Hungary: Guidance to Social Security and Personal Income Taxation con-cerns regarding the COVID-19 pandemic

As a result of measures taken due to the COVID-19 pandemic, numerous questions have risen regarding the social security liability and personal income tax liability of expats. In many cases they spent – or some of them were forced to spend due to borders being locked down – more time in their home country working remotely from home, while they were supposed to be working in another country.

Is there a change in the personal income taxation or the social security liability due to the involuntary home office working of these expats? Let’s see the guideline provided by the local authority (Hungarian Ministry of Finance) and compare it to the proposal of the European Committee and the OECD.

Personal income taxation

The most important question to determine which country has the right to tax the income deriving from non-independent activity is the tax residence of a person. Based on the OECD Model Tax Convention – which is the foundation for most double tax treaties – there is a certain order of aspects to consider so as to decide the tax residence of the individual:

1. permanent home;
2. centre of vital interests;
3. habitual abode;
4. citizenship.

1. As for the OECD commentary on the Model Tax Convention, a permanent home is a place where the person has established the conditions for a longer period of dwelling. These expats may have an owned house at the country of residence – to which they possibly returned in the pandemic situation – while they might also have a rented house in the country of work. In this case, it is not possible to determine the tax residence.

2. The centre of vital interest is the state where the individual’s personal and economic relations are closer. At this point, it should be noted in which state the individual’s family and friends, the employer, the belongings and the place of work can be found. There could possibly be an example where the expat has economic ties in both countries and the family also moves together with the individual, so there is also a social tie in both locations. According to the opinion of the Hungarian Ministry of Finance, the temporary, extraordinary circumstances caused by the pandemic should not usually result in the change in the centre of vital interests of the employee.

3. The habitual abode is the place where the individual usually and frequently stays for a certain period of time. As for the analysis of the OECD issued on 3 April 2020, “OECD Secretariat analysis of tax treaties and the impact of the COVID-19 crisis,” this point should be considered in a broader context and it should not be affected by a temporary event. On the other hand, the guideline issued by the Hungarian Ministry of Finance has a different view in this regard, and it says that a person staying more than 183 days in Hungary can change the tax residency, which leads to personal income tax liability.

 Social Security

The social security obligation is in the country of work unless the individual’s working hours exceeds the 25% limit in another country. According to the opinion of the Hungarian Ministry of Finance, the existing social security status of the individual will not be reviewed due to the pandemic even if there is a change in the proportion of the working time spent in the country of residence. This latter approach is in line with the guidance of the European Committee in cases that could lead to changes in the employee’s member state of insurance due to COVID-19.

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