Employees working in a different country to that where the registered office of their employer is located raises several taxation issues.
According to the OECD convention for the avoidance of double taxation, a person is considered resident if he/she has a permanent home in the given country. If a person qualifies as a resident in more than one country according to the domestic laws, then the following aspects have to be considered when defining residence:
→ permanent home;
→ centre of vital interests;
→ habitual abode;
To determine where the income from non-independent activity is taxable, firstly, the tax residence status of the expat worker has to be determined on the basis of the above criteria. Once tax residence is established, it is necessary to examine where the income deriving from the non-independent activity and received for the posting should be taxed. Based on the conventions avoiding double taxation, the country of residence is the country of taxation, provided the expat works in this country. If, however, work is carried out in a different country than the country of residence, the tax payment obligation arises in the country of work.
Due to the COVID-19 pandemic, plenty of expats and other workers living in border towns and commuting to neighbouring countries had to stay in Hungary and work from home offices during the lockdown. Where should the income earned during the home office period be taxed?
The residency position of cross-border commuters does not change due to the pandemic; however, the country of work is now the same as the country of residence. The income from non-independent activity is now, in this new situation, taxable in Hungary. This has consequences for the employee, such as quarterly tax advance calculations and payment obligations.
If the employee temporarily changes his/her permanent residence due to COVID-19, in accordance with the OECD guidance issued in April, “despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position”. This means that, when establishing residence for the (hopefully!) transition period caused by the coronavirus, the authorities should consider the employee’s normal living conditions. Unfortunately, the Hungarian Ministry of Finance has not yet published its official opinion in this regard.
If the Hungarian working hours of a Hungarian individual working abroad did not reach the 25% limit before the pandemic, his/her social security obligation arose in the Member State of work. Therefore, said individuals were covered by the social security system of that country. As a result of the quarantine measures implemented due to the global pandemic, the increase in working hours spent involuntarily at their place of residence in Hungary often resulted in cases where the 25% limit was exceeded. The guidance issued by the European Commission in March 2020 formulates a recommendation for such cases: in cases which could lead to changes in the employee’s Member State of insurance, the Member States should apply the exception defined in the coordination regulation so that the social security entitlement of the affected employee remains unchanged.
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