It occurs often that a multinational company employs a foreign manager based on an employment contract or secondment. In the first case the Hungarian company is considered as the legal and the economic employer as well, therefore the salaries are payed directly by them. In the second case, the employee maintains the employment contract in the „mother country”; therefore, the salaries are still paid by the parent company (naturally the Hungarian company pays a „service fee” for the secondment to the parent company). The mentioned cases differ from many points of view; therefore, an improper classification may trigger many issues.
First of all, a problem could arise respecting the legitimacy of classifying a relationship as secondment. To be able to make a decision in this regard a detailed analysis of all aspects shall be performed. However, the place of taxation cannot be derived certainly from this analysis only.
In order to be able to decide about taxation, it is important to be familiar with the concept of tax residency which indicates the sole country having rights to tax worldwide income. Irrespective of the source and type of the income – salary, interest or other –, the individual is obliged to report it someway to the competent tax authority.
Regarding salaries the right of taxation is based on the principle of territoriality that is the State of employment, which is Hungary in this case. Although Hungary can only levy taxes after the Hungarian workdays, every other workdays shall be taxed in the state of residency or in third countries. The income should be proportioned among different countries where the individual is physically working, but this difficult calculations is only the tip of the iceberg! Every country has different consideration regarding the tax base. In Hungary this is the gross salary, whilst in Austria the tax base is the salary plus advisory fees reduced with the social security contribution. There could be moreover other differences as well: for example the allocation keys may differ from country-to-country, taxation of fringe benefits, company cars, mobiles etc. may also vary.
Another contradiction that could worry the advisors is the fact that many foreign manager would like to keep his/her social security coverage in the homeland, but also attracted to the relatively low, 15% Hungarian personal income tax rate. Contrary to Hungary – where social security contribution is due without any cap – many states have a ceiling for the contribution payments. Furthermore, the managers also insist to their homeland social security coverage based on their personal emotions, they trust more in the pension and the health care over there. The fact that services and pensions provided by the social security or other health care systems of the different countries are not harmonized at all makes this area more important for private individuals. Because the principles of taxation rules are different than that of the social security contributions, after we have decided the place and amount of taxation we should undergo a separate process with the contributions as well.
Mistakes could lead to tax shortages and tax penalties, but could even result overpayment of taxes by the individual. In order to comply with both the difficult regulations and the individual needs, and to avoid double taxation an advisor with international background having a ‘full picture’ should be consulted regarding tax planning and payroll accounting. Many times the existing structures are also mistreated for years; therefore, it is recommended revising both, the employment structure and the practice in the frame of a health check.
LeitnerLeitner is one of the most influential tax consulting, accounting and auditing companies our assistance in the treatment of secondments, employments of Hungarian and foreign citizens. We also handle special incomes from investments, stock and other capital transactions, entrepreneurship, and many more.