Global mobility:
the responsibilities of the foreign employer in the case of employment in Hungary
In this part of our employee mobility newsletter series, we present the case that is becoming more and more common based on the trend of recent years. The spread of working from home, online conferences and remote working has also opened up new dimensions in employment. It is becoming more and more common for foreign employers to employ Hungarian workers without the company having a branch, premises or permanent establishment in Hungary.
In this newsletter, we present the issues that should be considered before implementing this special employment structure.
Employment as a foreign employer in Hungary typically arises in the following cases:
• the most common case is when a - typically manufacturing company - wishes to hire a salesperson to personally build and maintain customer relationships in Hungary in order to gain market share,
• in addition, a common situation in recent years is that Hungarian workers have moved back to Hungary because of the COVID-19 pandemic and have decided not to return to their foreign employer's country even after the pandemic has subsided.
So, we start from the assumption that the employee is a Hungarian citizen, who has a Hungarian residence address and economic and personal ties to Hungary (their centre of vital interests is in Hungary). They are also Hungarian tax residents (see our previous newsletter for details) and are covered by the Hungarian social security system.
First of all, it must be examined whether the employment of the Hungarian worker should create a permanent establishment for taxation purposes for the foreign employer. For this assessment, the provisions of the double taxation convention in effect between the two countries must be considered. It is important to clarify this before setting up the employment structure, because if a permanent establishment for taxation purposes is created for the employer or it even has an obligation to establish a legal entity, additional administrative tasks and costs may arise in connection with the employer’s Hungarian operations.
If employment in Hungary does not create a permanent establishment for tax purposes, the personal income tax and social security contributions are still payable in Hungary on the Hungarian worker's employment income.
The following options are available for settling these obligations:
• the foreign employer requires a technical tax ID number in order to be able to pay the social security contributions of the Hungarian employee’s income. This technical tax ID number serves this purpose only and it does not allow to carry on any other activity;
• the foreign employer agrees with the Hungarian employee that the employee will receive a “grossed-up” salary amount (i.e. including the employer's contributions) from the employer each month, and the employee will pay the personal income tax advance and social security contributions to the Hungarian tax authority from this amount.
Please note that it is very important in this scheme that the Hungarian employee must have an employment contract concluded under Hungarian law.
In the above scheme, the reporting, payroll and taxation process is also different from the usual practice for Hungarian employers, given that the foreign employer is not considered a Hungarian income-payer company. To ensure that employment is carried out in accordance with the rules, it is recommended to involve experts in the design of the structure. To this end, VGD Hungary provides a full range of services, both in the registration process and in the monthly payroll tasks.
11 Oct, 2022
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Should you have any questions regarding this newsletter,
the tax experts of VGD Hungary will be pleased to assist you.
This newsletter provides general information and does not constitute tax advice.
