Personal income tax, social contribution tax and social security contributions
It is not uncommon for a foreign employer to engage a Hungarian employee without having a registered legal presence in Hungary. However, many are unaware of who is responsible for fulfilling Hungarian personal income tax, social contribution tax, and social security contribution obligations in such cases. In this article, we summarise the key questions and answers from both the employer’s and the employee’s perspective.
Can an employment contract be concluded directly with a foreign company?
A Hungarian employee may, of course, conclude an employment contract with a foreign company; there are no prohibiting regulations in this regard. However, it is important to ensure that Hungarian public levies associated with the employment are paid correctly and on time. In such specific cases, reporting, payroll processing, and taxation differ from the standard practices applicable to Hungarian employers, as the foreign employer does not qualify as a payer in Hungary.
From the employee’s perspective, the following aspects should be considered:
- Is the individual a Hungarian citizen?
- Is the work primarily performed in Hungary?
- Does the individual have a Hungarian address?
- Are their economic and personal ties connected to Hungary, i.e. is their centre of vital interests in Hungary?
- Do they qualify as a Hungarian tax resident?
- Are they subject to Hungarian social security regulations?
What should foreign employers consider?
From the employer’s perspective, the primary question is whether employing a Hungarian worker creates a permanent establishment (PE) in Hungary for tax purposes. This goes beyond payroll considerations, as it requires analysing the provisions of the applicable double taxation treaty between the two countries. If a tax presence or even a legal entity establishment obligation arises, additional administrative tasks and costs may burden the employer in connection with its Hungarian operations.
Even if no permanent establishment is created, Hungarian personal income tax advances and social security contributions must still be paid in Hungary on the employment income of the Hungarian employee. To determine this, all relevant circumstances of employment must be assessed based on:
- the applicable double taxation treaty,
- other international agreements, e.g. the EU Coordination Regulation (EC) No. 883/2004, and
- bilateral social security agreements.
How can tax and contribution obligations be declared?
There are two options for declaring taxable income, social contribution tax, and contributions:
- General rule: The foreign employer applies for a technical tax number prior to employment in order to pay the Hungarian employee’s social security contributions (Section 87 of the Social Security Act). This tax number is strictly limited to this purpose.
- Alternative solution: The foreign employer agrees with the Hungarian employee that the employee receives a grossed-up salary (including employer contributions), from which the employee pays personal income tax advances and social security contributions to the Hungarian tax authority and files the related returns under their own tax number.
Which form should be used?
Form 2608INT is used to declare social contribution tax (13%), and social security contributions (18.5%) and for the self-revision of them. This form applies to foreign companies without Hungarian registration and their employees. The return must be submitted monthly, by the 12th day of the month following the reporting period, electronically via the Hungarian e-administration system. Payment obligations must also be fulfilled by this deadline. Please note that this form is not used for employee registration or personal income tax (15%). For personal income tax, the individual must pay quarterly tax advances and file an annual tax return.
Who pays any potential penalties?
If the foreign company fails to register the employee, the employee is responsible for fulfilling reporting, contribution payments, and tax returns related to social security coverage. The employee also bears the legal consequences of non-compliance, except for default penalties and tax penalties, which do not apply to them.
