Global employee mobility is an increasingly common issue for companies. Therefore, it is important to be familiar with the basic legal and tax regulations regarding postings. While the first chapter of our three-part series focused on the most important legal questions, this time we will explore tax and social security considerations.
When a Hungarian employer employs a Hungarian employee in Hungary, all related social security contributions are to be paid according to Hungarian law. However, the moment the Hungarian employer sends the employee abroad for work, taxation becomes much more complex. How many days the employee spends abroad, which country they go to, who their employer is, whether the foreign party is billed for the employment costs, and so on are all relevant factors should be taken into consideration. Moreover, foreign employment has completely different tax and social security implications. For this complex situation, we try to provide some guidance (without aiming for completeness) in the following.
Taxation
Hungary currently has double tax treaties in force with more than 90 countries. Although these treaties may differ from each other, most of them follow the OECD’s model treaty.
According to this model, as long as the duration of the posting does not exceed 183 days, the Hungarian employee generally remains under the scope of Hungarian tax laws and continues to pay Hungarian personal income tax (PIT). However, several factors can complicate this situation, such as if the Hungarian employee acquires residency in the host country (although this is unlikely for postings under 183 days), if the Hungarian employer’s foreign branch pays the costs of the posting, or even if the costs are merely recharged to a foreign branch (which can be common for transfer pricing reasons). Any of these could result in the employee becoming liable for taxes in the host country, even if they do not spend more than 183 days there.
If the posting lasts longer than 183 days, the host country has the right to tax the employee’s salary. At this point, we are dealing with possible double taxation, as the employee will still be subject to Hungarian tax. This double taxation is addressed by the relevant treaties: in most cases, Hungary exempts the employee’s foreign-sourced salary from Hungarian taxation (or, in some cases, the foreign tax can be credited against the tax payable in Hungary).
The situation becomes a bit more complicated if the employee is posted to a country with which Hungary does not have a double tax treaty. This can easily occur with postings to the USA, for example (as Hungary currently does not have a treaty with the USA). In such cases, local laws will determine whether the posted employee is required to pay taxes in the host country and when they must begin paying them. This means that even a short-term assignment, lasting less than a few months, could trigger foreign tax obligations. In such cases, the Hungarian PIT law theoretically allows for the foreign tax paid to be credited against the Hungarian tax. However, this credit is not always comprehensive, and it may lead to partial double taxation of the income.
Social Security Contributions – a completely different framework
When considering the public burdens, social security contributions and other related charges are just as significant. However, when dealing with contributions, one must think in a matrix that is entirely different from the one of income taxation.
If the posting is to another EU company, the rules are governed by an EU regulation. According to this, if the duration of the posting does not exceed two years, the employee must continue to pay Hungarian social security contributions and other related charges. In this case, the Hungarian employee provides an A1 certificate to prove that they remain under the Hungarian social security system while working abroad. If the duration of the posting exceeds two years, EU law determines whether the Hungarian employee remains under the Hungarian social security system or whether they must switch to the social security system of the other EU country.
If the posting is to a non-EU country, the determining factor is whether Hungary has a social security agreement with the host country or not. Hungary has such agreements with many economically developed countries outside the EU, including Canada, Australia, and the USA (the termination of the double taxation treaty with the USA did not affect our social security agreement with the USA). If a Hungarian employee is posted to one of these countries, the social security situation will be governed by the rules of the agreement (which, in most cases, also means that the employee remains under Hungarian social security for postings not exceeding two years). However, it is necessary to carefully review the specific agreement in such cases.
If the posting is to a country with which Hungary does not have a social security agreement, it is likely that the employee will be required to register with the social security authorities in both countries. This will likely result in double contribution obligations, which the employee may not offset by receiving pensions from both countries.
Other taxation risks
If calculating PIT and social security obligations doesn’t provide enough of a headache for the company’s financial officers, there are other “traps” to be aware of. For example, corporate tax. A foreign posting could easily create a permanent establishment for the Hungarian company sending the employee, and thus tax liabilities in the host country. This could arise even if the Hungarian company does not have any form of legal establishment, such as a branch, in the host country. This taxation could be triggered, for example, by posting of higher-ranking employees (e.g., sales managers) who, during their posting, still have signing power on behalf of the Hungarian company.
Conclusion
Understanding the taxation of employee mobility is a multi-faceted puzzle, involving factors such as the duration of the posting, the posting location, the employee’s role, whether the host country reimburses the employee’s salary, and many other considerations. Therefore, it is often only possible to determine the final tax burden on a case-by-case basis.