A question of residence
As the first step of the assessment of tax liability, we have to determine the country of tax residence of the individual coming to Hungary. For this purpose, we first have to examine the internal, national rules of the countries concerned. If, based on national tax regulations, the individual only qualifies as resident in one of the states, the country of residence is clear and no further investigation is necessary in this regard.
Frequently, however, the individual is resident in both countries based on national regulations. In such cases, we have to check whether Hungary concluded a double tax treaty with the given state. If yes, the actual residence of the individual has to be determined according to the treaty, typically based on residence, the centre of vital interests, the usual place of stay or citizenship. Even though this seems easy to decide, based on the Commentary to the OECD Model Convention, a large number of aspects have to be considered for the unambiguous determination of the country of residence. In our experience, if the investigation is carried out prudently based on the specified aspects, the country of residence can, in almost all cases, be clearly determined. If, however, this is not possible, the matter is decided by the competent authorities of the two states in a reconciliation procedure.
If no double tax treaty is available and the individual qualifies as resident in both states under national rules, it is possible that the individual has residence in both countries and the same income is taxed in both countries.
I also devoted such a large section of my post to the question of residence because if it is not determined correctly, the individual will have a tax shortage in at least one of the states and will be obliged to pay the amount of the tax shortage and may also be sanctioned with other measures (e.g. late payment interest, default penalty).
Place of tax payment in the case of countries with a tax treaty
If the individual comes from a country with which Hungary has a double tax treaty, the place of tax payment shall always be determined based on the treaty.
If the place of residence of the individual and the place of his work are different, the income from employment is taxable (under the main rule) in the state in which the individual works. Accordingly, if a foreign-resident individual works in Hungary, his income will be taxable in Hungary by the main rule.
The above rule does not apply if the foreign resident individual works in Hungary on a temporary basis and satisfies each of the following conditions:
- the individual stays a maximum of 183 days in Hungary (whether the 183 days have to be considered for one tax year or for any 12 month period starting or ending in the tax year is always determined based on the wording of the given treaty);
- the individual’s remuneration is paid by or on behalf of an employer who is not resident in Hungary;
- the cost of the individual’s remuneration is not borne by the employer’s Hungarian site.
A high risk in this regard is that taxpayers often automatically regard as their employer the company specified as such in their employment contract and do not perform the so-called integration test the purpose of which is to determine the employer from an economic perspective. For the purposes of double tax treaties, employer means the economic and not the legal employer.
Cases may occur easily in which a foreign employer assigns a foreign national individual to a Hungarian company for a period shorter than 183 days but the activity of the individual becomes an integral part of the activity of the Hungarian company as a result of which the Hungarian company will have to be regarded as the economic employer and tax payment obligation will apply in Hungary from the first day of the assignment.
Place of tax payment in the case of countries without a tax treaty
If no double tax treaty is in place between Hungary and the country in question, both the residence of the individual and the Hungarian tax payment obligation have to be determined based on domestic legal regulations.
The entire income of a Hungarian resident individual is taxable in Hungary.
Foreign resident individuals only have to pay tax in Hungary on their Hungarian source income.
As mentioned earlier, in the absence of a double tax treaty it is possible that an individual qualifies as resident in more than one country under national rules and more than one country will tax the same income. For such situations, Hungarian law provides that if the consolidated tax base includes income on which the individual paid any tax corresponding to income tax abroad, 90 percent of the tax paid abroad but maximum the amount calculated by applying the domestic tax rate to the tax base of the foreign income shall be deducted from the tax payable.
