at the same time. If a foreign individual accepts an assignment in Hungary and is accompanied by their family, then Hungary is likely to be the centre of vital interests in terms of family relations. When considering economic relations, then among other things the place where the person earns and spends their income needs to be taken into account, as well as the countries where they have bank accounts.

Habitual abode

The third step in defining tax residence is habitual abode. Under habitual abode, the tax residence of foreign workers is assigned to the country where the given person spent more days compared to the other country.

Once the tax residence is determined, we need to define the countries where the various types of income are liable for tax. If there is a convention for the avoidance of double taxation between Hungary and the other country concerned, the convention will prescribe the country where the income is subject to tax. National rules are applicable if there is no convention between the countries.

Income from employment

Income earned from employment is taxable in the country of residence if the foreign workers perform the work in that country. If the work is performed in a country other than the country of residence, the income is normally subject to tax in the country where the work is performed, but under certain conditions, taxing rights remain in the country of residence.

Capital gains

In terms of foreign workers’ capital gains, income from interest and exchange gains is normally subject to tax in the country of residence according to the conventions.

Income from dividends belongs to a special category. These incomes are normally subject to tax in the country of residence too, but up to a certain level (10 or 15% depending on the convention) the source country may also impose a tax. The tax deducted in the source country is taken into account under the conventions. For example, if a German citizen working and resident in Hungary receives dividend income from Germany, and a tax amounting to 15% is deducted according to the relevant convention, then no tax is payable in Hungary in relation to this dividend income because the relevant tax rate in Hungary is also 15% (the person still has to submit a tax return though).

Income from real estate utilisation 

In line with the conventions, the right to impose tax on income from real estate belongs to the country where the real estate is located.

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