The income of employees working remotely abroad may be taxable in Hungary, and therefore they may face a tax risk if they continue to pay the tax in the country of the employer’s registered office, while already working in Hungary. Furthermore, if the tax paid abroad is higher than 15 percent, they may not only avoid the tax risk in Hungary by retrospectively fulfilling the Hungarian personal income tax payment obligation, but gain a financial benefit too. In this case, the amount of the personal income tax they can reclaim exceeds the Hungarian tax liability.
1. Private individuals may also face a tax risk in Hungary
No matter if the tax has been paid abroad, the employee is held fully liable for the risk arising from the non-payment of taxes in Hungary. Tax paid abroad is not taken into account by the Hungarian Tax Authority.
When a Hungarian individual enters into an employment contract with a foreign company, and based on this, performs work in and receives salary from the country of the foreign employer’s registered office, the tax liability abroad is a legitimate issue. At the same time, countless companies have closed or significantly restricted access to their offices due to the pandemic. As a result, a lot of Hungarian workers have returned to Hungary, after having worked in a home-office setup for a long time, who may still work from the Country.
Preparing the personal income tax return
Based on our experience, foreign companies and individuals fail in many cases to take into account that the place of tax and contribution payment may change as a result of working from a Hungarian home office. Therefore, they may still pay any taxes and contributions imposed on their wages in the country of the employer’s registered office.
However, as a rule of thumb, if an individual with Hungarian tax residence works as an employee from Hungary, his or her income from abroad is taxable in Hungary under both the domestic and international laws.
It is the responsibility of the individual to declare and pay the personal income tax. He or she bears all risks arising from a failure to do so.
After any income from abroad that originates from an employment taxable in Hungary, the employee should pay the tax advance applicable to personal income in Hungary on a quarterly basis. Furthermore, the employee should also declare the income, the personal income tax charged on it, and the tax advance paid in his or her annual personal income tax return. Individuals having income from abroad in 2021, can fulfil their declaration obligation in their personal income tax return for 2021. The deadline for submission is 20 May 2022. Any delay with the payment tax advance may result in the charging of a late payment fee.
If an individual earned such income before 2021, he or she may fulfil the tax payment obligation by the self-revision of the personal income tax return submitted for previous years, or if he or she did not file a tax return in Hungary for a given year, by the subsequent submission of the personal income tax return and payment of the relevant tax.
2. You can earn millions by clearing your personal income tax
If the personal income tax abroad is higher than 15 percent, it may be favourable for an individual to pay the Hungarian tax rate. Any tax paid abroad after income taxable in Hungary can be reclaimed according to the rules applicable in the given country.
Furthermore, if the employee has children, he or she may be entitled to a tax refund of up to HUF 809,000 in Hungary.
For illustration, suppose that a Hungarian individual entered into an employment contract with an Austrian company in 2020. The individual worked in Austria throughout 2020, spending his weekends and holidays in Hungary with his wife and children. In 2021, due to the pandemic, the employee returned to Hungary and performed his duties in a home-office setup. His income tax and contributions were still deducted in Austria in 2021. In 2021, he earned a gross income of € 100,000, after which he paid personal income tax at € 37,530 in Austria.
However, pursuant to the treaties for the avoidance of double taxation and the domestic legal regulations, the individual should not have paid the personal income tax in Austria, but in Hungary in 2021. Without the tax relief, the personal income tax is 15% in Hungary. Although the income and the tax charged on it must be declared and paid in HUF, after conversion at the appropriate exchange rate, the personal income tax payable in Hungary is roughly EUR 15,000 after EUR 100,000. Thus, in our example, the individual’s personal income tax payment obligation amounts to EUR 15,000 in Hungary, and he can reclaim EUR 37,530 in Austria. Therefore, the individual could gain EUR 22,530, i.e. roughly HUF 8 million, by clearing his tax liabilities.
Caution! Tax liability also arises in Hungary, if the individual does not work from Hungary throughout the year; in such cases, the tax base must be divided between the countries.
3. An individual can face contribution related risks in Hungary
In the lack of an adequate certificate, an individual may also face contribution and social contribution tax-related risks in Hungary.
As a rule of thumb, the obligation to pay social insurance contribution arises in the country where you work. In case of working from home, this means Hungary. If someone works from Hungary in a home-office setup due to the pandemic, he or she can obtain a certificate, on the basis whereof the contribution payment obligation will continue to apply abroad during the transitional period, and only the personal income tax will have to be paid in Hungary.
In the lack of such certificate, if the foreign employer fails to register in Hungary and to fulfil their deduction, declaration and payment obligations related to the social insurance contributions and the social contribution tax, the employee will bear all risks in this respect too!
In summary, we may conclude that, without clearing all tax and contribution payment obligations related to work performed from a home office for a foreign employer, an employee is liable to face significant risks. The good news is that it is relatively easy to correct a possible mistake by properly adequately managing the personal income tax returns and obtaining the required certificates. What is more, the employee may even benefit from the situation financially, if he or she fulfils the tax payment obligation in Hungary.
