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.
