Global Mobility:
taxation of the share-based payments received from a foreign parent company

In our newsletter, we will focus on the assessment of the taxable income and the related tax liability arising from the share-based compensation received by Hungarian employees from the foreign parent company of their Hungarian employer. Due to the termination of the Hungarian-American agreement, this topic is particularly relevant, since in the absence of an agreement on double taxation, different rules have to be taken into account when determining the tax liability related to income derived from such benefits (e.g.: dividends).

In the case of multinational company groups, employees often have the opportunity to benefit from the shares of the foreign parent company as part of an employee incentive scheme. Under the rules of the share-based payment scheme, employees may receive shares of the parent company at a reduced price, or even free of charge, or may be entitled to share options.

Although foreign share-based payment schemes vary due to the specificity of the legal environment in a given country, they are similar in that they impose a certain waiting ("vesting") period for access to shares/stock options, i.e. the date of full disposal.

The employee becomes entitled to a certain number of shares or options free of charge or at a discount in return for a percentage of his or her salary, which they can then exercise after a certain period. At this point, the employees are usually automatically granted full discretionary rights or, in the case of options, the right to decide when to buy company shares.

What is the date on which the income is earned?

Under Hungarian rules, the tax liability does not arise at the "granting date". This only occurs when the vesting period expires and the individual becomes entitled to carry out the relevant share transactions ("vesting date") - or when the individual exercises this right. (In Hungary, the date when income is earned is the former, but there are countries where the date when income is earned may be linked to the latter date).

When tax liability arises, it is necessary to examine the tax residence of the employee receiving the income. If the employee is a Hungarian tax resident under the Hungarian Personal Income Tax Act and the relevant double taxation convention (if any), the tax should be payable in Hungary. However, knowledge of the terms of the share-based payment scheme is also very important, because if the income is attributable to an employee for a longer period in the past, and the employee has worked in several countries during that period, the taxable income may be attributable to several countries, so the income needs to be apportioned.

What will the tax base be and what will be the public charges in Hungary?

The taxable base is the market price of the share or option in the case of a free acquisition, or the market price less the amount paid by the employee in the case of a discounted grant. The individual is liable for the payment of the tax, given that the parent company is not a paying agent in Hungary for social security and personal income tax purposes. The income is subject to a 15% personal income tax and a 13% social security tax. The tax base is 89% of the income under a special rule of the Hungarian Personal Income Tax Act.

Can any other incomes arise during the holding or selling of shares?

When holding securities, the individual may also earn interest and dividend income, in respect of which the individual may also be liable to pay tax and make a declaration in Hungary, based on the assessment of the individual's tax residency. In the case of these revenues, it is particularly important to examine the existing double taxation agreement between the two countries in order to correctly determine the tax liability. If there is no double taxation agreement between the two countries, then in the case of these incomes, the so-called offsetting method can be used. Even if the foreign tax burden will be higher than the Hungarian tax liability and even if the tax paid abroad can still be deducted, in the absence of an international treaty, an additional 5% PIT will have to be paid on the income in Hungary.

When the share is sold, if the sale price is higher than the value of the security at the time of acquisition, the difference is taxable as a capital gain in Hungary.

Since the shares are usually provided by a foreign parent company, neither the income realised on the acquisition, nor the income realised on holding and sale will appear in the employees' draft Hungarian income tax return prepared by the Hungarian tax authority. When completing the draft return, the individual should therefore ensure that this information is included correctly.

If the employee fails to do so, the Hungarian tax authority may use the automatic exchange of information between countries to identify the discrepancies and require the individual to declare this income and pay the associated tax. The individual can make up the missed obligations within the deadline, in which case no other sanctions will apply. However, if the individual fails to cooperate with the tax authorities, they may expect the tax shortage assessment together with a tax penalty, a late payment penalty and a default penalty.

It is easy to see the complex background knowledge required to determine in which country, at what time and on what taxable base an individual is liable to assess, declare and pay tax on their income from share-based payment. This task can become even more complicated if the employee's place of work is constantly changing, or if they have to declare missed income and determine tax liability for several years.

VGD Hungary provides a full service for the assessment, declaration and payment of income earned under share-based payment schemes, and our partner companies in the Nexia network of international consultancy firms in more than 100 countries provide all the necessary support to our clients if the specialities of a foreign share-based payment scheme require so.

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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.