A foreign employer in Hungary faces several questions, like residency, tax registration, employment reporting, and tax payment. What tax and social insurance obligations arise and who pays them if a UK company employs a worker who carries out their job in Hungary?
Under the Trade and Cooperation Agreement between the United Kingdom and the European Union, the Protocol on the coordination of social security systems applies to persons legally resident in the territory of the Member States or the United Kingdom.
This means that, as a general rule, you will be insured in the country in which you work.
Tax rates
If you work in Hungary, then both income tax and social security contribution obligations must be met in Hungary. In this case, the foreign employer is liable for contributions in Hungary. They shall deduct 18.5 per cent of the contribution from the employee’s gross salary and pays 15.5 per cent employer’s social security contribution.
The employee needs to pay and report the personal income tax every quarter, which is 15 per cent of the amount of the income from the foreign employer.
Accordingly, tax reporting splits between the employer and the employee. The employer will report the social security contribution every month, and the employee will report personal income tax quarterly.
Foreign employer registration
Before starting employing someone in Hungary, a foreign employer must register with the National Tax and Customs Administration (NAV) and apply for registration with the tax office as an employer. This can be initiated on the form T201INT.
After the registration got completed, the foreign employer needs to report the start of the employment. This should be filed to the Hungarian tax office before the first day of employment. When employment terminates, the employer should send a similar report within 8 days. These notifications must be made on the form T1041INT.
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If the foreign employer does not have a representative to fulfil the contribution obligations (ie. does not have a branch or financial representative) and fails to register as a foreign employer, then the employee must fulfil the obligation to register, pay the social insurance contributions and file tax returns. Also, the employee bears the legal consequences of non-compliance with obligations, excluding default fines and tax fines.
Social security payment
The Hungarian social security obligation can be avoided if the English HM Revenue & Customs issues you a so-called A1 certificate, based on which you can remain subject to English social security. You, or your employer, could apply for a certificate or document if you are going to work temporarily in the EU for up to 2 years.
Applications can be made through the gov.uk website here: https://www.gov.uk/guidance/tell-hmrc-about-employees-going-to-work-in-the-european-economic-area-ca3822
This is conceivable if you are sent to work in the Hungarian office. In this case, your English employer will continue to pay your wages, you will be insured in the UK and you will pay your NI there. Your personal income tax will be determined by your tax resident status. If your stay in Hungary exceeds 183 days, you will become a Hungarian tax resident and must pay personal income tax in Hungary on your worldwide income.
Opening a company in Hungary and supply the service through that
It is possible to do the job as a freelancer or by founding a Hungarian company and thus providing services to the UK company.
In the case of the provision of services as a freelancer or by establishing a Hungarian company, the payment of taxes and contributions also arises in Hungary, which must be paid by the self-employed person or the Hungarian company.
Opening a Hungarian company can be an optimal tool to run your business and make use of the Hungarian 9% corporate tax rate, which is the lowest in Europe. Through a company in Hungary, you can easily meet the employment reporting and taxation requirements too.
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In this case, it is important that you carry out the activity on your own and not on the instructions of your former employer. Otherwise, this can qualify as disguised employment, and there is a risk that the tax authorities will reclassify the relationship as employment.
In terms of separating employment from a contractual job, the UK’s IR35 test gives a good understanding. Use this tool to find out if you should be classed as employed or self-employed / contractor for tax purposes. The online questionnaire is available from here: https://www.gov.uk/guidance/check-employment-status-for-tax
Separation considerations include, for example, the following:
- Does your client have the right to reject a substitute?
- Would you have to pay your substitute?
- Does your client have the right to move you from the task you originally agreed to do?
- Does your client have the right to decide how the work is done?
- Does your client have the right to decide your working hours?
- Does your client have the right to decide where you do the work?
- Will you have to buy equipment before your client pays you?
- Will you have to fund any vehicle costs before your client pays you?
- Will you have to buy materials before your client pays you?
- Will you have to fund any other costs before your client pays you?
- Would you have to put your mistakes right?
- Will your client provide you with paid-for corporate benefits?
- Will you have any management responsibilities for your client?
- Does this contract stop you from doing similar work for other clients?
- Are you required to ask permission to work for other clients?
- Are you having a series of contracts agreed with this client?
- Does the current contract allow for it to be extended?
- Will this work take up the majority of your available working time?
- Have you done any self-employed work of a similar nature for other clients in the last 12 months?
According to similar principles, the Hungarian legislation also distinguishes the employment relationship from the self-employed / company service contract, and though the questions target the same areas, those are less detailed.
- The activity was not or could not be performed exclusively by you personally.
- You did not receive at least 50 per cent of your income for the calendar year from the customer.
- The client could not give instructions on how to carry out the activity.
- The place where the activity is carried out is in your possession.
- The tools and materials needed to carry out the activity were not provided to you by the client.
- You determine the order in which the activity is carried out.
- You do not have an employment relationship with your client in addition to your business.