Expatriates assigned to Hungary
In 2012, HU TA published an information stating that the provisions of Commentary to the OECD Model Tax Convention relating to economic employers are applicable when determining in which country tax is payable on income from employment under a certain treaty. Still, we find many cases in which companies and expatriates do not take this into account and if someone works less than 183 days in Hungary as an assignee with their wages paid by the foreign employer, no personal income tax is paid in Hungary thinking that this is the right approach based on the double tax treaty. This is not necessarily true!
According to the main rule, employment income is taxable under double tax treaties in the state in which the work is performed.
1. Personal income tax exemption rule relating to expatriates
The treaties contain an exemption rule according to which tax is not payable on wages in the state in which the work is carried out but in the state of residence of the individual if all of the following conditions are fulfilled:
- the individual spends less than 183 days in the state in which the work is performed (the 183 days is to be determined according to the provisions of the treaty either for a tax year or for any 12-month period); and
- the remuneration is paid by or on behalf of an employer that is not resident in the state in which the work is performed; and
- the cost of remuneration is not covered by the permanent establishment of the employer in the state in which the work is performed.
The Hungarian tax base is determined on the basis of the foreign pay slips. However, in the vast majority of the cases, it is not enough just to convert the wage paid during the assignment at the exchange rate prescribed by legal regulations. In many cases, certain payments have to be proportioned and a part of these will be taxable in the state of residence of the expatriate and the other part in Hungary. This typically happens if someone works in multiple countries simultaneously or receives income or a bonus with regard to a period in a part of which they worked in the country of their residence, while in another part, they were in foreign assignment.
In addition, when preparing the tax calculation, tax return, we also have to examine whether any tax credit is available that the individual may apply.
2. The exemption rule does not apply in the case of economic employers
In the case of expatriates coming to Hungary, it is not enough to check just the above three criteria. We also have to examine whether the company receiving the expatriate qualifies as an economic employer or not. If the receiving company qualifies as the economic employer of the expatriate, the exemption rule does not apply and the wage paid with regard to the period of the assignment will be taxable in Hungary. In this case, personal income tax payment obligation arises in Hungary and the expatriate will have to file a personal income tax return in Hungary. The deadline of May 20 applies to expatriates also in respect of the filing of the tax return.
When determining the economic employer, we first have to examine whether the activity of the expatriate is integrated into the activity of the receiving company. This is the so-called integration test. If, the legal and the economic employer are different based on the result of the test, further aspects defined in the Commentary to the OECD Model Tax Convention and the ruling of HU TA have to be taken into account.
Determining the economic employer is a very complex task that needs to be performed specifically in each case and none of the aspects recommended by OECD may be disregarded.
Hungarian personal income tax liability of artists and athletes
Foreign artists and athletes typically only spend little time in Hungary, sometimes only a couple of hours or days but may still have tax payment and tax return filing obligation here as, based on most double tax treaties, if artistic and sport activities are performed personally in Hungary, the income paid with regard to this activity will be taxable in Hungary!
This is true even if the remuneration is not paid directly to the artist or athlete but, for example, to their agents or if the production in question is covered by the Hungarian indirect film subsidy system.
Based on the above, we can draw the conclusion that personal income tax payment obligation and the deadline of May 20 for personal income tax return filing may also apply to the foreign individuals who only carry out income earning activities in Hungary for a short time and are not in the employment of a Hungarian company.