Cross-border Employment – Tax and Social Security

Multinational companies rely increasingly on cross-border employees. The legal and tax implications of employing workers from abroad are complex and it is well worth planning the tax and social security aspects in advance. Below we describe the three most common scenarios of cross-border employment in Hungary.

In our discussion of the most common scenarios we shall take the example of an engineer from Poland who is working in Hungary on a cross-border basis. As based on this example, we shall analyse the tax and social security consequences and options, shedding light  also on some classic pitfalls. Although in our example the cross-border worker in Hungary is a Polish citizen, the considerations are similar for employees from other EU-countries such as Germany, Austria, Slovakia, etc.

Direct employment

Summary: In this example the Polish engineer is employed by Hungarian company and he works in Hungary. Most typically, the all-over taxability of the engineer will be in Poland if the engineer remains a Polish tax resident. Personal income tax for work income will be due in Hungary, as well as social security.

Aspects to consider:

• Personal income tax obligation is regulated by the Double Tax Treaty between Hungary and Poland. Where is the main place of living and center of interests of the Polish engineer? The permanent place of abode and center of life interest does not depend on address registration by authorities.
• The world-wide income of the engineer will be taxed in the country of tax residency. Most typically the engineer will remain a Polish tax resident and he will be taxed in Poland on world-wide income. Only his salary will be taxed in Hungary.
• If the engineer becomes a Hungarian tax resident, then his world-wide income will be taxed in Hungary, including his salary.
• Income from employment in Hungary will be taxed in Hungary. The Hungarian company must be not just the legal but also the “economic” employer.
• Social security will be due in Hungary because it is the place of work. Based on the  coordination of social security within the European Union, the engineer will have the right to full social security services in Hungary and to full in-kind health care in Poland if he lives in Poland.
• Pension entitlement will be based on the Hungarian insurance according to EU regulations. The pension amount will be calculated proportionally, considering length of service and average earnings in a given member state proportional to entire service.

Two or more employers?

If the engineer normally works as an employee in two or more Member States, this can lead to an incorrect handling of social security by the employer. Employers often disregard the fact that in such cases the engineer will be subject to social security only in the Member State of residence (Poland). This exception from the general rule applies  also in the case if a significant part of his activity  is carried out in Poland, or if he is employed by different employers whose registered offices are located in other Member States than Poland.

Secondment

Summary:  In this example a Polish company sends a Polish engineer to work at a company in Hungary. Typically, personal income tax for work income will be due in Poland if the engineer spends 183 days or less in Hungary. If he spends  more than 183 days in Hungary, then his work income will be taxed in Hungary, however his all-over taxability will be in Poland if the engineer is a Polish tax resident. Social security will be due in Poland.

Aspects to consider:

• Personal income tax obligation is regulated by the Double Tax Treaty between Hungary and Poland. Where is the main place of living and center of interests of the Polish engineer? The permanent place of abode and center of life interest does not depend on address registration by authorities.
• The world-wide income of the engineer will be taxed in the country of tax residency. Most typically the engineer will remain a Polish tax resident and he will be taxed in Poland on world-wide income. Personal income tax for work income will be due in Poland if the engineer spends 183 days or less in Hungary. If he spends  more than 183 days in Hungary, then his work income will be taxed in Hungary.
• If the income from employment in Hungary from the Polish employer is taxed in Poland, then the engineer will have to provide a certificate of Polish fiscal residence in Hungary for every fiscal year. This is a certificate issued by the Polish tax authorities. Otherwise, the Hungarian tax authority will tax the engineer in Hungary.
• Social security will be paid in Poland provided that the employee continues to work on behalf of and for the benefit of the Polish posting company and the expected duration of work does not exceed 24 months. The employee must also have at least 30 days of insurance and may not be sent to another Member State or replace an employee whose posting period has expired.

Home office

Summary: In this example the Polish engineer moves to Hungary permanently and carries out distance work for a Polish company from his home in Hungary. In most cases  the all-over taxability of the engineer will be in Hungary including personal income tax for work income. Social security will also be due in Hungary.

Aspects to consider:

• The engineer is in this case a Hungarian tax resident and his world-wide income will be taxed in Hungary, including his salary. Social security will also be due in Hungary
• The Polish company will have to register in Hungary for tax and social security purposes as an employer. Declaration and payment of tax and social security will be due on a monthly basis.
• Option: the engineer can register himself instead of the employer and pay taxes and social security on behalf of the employer. In this case, declaration and payment of tax and social security will be due quarterly.

What about corporate income tax?

This question may seem out of place, however a person working at a home office in Hungary may create corporate income tax liability for the foreign employer.  In our example, the Polish company may be deemed to have a “permanent establishment” in Hungary for corporate income tax  purposes in a wide set of constellations, such as in the case of visiting and negotiating with customers.

Conclusion:

In all cases of cross border employment, whether it is planned by a foreign or a Hungarian company, it necessary to analyse the tax and social security consequences on an individual basis for every employee in advance. The common scenarios described above have been based on an economic relationship between two EU Member States, namely Hungary and Poland. In this respect it is to be noted that the results of our general considerations would have been completely different if we had analysed examples involving a non-EU member country.

Note :This article is based on our presentation at the Hungarian-Polish Chamber of Commerce in February 2023.