Extended business travelers are likely to be taxed on employment income relating to their Hungarian work, but treaty rules are examined closely.
Liability for income tax
An individual’s tax liability in Hungary depends on residence status. If an individual is a resident, worldwide income must be declared in the annual tax return.
Non-resident individuals are taxed on their income from Hungarian sources. Residence rules are determined very similarly to income tax treaty rules.
Most categories of income are aggregated, but certain categories are taxed separately (such as dividends and capital gains).
Extended business travelers are likely to be considered resident if they spend more than 183 days in Hungary. If they spend less than 6 months, then the treaty rules are used to determine tax liability.
Employment income is derived from Hungarian sources if it is paid by a Hungarian entity, the work is performed for a Hungarian entity, or the Hungarian entity bears the costs of the employment.
Tax trigger points
There is no minimum number of days when determining tax liability. If an individual is non-resident in Hungary but the employment costs are borne by a Hungarian entity (i.e., the Hungarian entity is the economic employer), then even 1 day of work is taxable in Hungary.
Hungary has adopted the economic employer approach introduced by the Commentary of the Organization for Economic Co-operation and Development (OECD) Model Convention for each assignment/business travel starting from 1 November 2012. The Hungarian Tax Authority issued guidelines in order to determine the economic employer,
Types of taxable income
For extended business travelers who are resident in Hungary, worldwide income is subject to tax in Hungary, but foreign-sourced income that has been subject to tax in a foreign country is exempted. If they are non-resident in Hungary, the types of income that are generally taxed are employment income, income from Hungarian sources, and gains from Hungarian assets (such as real estate). Fringe benefits provided by a Hungarian entity are taxed at the entity level unless they are subject to tax as income from employment.
Income is taxed at a flat rate. On annual gross salary, 16 percent tax is payable.
Liability for social security
Employers pay a 27 percent social tax on gross salary. Hungarian resident employers also pay a 1.5 percent contribution to the training fund. All contributions are uncapped.
Employees pay a 10 percent pension contribution, 7 percent health insurance contribution, and 1.5 percent contribution to the unemployment fund. These contributions are uncapped.
Health service contribution payable by a non-insured individual is HUF 6,810 per month (HUF 227 per day).
Social security is not payable by individuals who are insured in their home country if a treaty/totalization agreement allows this possibility. If an extended business traveler is insured in a European Economic Area (EEA) member country or in a country with which Hungary has a totalization agreement, those rules apply.
Third county citizens who have already started their assignment in Hungary are not subject to the Hungarian social security system, if their assignment does not exceed 2 years in duration counted from 1 January, 2013. This applies for both the individuals’ part of the social security contributions and for the social tax payable by the employer. Third country citizens being on assignment in Hungarywill be exempted from the social security contribution after the second year of the assignment, as long as the assignment has been extended after the first year based on an unforeseen reason and if the individual declares this extension to the Hungarian Tax Authority. The 27 percent social tax will be payable in cases of assignments exceeding 2 years in duration after the first two years and onwards.
Employee compliance obligations
Tax returns are due by 20 May in the year following the tax year. Individuals who are not able to prepare their tax returns by this deadline (especially when they have income from foreign sources) could file a declaration by the original deadline indicating the reason for the late filing. Based on this declaration they could file their tax return by 20 November, together with an excuse letter to avoid penalty on late filing.
If there is no local Hungarian employer but the individual receives the remuneration from a foreign entity, the individual is obliged to pay tax advances on a quarterly basis. This generally applies to extended business travelers.
Employer reporting and withholding requirements
If the Hungarian seated employer pays any remuneration to an individual, taxes must be withheld and paid to the tax authority. Withholdings from employment income must be reported to the tax authority.
Social tax and social security contributions are due on a monthly basis, and as a general rule the foreign entity should register in Hungary for administration, payment and tax return filing purposes. If the foreign entity misses this registration, the individual becomes liable for the social security obligations.
Work permit/visa requirements
Work permits and visas are required only for third-country nationals (i.e., non-EU/European Economic Area (EEA member country citizens). Visas and work permits must be obtained before entering Hungary. Work residence permits must be obtained after arrival. EU/EEA citizens must obtain registration cards, which are valid for 5 years.
Double taxation treaties
Hungary has an extended double tax treaty network with over 60 countries.
Permanent establishment implications
A permanent establishment (PE) could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Value-added tax (VAT) applies at 27 percent on most of the goods and services. Certain goods and services have a preferential lower rate. Excise duty tax is levied on several goods, such as tobacco and fuel.
Hungary has a transfer pricing regime. A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in Hungary, and certain costs in relation to the work are charged to Hungary.
Local data privacy requirements
Hungary has data privacy laws which is in accordance to the EU standards.
Hungary does not restrict the flow of any currency into or out of the country. Certain reporting obligations are imposed, however, to control tax evasion and money laundering.
Legislation requires financial institutions and other cash dealers to give notification of cash transactions over 3,600,000 Hungarian forint (HUF), suspicious cash transactions, and certain international telegraphic or other electronic funds transfers. All currency transfers made by any person into or out of Hungary of HUF3,600,000 or more must be reported.
In the case of cash transactions over 1,000 euros (EUR), the person must be identified.
Non-deductible costs for assignees
No costs are deductible from employment income.