Attention foreign temporary employment agencies and airlines!

There are new tax and registration obligations for foreign companies' establishments in Hungary. Temporary employment agencies and airlines will have to pay local business tax and innovation levy in Hungary from 2024.

Under the recently adopted changes, foreign temporary employment agencies and airlines will also have to pay business tax (and presumably further taxes) in Hungary. While the new rules on the ’place of business’ clearly reflect the legislator's intention to bring more and more foreign service providers under Hungarian tax jurisdiction, the new rules may also impose additional administrative burdens - and in extreme cases even a higher tax rate - on domestic service providers.

In line with the tendency above, foreign financial and investment service providers offering cross-border services are obligated to pay transaction fees, not to mention the fact that foreign online shops are also subject to an increasing number of Hungarian taxes (product fees, EPR fees, retail sales tax, public health product tax, etc.). We will report on the latter in a separate newsletter.

Local business tax (LBT) is levied on foreign employment agencies and airlines, while domestic service providers must split their LBT base.

One of the key additions to the summer taxing changes sets out an unprecedented way of determining the status of a ’place of business’ (permanent establishment) for a number of domestic and foreign companies.

Section 52 (31) of the Local Taxes Act, with a few exceptions, is basically based on the concept of a physical establishment, i.e. a taxpayer is considered to have a permanent establishment (PE) in the territory of a municipality if it has a physical establishment (shop, office, warehouse, etc.) which it uses for the conduct of a business activity under a specific entitlement.  This approach changes, as:

• in the case of temporary employment agencies, the establishment is linked to the work of the temporary workers,
• in the case of airlines, the establishment is linked to the departure of their flights.

In neither case, therefore, is the existence of a physical establishment, but rather the place of service providing will be the basis for the taxing right of the municipality.

In the case of temporary agency work, a more restrictive paragraph has been introduced in the HIPA Act. In the future, a temporary employment agency will be considered to have a PE in the jurisdiction of the municipality in which the temporary agency workers are employed for a total of at least 21,000 hours (2625 full-time working days) during the tax year.

What does this mean for domestic and foreign recruitment agencies? What other obligations are there in addition to LBT?

For domestic providers, this could result in increased administration and, in some cases, an increase in tax liability. The additional administrational burden will result from the split of the tax base between the HQ and the place(s) of business, which will be done by apportioning the tax base on a pro rata basis for personnel expenses (possibly based on the value of assets) and, above a tax base of HUF 100 million, by using a mixed method. Due to the different business tax rates applied by each municipality, this may even result in an additional tax burden for the company concerned. The new rule does not limit the number of such establishments.

For foreign temporary employment agencies, the creation of a place(s) of business in Hungary will primarily result in a LBT liability. It should be noted the last years’ amendment to the Innovation Levy Act which brought permanent establishments, defined by the Local Tax Act, under tax liability. As a result, LBT almost automatically entails the obligation to pay the innovation levy. The obligation to pay the innovation levy also seems unavoidable because tax establishments are not covered by the SME exemption. In addition, hiring out of labour for more than 183 days already raises the issue of establishment under corporate tax. In case of countries with that our existing double tax treaties include the concept of a service establishment, the corporate tax liability should be analysed. If a permanent establishment is also created under corporate tax law, transfer pricing obligations may arise in respect of transactions between the foreign company and the permanent establishment. Furthermore, the permanent establishment may also be taken into account for the purposes of the global minimum tax rules in the future.

The aforementioned obligations can only apply to companies established in an EEA Member State, as companies established in a third country outside the EEA cannot hire out workers in Hungary under the Labour Code.

And what is the situation with the airlines?

Airlines will face similar changes to temporary employment agencies. Air passenger transport operators will establish themselves at the airport from which their flights depart and will therefore have LBT obligations to the municipality in whose jurisdiction the airport is located. In their case, the value of the air passenger transport service provided on their flights from Hungary and the services provided in conjunction with it (e.g. baggage transport, VIP lounge, priority accommodation, etc.) are also included in their net revenue. For domestic companies this will mainly be an administrative burden due to the possible allocation of LBT between municipalities according to the place of establishment (they will have to apply a special method of allocation). On the other hand, foreign companies it will also imply a new tax liability, which, like for temporary employment agencies, will also entail an obligation to pay innovation levy.

If you have any further questions regarding the information in this newsletter,
please do not hesitate to contact our tax experts.

This newsletter provides general information and does not constitute advice.