Tuesday, 16 April 2019

Taxation that follows postings

Employment posting questions emerge in both short- and long-term relations. In practice, long term-postings are usually handled by the HR department; however, short-term business trips and trainings that may get a lower emphasize also require due care from a taxation and administration perspective. In addition, the logistics sector also has some special treatments.

Long-term postings: the most complex taxation, social security and labor implications.

Salaries, wages and similar remuneration may be taxed in the receiving or the posting country. Taxation depends firstly on whether the private person keeps his or her tax residency during the period away from the home country. A change of tax residency may incur if the whole family travels and moves out of Hungary for a longer period together; thus the personal relations of the individuals are significantly and permanently changed.

If the work is physically carried out in the receiving country and the tax residency of the persons has also moved, then taxation rights go exclusively to the receiving country. Moreover, shift of tax residency for a private individual results the shift of taxation for its worldwide income too (e.g. investment income); except for income deriving from real estates which remains taxable at the place where such properties are located. Otherwise, if tax residency remains at home, the taxation of salaries will depend on the physical place of work, the duration of stay and the disburser of the money (i.e. potential permanent establishment to be created in the receiving country or not). In such cases, income taxation may goes to the receiving or the posting country or to both in combination.

Social security legislation is based on a different logic, meaning that it is not always in harmony with the taxation. As a main rule, a private individual may be insured in the social security system of one and only country, unlike in taxation. To find our which country should provide coverage, and thus be entitled to the contributions, the length of the posting, and single or parallel working relations in the affected countries should all be investigated.

In terms of labor relations, the receiving and posting countries’ legislation should be jointly applied in terms of minimum wages, maximum working times, minimum rest periods, health and safety, protection of female and youngsters, equal treatment and lack of discrimination. The understanding of both legislations is very important as the most advantageous rules shall be applied in a conflict of the rules.

Short-term delegations may also create difficulties in taxation

Cafeteria elements were deregulated in 2019, although this does not affected the treatment of business trips and short-term delegations from a tax point of view. For such short trips, the employer may provide its employees with a daily allowance fee, which is at least partially exempt from taxation. The thresholds for this tax exemption depend on the destination: domestic allowances may be granted tax free up to HUF 500 per day normally, and HUF 3,000 per day in the logistic sector.  Logistic sector is special with EUR 60 tax free daily allowance. Travel and accommodation expenses may be provided without taxation; always on the condition that the proper invoice is issued for the name of the company.

If no daily allowance is provided, the employee may be entitled to hand in invoices, again for the name of the company only, for the food he/she buys during the trip. Such reimbursements are taxable, but taxes to be paid by the employer at 15% personal income tax and 19.5% social tax over an income multiplied by 1.18%; so the total effective tax rate is 40.7%. Similar tax implications need to be considered for representation costs, if the employee during its business trip invites others to a business meal.

Special attention should be made, however, on the legal aspects as well; the wording of the employment contract can result in different interpretations about postings. If no place of work is regulated in the contract, or the workplace is varying, the definition of postings could be difficult to fulfil in practice. This leads to additional taxation for business trips and car utilization.

In some cases, companies also organize trainings for the personnel that may be tax exempt costs or in-kind contributions depending on the nature of the event and the portion of business and entertainment character. In-kind contributions are fully taxable at the level of the disbursing company similar to representation by an effective tax rate of 40.7%.

Short-term postings, business trips and training, therefore, fall under even more complicated taxation implications. This, based on our practical experiences, is usually overlooked or treated improperly within organizations. It is not bad thing to accept the helping hand of external advisors and payroll specialists in employment posting matters both in short- and long-term cases, whether domestic or cross-border situations.

LeitnerLeitner is one of the most influential tax consulting, accounting and auditing companies in Central Europe. We have comprehensive knowledge on the legal and tax environment of countries in the region. With the help of our other experts we can provide high quality advise on taxation aspects of posting for our Clients.