In practice, the tax treatment of secondments and expatriate assignments is often more complex than one might think at first. A number of international tax issues may arise (for example, the 183-day rule, the assessment of the economic employer, the A1 certificate and social security contribution liability, or the taxation of bonuses/share-based awards related to the secondment), some of which are not necessarily widely known. As a result, these topics are frequently misunderstood and may therefore lead to tax risk. In this post, based on our experience, we summarize the most common misconceptions worth paying attention to—whether foreign employees (expatriates) are coming to work with us, or our own employees are working abroad on secondment for a shorter or longer period.
6+1 misconceptions regarding the taxation and social security contribution treatment of expatriates and secondments
Shorter than 183 days = no tax liability in the host country
This is one of the most common misunderstandings related to secondments. Many people assume that if an employee is seconded from abroad to a Hungarian company (as an expatriate) and spends fewer than 183 days in Hungary during the year, no Hungarian tax liability arises. In reality, the situation is far more complex: it is not only the duration of the secondment that determines whether a tax liability arises in the host state.
The 183-day rule is only one of the conditions for the employee’s employment income to be taxable exclusively in the individual’s state of residence (typically the country from which the employee is seconded). Additional criteria must also be met—for example, the remuneration must not be paid by an employer resident in the host state, and the salary costs must not be borne by the Hungarian employer’s permanent establishment in the country of the secondment.
It is particularly important to correctly determine who the employer is. For tax purposes, the “employer” is not always the entity with which the employee has concluded the employment contract. It may happen that during the secondment, the company where the employee actually performs the work qualifies as the employer (the “economic employer”), rather than the contractual (formal) employer—i.e., the entity that bears the risks related to the work performed and exercises direction and control. In such cases, the host company may become the economic employer, which in itself may trigger a tax liability in the host state—regardless of whether the 183-day threshold is met.
Naturally, the above must also be considered when a Hungarian company seconds its employee to another country.
. In such cases, it must be assessed whether the host country applies the economic employer concept. If it does, and the host entity qualifies as the economic employer during the assignment, then a portion of the remuneration will be subject to personal income tax abroad—even if the individual spends fewer than 183 days in the other state.
Income received after the secondment cannot become taxable in the former host country
If, during a cross-border secondment, a personal income tax liability arises in the host state, this also affects the taxation of income that is paid in respect of a period that includes the secondment. Typical examples are annual bonus payments or income derived under a share-based incentive plan. When taxing such benefits, the relevant period to be examined is always the period in respect of which the employee earned (i.e., “vested” or “performed for”) the entitlement.
If part of this “service period” fell within a period when employment income was taxable in the host country, then income received later in respect of that period may also become taxable in the country where the employee was seconded—even if, at the time the income is actually received, the individual is no longer on secondment.
During a secondment, only salary and other wage-type benefits need to be addressed
A secondment can affect the taxation not only of salary but also of various other benefits. The most common items include housing support, education allowances, and private health insurance. Correct treatment is crucial not only for the employee but also for the employer, as certain benefits may be provided on a preferential basis—or even as tax-exempt benefits linked to the secondment—depending on the applicable rules.
During a secondment, the personal income tax base and the social security contribution base are always the same
It may happen that, for personal reasons and on their own initiative, someone continues to perform their work temporarily—or even permanently—from another country. For example, it is increasingly common for Hungarian employees working for a foreign company to decide that they would like to continue working from Hungary, which they can often do today in a home office arrangement. Companies frequently treat such situations as a secondment and apply for an A1 certificate in light of the cross-border work arrangement.
If an employee works from another country, it is automatically a secondment
It may happen that, for personal reasons and on their own initiative, someone continues to perform their work temporarily—or even permanently—from another country. For example, it is increasingly common for Hungarian employees working for a foreign company to decide that they would like to continue working from Hungary, which they can often do today in a home office arrangement. Companies frequently treat such situations as a secondment and apply for an A1 certificate in light of the cross-border work arrangement.
However, if the work is performed in a country other than the employer’s country of establishment specifically at the employee’s request, this cannot be treated as a secondment; therefore, the secondment rules do not apply in such cases. In these scenarios, the social security contribution liability often arises in the country where the work is physically performed.
In connection with secondments, only personal income tax and social security contribution issues need to be addressed
Many employers do not consider that seconding an employee may, depending on the nature and duration of the secondment and the work performed, give rise to a permanent establishment in the host country. In such cases, it is no longer only the seconded employee’s personal income tax and social security contributions that are at stake: the employer may also face foreign corporate income tax, VAT and other tax liabilities, together with the related registration and tax filing obligations.
The secondee must pay personal income tax in Hungary, and the host company has no tax obligations
Many people assume that if an employee arriving from abroad receives their salary from their foreign legal (contractual) employer, the Hungarian company has no tax-related tasks—even if the individual becomes liable to pay personal income tax in Hungary—since, under Hungarian rules, the obligation to pay and file the tax rests with the individual.
What many are not aware of is that the Hungarian host company must notify the tax authority if an individual working at the company on secondment becomes subject to Hungarian personal income tax.
For any questions related to secondments, please contact our tax advisors!
