In today’s era, posting of workers has become more and more common, as companies are taking advantage of the increased access to international markets and resources. The benefits of global mobility are countless: from getting access to new skills and technologies to gaining a better understanding of the local culture and diversifying the workforce. However, each market has it’s own specifics when it comes to international taxation of the expats. Our tax professionals from Hungary have prepared a comprehensive overview on the legislative aspects of posting of workers and employing expats in Hungary.
Who is an expat?
When searching for topics related to international taxation, the first concept we undoubtedly come across is “expat.” Let’s examine what the term “expat” actually means.
The term “expat” originates from the English word “expatriate” and refers to a person living in a foreign country or, in terms of taxation, an individual who temporarily works in a location different from their residency. This can apply to individuals working abroad from Hungary or individuals coming to Hungary from abroad for employment purposes.
There can be various situations when it comes to international employment. For instance, when an employee is sent by their employer to work in another country, this is referred to as a posting. Another scenario is when a foreign employer becomes the employer of a Hungarian individual who works for them in Hungary. It is also possible that a Hungarian employee works outside of Hungary for a Hungarian employer. Additionally, there are cases where an employee works in multiple countries for the same employer.
Right from the beginning, it should be noted that no two cases are exactly the same, and each situation must be examined individually. The most important question is that taxation and social security contributions cannot be treated as one entity. Their regulations are completely separate and distinct from each other.
International Employment Taxation
To begin with, let’s examine international regulations, personal income tax, and determine the tax residency of the employee.
Tax Residency: Tax residency expresses the closest connection between an individual and a specific state for taxation purposes. For instance, if multiple states would consider the same individual as a resident based on their internal laws, we need to examine the relevant double tax treaties to make a determination.
How is tax residency determined according to international agreements?
International agreements primarily rely on the rules of Model Tax Convention to determine tax residency. The main criterion is the individual’s permanent residence. If a person has permanent residences in multiple countries, the focus is on the center of their vital interests. In cases where this criterion is also met in multiple countries, the agreement considers the habitual place of residence. The nationality of the individual is the last factor to be examined, if necessary.
Hungarian Personal Income Tax Law disrupts this order as it first examines nationality, followed by the right of free stay (whether the individual spends 183 days or more in Hungary within a year). Many individuals are familiar only with the “183-day rule,” while in reality, it is just one of several rules to consider.
In the case of permanent address residency
According to the Hungarian regulations, the residential card (a.k.a. address card) is merely an administrative matter. Permanent residence refers to the place where an individual has registered for long-term residence and actually lives. According to the law, this can even be a hotel room if the aforementioned conditions are met, and the room is at the disposal of the individual.
In the case of center of vital interests’ residency
The center of vital interests refers to the examination of where the employee’s closest family and economic interests are located and to which country they are linked (children, spouse, bank account, ownership).
Why is determining tax residency important?
Determining tax residency is crucial because it is necessary to declare worldwide income, including income from both domestic and foreign sources, in the tax return filed in the country of the tax residency.
What is a double tax treaty?
A double tax treaty, also known as a tax treaty or tax convention, is an agreement between two countries to prevent double taxation.
Countries establish these treaties to determine which country has the right to tax specific types of income. Once the allocation of taxing rights is determined, the domestic laws of each country are examined to ascertain the specific tax treatment and any applicable tax rates for the income in question. In Hungary, for instance, double tax treaties have been established with 80 countries to avoid double taxation.
When there is no double tax treaty in place
If there is no double tax treaty between two countries, then only the Hungarian Personal Income Tax Act (Act on PIT) needs to be examined for both tax residency and taxation purposes. The taxation of income is determined based on the provisions of the Act on PIT, which may potentially lead to double taxation in certain cases. However, the Act on PIT provides solutions for such situations. If the income has already been taxed in another country, the Hungarian tax legislation partially recognizes it by allowing a deduction of 90% of the foreign tax paid from the tax assessed after the tax base.
When there is no double tax treaty, but there is an international agreement
These are mostly specialized sector-specific agreements (e.g., aviation). However, we may also encounter individuals belonging to the professional or civilian personnel of NATO who are stationed and active in Hungary, but are not required to pay Hungarian personal income tax (PIT). International organizations and diplomatic bodies may also have other exemptions and benefits.
Conclusion: If there is a treaty between two countries, the tax will be paid in one country for sure. If there is no treaty between the two countries, partial taxation may occur by one of the countries, or both countries may have the right to tax the income. In the case of certain types of incomes (such as royalties, dividends, interest income), double taxation may still occur even with the existence of a treaty.
Contribution payments in the case of international employment
Regarding the payment of contributions, there are also international agreements, which can be classified into four categories:
- The individual falls under the EU regulation.
- The individual does not fall under the EU regulation, but there is a separate agreement in place.
- The individual does not fall under the EU regulation, and there is no agreement in place.
- Whether the individual falls under the EU regulation or not, there is a specific international agreement in place.
Payment of income falls under the scope of the EU Social Security Coordination Regulation for individuals
The Regulation on the Coordination of the Social Security Systems of the European Union has direct applicability even without being implemented into domestic legislation, and it applies even if it contradicts the laws of Hungary or any other country. It applies to citizens of member states, stateless persons and refugees with a residence in member states, their family members, as well as to the citizens of Iceland, Liechtenstein, Norway, and Switzerland. The regulation establishes the main rule that individuals falling under this regulation can be subject to the legislation of only one state. As a result, while taxation can be divided among countries, in cases falling under the regulation, social security contributions must be paid exclusively in one country.
Payment of income when the individual is not covered by EU regulations, but there is a separate agreement in place
This category includes bilateral agreements on social security and social policy that are currently in effect. Hungary, for example, has such agreements with Japan, India, Canada, Austria, and Montenegro.
Payment of income when the individual is not covered by EU regulations and there is no agreement in place
These individuals are referred to as third-country nationals with whom Hungary has not concluded a social policy agreement or who are not members of the EEA. An example of such a case is China. In this situation, dual contribution may occur, as a Chinese individual coming to work in Hungary may be required to pay contributions in both Hungary and China or may be on posting.
Similarly to the case of double taxation, specific agreements typically apply to airlines, NATO, and other international organizations and to their personnel.
Secondment as International Employment
Secondment refers to the situation where an employee from Hungary is posted abroad by their employer. This can be considered the most common circumstance, and it is regulated both at the EU and at international levels. In such cases, the employee remains under the jurisdiction of their Hungarian employment contract, and the posting is strictly temporary, for a limited period. The temporary duration is defined as 183 days for tax purposes and, in certain cases, up to 24 months for social security contributions.
Taxation in the case of posting
The determination of taxation follows the principles outlined in the double taxation agreements established by the OECD Model Tax Convention. If, within a period of one year or 12 consecutive months, the duration of the posting exceeds 183 days, the right to tax is transferred to the host country. This also occurs if the secondment lasts less than 183 days but the remuneration is paid by the host employer. In such cases, the obligation to pay personal income tax (PIT) is established in the host member state.
The EU Social Security Regulation
If the duration of the secondment (posting) does not exceed 24 months, the employee remains subject to the social security rules of the sending state.
A Hungarian private individual works for a foreign company from Hungary
If the employee is subject to the Hungarian social security system and will remain covered by Hungarian insurance in the future, the employer is required to register in Hungary as a foreign employer.
Foreign Employer in Hungary
In such cases, the foreign employer obtains a Hungarian tax identification number, which can only be used for the payment of social security contributions related to the individual employee. The payment of personal income tax is the responsibility of the employee in this case, not the employer. Therefore, the employee is required to pay the tax to the tax authority.
Short-term Assignment of a Foreign Employee at a Hungarian Company
It is crucial for the foreign employee to have a certificate of tax residency from their home country, which allows them to maintain their tax liability there during a short-term assignment (under 183 days). Another important document is the certificate of coverage for foreign insurance (A1 certificate), and in such cases, the employee is exempt from paying social security contributions in Hungary.
Global Citizen: An Employee Working Regularly in Multiple Member States
The first step is to determine where the employee has their permanent residence because if they “habitually carry out substantial work” in the state of permanent residence, they will be subject to social security coverage in that Member State. If the employee does not perform their work “substantially” in their state of permanent residence, then they will be covered by social security in the country where the employer is based.
The determination of “substantial work” needs to be assessed on a case-by-case basis, considering the working hours in each country and the extent of remuneration. Accurate records and attendance sheets are necessary for this assessment.
Remote Work, Home Office
Remote work and home office are not considered business trips or assignments (posting), and temporarily working abroad is unlikely to change the location of tax and social security obligations. However, engaging in long-term remote work or home office in a foreign country may establish a basis for changes in tax obligations. Therefore, it is important for employers to know where their employees are located and from where they are performing their work, as income tax or social security contributions may arise in another country where the employee is working in a home office.