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Since working from home became widespread, it has been common for some employees not to have to go into their workplaces at all.
In fact, more and more companies are even offering the option of teleworking from outside the country. It is no coincidence that many people from Hungary are already taking jobs with foreign employers. However, it is important for people in situations like this to be aware of what tax and social security rules apply to them. If they are not careful, employees can fall subject to tax penalties and face serious problems with their social security status.
Who should explore the tax legislation as soon as possible?
Any employee whose work is not tied to a particular place of work could be affected, primarily employees in white-collar positions. In our experience, this happens most in the IT (developer), finance, consulting, marketing, education and engineering fields, but practically it can have an effect on any area where people work in the structure described below.
Let's take a German company’s regional sales representative who visits customers mainly in Hungary, but sometimes in other countries too. Under which country's rules does this person have to pay taxes and social security liabilities? Or a full-time IT professional who works remotely from home or a coworking space in Hungary for a company in the US, Germany, Austria or the UK. Furthermore, a Hungarian or foreign citizen who previously lived and worked abroad, but whose employer allowed her to move to Hungary, while remaining employed by this foreign company and who still receives her salary from outside Hungary. These individuals can all be affected.
If they are physically present in Hungary, employees have to fulfill certain registration and tax payment obligations themselves as private individuals, and since they have a foreign employer, they are subject to special tax and social security rules, which are not easy to interpret or fulfill. In addition, foreign employers may also be subject to liabilities in Hungary.
Physical presence in a country is important for both tax and social security purposes.
For example, if someone lives and works permanently inside Hungary, they will most likely be resident for tax purposes here, so they will have to pay tax in Hungary on their worldwide income (including income from employment from foreign sources). For people who are employed by a foreign employer and receive their salary from abroad, accurately determining their tax residency is a must, but it is also important to avoid double taxation during the year. Since these both require the analysis of international rules and official procedures, it is essential to involve an expert in order to accurately determine and professionally settle the situation.
Under the current social security rules, individuals who work in multiple Member States within the European Economic Area will be insured in the Member State of residence if a significant part of their activity (at least 25%) is carried out from there. On 1 July 2023, a new international framework agreement entered into force.
What happens if I pay my taxes in the wrong state?
In its previous communication the Hungarian tax authority confirmed that through the exchange of data between national tax authorities, it has an overview of the income that people living in Hungary earn in other countries.
In addition, an official inspection at a foreign employer can easily reveal if someone is not paying taxes and contributions in the right state or has not fulfilled their registration obligations in a certain country based on the relevant international rules. This should also be taken seriously because default penalties, tax penalties and late payment interest are currently very high in Hungary, while wage obligations are lower in general, not only for the employee but also for the employer. It is easy to avoid late payment interest and default penalties following an inspection, and it may even be possible to reduce the tax liability. If someone has not fulfilled their obligations properly for a long time, there is no immediate cause for concern, as an experienced consultant can easily help them settle the situation.
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Summary
The last date until the above individuals are suggested to arrange their tax matters is the due date for the 2023 annual personal income tax return submission– 21 May 2024. We would like to highlight that the draft tax returns prepared by the tax authority will not include the foreign sourced income, therefore amendment of the draft tax return is necessary in these cases.
For people who work for a foreign employer from Hungary, getting the right information in time is key, because if they pay tax and social security in the wrong state or do not fulfill their registration obligations based on the relevant international rules, they could be fined during an official inspection.