Personal income taxation
The tax residency shall always be the first factor to be checked for individuals taking a cross-border engagement, as the length of the engagement, the family shift surrounding the new career may affect even the basis of the personal income tax relations. Moreover, in a cross-border situation not only the domestic law of the sending and the receiving country but also their bilateral relations, i.e. the relevant treaties concluded between them should be investigated. Tax residents are subject to personal income tax on their worldwide income.
Hungary maintains a treaty network with approx. 80 countries worldwide, although most of the Hungarian treaties are concluded in accordance with the OECD Model Convention (“OECD MC”). By this, overriding even the Hungarian domestic provisions, the decisive factors for determining the place of tax residency are the potential permanent residence, the centre of “vital interests”, and the place of habitual abode. Consequently, expatriates arriving together with their families into Hungary and maintaining a permanent home here may not only subject to tax for their income sourced from Hungary, but could obtain even a Hungarian tax residency and tax worldwide income in Hungary.
If this is not the case, i.e. the cross-border engagement does not result in a shift of tax residency, then the taxation rules of the given income category in domestic and treaty law shall also be determined. Provisions of Art. 15 OECD MC are applicable in case of cross-border employment, by which taxation rights are generally attributed to the country where the employment is physically performed (state of exercise), unless certain conditions are fulfilled.
A foreign tax resident individual’s income – with respect to its Hungarian employment – may only be exempt from Hungarian taxation, if:
- the individual is a resident of a country other than Hungary with which Hungary has concluded a treaty; and
- he/she is present in Hungary for a period not exceeding 183 days in the calendar year/tax year/12-month period concerned; and
- the remuneration is not paid by, or on behalf of, a Hungarian employer, and the remuneration is not borne by a permanent establishment in Hungary.
In cases when any of the above conditions are failed, the individual’s income paid for the Hungarian employment is taxable in Hungary. The other country may exempt or credit such income from their domestic taxation depending on the treaty provisions and the local legislation of the sending country.
If a Hungarian tax resident performs dependent activities (employment) abroad, similar rules govern its taxation. If the income is to be taxed in the country of exercise in accordance with Art. 16 OECD MC, the income is exempt from taxation in Hungary.
Different rules apply for the cross-border employment of members of supervisory boards and directors, according to the provisions of Art. 16 OECD MC. Under these, the fees of the supervisory board members and the directors are exclusively taxable in the state of residence of the company.
For further details about Hungarian personal income taxation, please check our posting “Taxation of Employment in Hungary” here.
Social security law
Besides personal income taxation, the social security obligations shall also be determined in a cross-border employment, especially because the governing provisions and the logic behind are totally different from those cited above.
Exemptions from the Hungarian social security obligation (which is quite burdensome in an international comparison, not like our 15% flat personal income taxation) depend on the individual’s citizenship (EU citizens, third–country citizens) and on the conditions of the employment/assignment.
Foreign nationals coming to Hungary to perform their dependent activities are basically subject to the same social security system applicable for domestic employees. Practically speaking, in general, if the foreign individual is employed by the Hungarian company (also in the case of a dual employment), all social charges are due, as in the case of employees with the Hungarian nationality. For more details about the Hungarian social security provisions, please see our posting “Taxation of Employment in Hungary” here.
Moreover, foreign individuals are in most cases also insured in their home country for social security purposes. With the aim of preventing double payment or double non-payment of social security contributions, EU coordination rules and bilateral social security agreements (Hungary has concluded 12 social security agreements with non-EU countries) are applicable.
In the case of EU citizens, EU coordination rules (EEC Council regulation no. 883/2004; in relation to citizens of Norway, Liechtenstein, Iceland and Switzerland EU regulation no. 1408/71 is still applicable) determine which country is entitled to charge social security contributions. Based on the general rule of the EU regulation, the individual should pay social security contributions in the country where the work is carried out. However, if an individual wishes to remain in the home country’s social security system, certain conditions must be met and a certificate of coverage (e.g. E101; as from 1 May 2010 A1) must be obtained, based on which Hungarian social security charges may be avoided.
Besides the general rules, there are no special provisions or tax exemptions applicable to non-residents working in the territory of Hungary or to Hungarian residents working abroad.
If you need further information about personal income taxation and social security charges for expatriates working in Hungary, please do not hesitate to contact us! LeitnerLeitner Budapest is ready to be of your assistance in full-scope tax advisory and compliance as well.
Address: 1027 Budapest, Kapás utca 6-12.
Telephone: +36 1 279 2930
Fax: +36 1 209 4874