Do you employ guest workers in Hungary?

Take special care of immigration, labour law and tax aspects before starting your investment.

The growing demand for labour in connection with major domestic investment means that more and more workers from third countries are working longer or shorter periods in the country. In response to this phenomenon, Parliament recently adopted a law on the employment of guest workers in Hungary. However, the increasing domestic employment of guest workers in Hungary is not only a challenge for the legislation, employers also need to be prepared in time!

In our experience, the employment of foreign guest workers has become a cornerstone of domestic greenfield investments, which raises questions from various aspects. The administrative difficulties of obtaining authorisation/registration for domestic work in itself present a significant challenge for investors and their contractors, who risk significant fines.

In addition, major dilemmas arise from the following:

• choosing the right form of employment (e.g. secondment or employment in Hungary, simplified employment, etc.),
• the proper accounting and tax-efficient management of costs incurred in connection with the catering and accommodation of a significant number of employees (e.g. exemption from personal income tax in relation to workers' accommodation or the possibility of a corporate tax base reduction etc.),
• the legal and technical execution of the payment of wages (e.g. bank transfer, cash payment, payment in foreign currency, advance payment for periods not covered by a legal relationship, etc.)
• the choice of the appropriate form of economic establishment (e.g. company or branch).

As can be seen from the above, the issues of immigration, labour law, company law, PIT/social security liability and payroll go hand in hand when it comes to a large foreign investment in Hungary. Therefore, a prior and combined consideration of these aspects is necessary to ensure that the investment can be realised in the most risk-free and cost-effective way possible.

Considering these aspects before starting an investment is of key importance, as it is extremely difficult to fix a poorly planned project later. Preliminary planning requires the coordinated cooperation of several fields: a lawyer specialising in immigration law, labour law, an international tax advisor and a social security specialist, as well as a payroll specialist and an accountant are also needed.

In this newsletter, we draw your attention to the importance of tax and social security issues, which in our experience are only considered after it is too late. In our experience, prior consideration of international tax and social security issues is of key importance in the case of greenfield investments because these considerations determine the contractual framework of the employment and cooperation between the general contractor and subcontractors, and - if applicable - the form of domestic establishment of the foreign investment. The tax and social security aspects of these projects are therefore not just one of many other considerations, but must be the subject of strategic consideration.

Difficulties in obtaining permits for the employment of guest workers have an impact on the notification of employees, contracting and invoicing. By carefully choosing the form of employment (e.g. secondment or domestic employment), significant cost savings can be realised. By carefully choosing the form of the company (e.g. establishing a limited liability company instead of setting up a branch), the employer may incur additional administrative costs, but may also have access to certain tax advantages (e.g. exemption from personal income tax in relation to workers' accommodation, or corporate tax base allowance), which may make such a decision beneficial overall.

Planning in advance can minimize labour, tax and social security risks!

Given the above, it is recommended to consult tax advisors and social security experts before starting domestic investments, so that their cost-effective approaches can already be taken into account when establishing a company and in setting up contractual structures.

Recent changes concerning the permission to employ guest workers. Further changes should be expected!

Under the new rules, there will be no specialised authority involved in the work permit procedure, which will significantly shorten the time needed to issue a work permit. (However, it may be disadvantageous for employees that the rules for guest workers do not allow either family reunification or subsequent settlement.)

The key question is for which employers and employees the legislation will apply.

The law allows simplified permits for so-called "preferential employers" and for temporary employment agencies registered as a qualified temporary employment agency. Preferential employers are employers with a strategic partnership agreement with the Government, implementing a priority investment in the national economy, and with a partnership agreement under the Priority Exporter Partnership Programme.

The new legislation defines guest workers as a special category of workers and sets out the obligations applicable to them. Under the new rule, nationals of countries not neighbouring Hungary and outside the European Economic Area will be considered as guest workers and will be listed in a separate ministerial decree. However, no information is yet available on which countries these will be. The total number of guest workers per year and their maximum number per country will also be regulated by a separate ministerial decree.

As with the single permit, a residence permit for foreign workers can be applied for an initial period of two years in principle, and can be extended for an additional year.

The rules include increased liability for employers if a guest worker does not leave the territory of the European Union when their residence permit expires, and the employer must reimburse the costs of expulsion, travel and possible detention in the event of the guest worker is unable to pay.

The law would come into force on 1 November, but last week the Ministry of Economic Development announced that the government would change the regulations on the employment of third-country nationals.