2015. June 15.

Obligations of the foreign executive officers in Hungary

It is general nowadays in business life that a managing director of a Hungarian company, or other leading employee / officer is a foreign private individual – typically a person delegated by the mother company seated in another member state of the European Union.

Albeit, do these companies, or the affected managing directors know what tax and contribution payment obligations they have in connection with their executive officer’s activity?

Within our present analyses we are wishing to provide assistance with the brief and practical presentation of the basic rules.


I./ Basic rules of corporate law

Currently, the Civil Code (Act V of 2013, the „CC.”), entering into force in 2014 and the Act IV of 2006 on the business associations („Gt.”) is jointly applicable and valid to the Hungarian business associations taking into account that the Act on the entry into force and implementation of the Civil Code, companies are at the time of the first modification of their deed of foundation obliged to decide on the continuation of their operation in line with the provisions of the CC, but the conversion thereto had to be completed in case of limited partnerships (“Bt.”) and general partnerships (“Kkt.”) until the 15th of March 2015 and in case of limited liability companies (“Kft.”) and companies limited by shares (“Rt.”) until the 16th of March 2016 the latest.   

This conversion may affect the companies’ executive officers as well; however, neither act (nor the Gt. or the CC.) makes differentiation among the companies’ executive officers in terms that it is a Hungarian, or foreign citizen.

The corporate legal provisions are consequent that the executive officers may pursue the management activity of the company by their agreement concluded with the company within the framework of an (a) assignment contract, or (b) employment relationship.

It is important to note in case of partnerships (Bt., Kkt) that the management activity can be pursued only by one or more managing directors elected from the members with the restriction that the limited partner of a Bt. cannot be a managing director with regard to the fact that its liability concerning the obligations of the company is excluded.


II./ Rules pertaining to personal income tax

Firstly, it must be stressed that the income generated in connection with the foreign executive officers’ activity can be taxed in Hungary only if it is not restricted by bilateral or international treaties on the avoidance of double taxation, as for these treaties have primacy over the national regulations.  

Hungary has concluded such treaties on the avoidance of double taxation with more than 80 countries in order to determine in which country the tax obligation regarding the various types of incomes shall be settled, in case of the existence of certain international factors. (Lacking such treaty, the reciprocity between the states shall define the tax obligation, or in lack of the latter, both states can be entitled to tax payment.)  

  1. Determination of the tax residency

In case of the aforementioned international factor(s) – including the foreign citizenships, incomes originating from abroad etc. – the primary question is the determination of the tax residency of the private individual, since it constitutes the tax payment obligation, it expresses with what country the individual has the closest relationship.

The tax residency in Hungary – beyond the treaty on the avoidance of double taxation – is defined by the Act on personal income tax (Act CXVII of 1995, „Szja Act.”).

Pursuant to the Szja. Act, a person is tax resident in Hungary, if (i) he/she is a Hungarian citizen (ii) based on the right of free movement and residence resides in the country for at least 183 days, (iii) person having right of permanent residence, or stateless status, (iv) who has exclusively domestic residence, or whose centre of its vital interests is within the territory of the country.

Resulting from the above definition, those are considered to have foreign tax residency, who cannot be deemed to be private individuals having domestic residency; furthermore, those third country nationals who have the status of permanent residency and obtained permanent residence pursuant to Section 35.§ (1) e) of the Act II of 2007 on the Admission and Right of Residence of Third-Country Nationals and within a 12 month period they reside less than 183 days in the country.

In case of contradiction between the residencies – that is, if Hungary and the subject foreign country also considers the private individual as resident within its own territory, or neither do so, treaties on the double taxation usually provide the following order for the determination of the tax residency (in the below order):

(i) permanent residence; (ii) center of vital interests; (iii) habitual residence (iv) citizenship.

Eventually, the subject countries decide the question with conciliation procedure, if none of the above factors cannot determine the tax residency.

It follows from the above that if a foreign managing director’s Hungarian tax residency cannot be defined, its Hungarian tax payment obligation is restricted and can only be extended to the income obtained in Hungary, inasmuch as it is allowed by an international treaty or the domestic regulations.

  1. Application of the treaties on the avoidance of double taxation

Within the application of the tax treaties the main rule is that the income arising from the non-independent activity – thus the executive officer’s activity pursued upon assignment – is taxable in the country, where the private individual has tax residency, except if the place of the pursuance of work is in another member state, because in such situations the member state of the place of pursuance of the work will be entitled for the taxation (e.g. Austrian private individual as the managing director of a Hungarian kft. and its income arising in connection to these tasks will be tax obliged in Hungary).

If the pursuance of work takes place within the framework of a short-term assignment/appointment, then the articles of the treaties pertaining specifically to this situation shall be determinant and not the place of the pursuance of work, but it must be fulfilled in the country where the private individual is tax resident, taking into account that a short-term foreign posting would trigger undue administrative burdens.

In such cases the country of residency is entitled to taxation, if the below 3 conditions jointlyapply to the domestic private individual: 

  • it resides in the other country where the work is pursued within a period of 12 months for less than 183 days,
  • its remuneration is paid by the employer, who does not have domestic residence in the other country,
  • costs of the remuneration are not borne by the employer’s premises in the other country.

In lack of any of the above conditions, the tax obligation must be fulfilled in the country of the place of pursuance of work, for example, if during the foreign appointment the company in the receiver country provides allowances as well – such as catering, meal vouchers, or daily allowance – then in lack of the fulfilment of one of the conditions, the income generated during the appointment is taxed in the country where the place of the pursuance of work is.

We note hereby that the tax treaties contain separate provisions for the cases if the executive officer’s activity is completed as member of a body, because in such cases the provisions pertaining to the remuneration of directors and the members of the supervisory board shall be the governing.

  1. The application of Hungarian tax law provisions, enforcement of tax allowances

The activity of the executive officers of a business association can be regarded as income arising from not independent activity, not consolidated pursuant to Szja Act. As in case of such incomes, the question arises, whether the person is entitled to the tax base allowance, the possibility of tax allowance, or the right of disposal above the tax.     

It is a basic rule that the foreign tax resident private individual may only enforce the allowances, if the international treaties and the domestic legal provisions provide possibility for it. It will be entitled to this based on the Szja Act. and the international treaties, if (i) the income arising from the non-independent activity and the income arising from the independent activity, pension and the income received with regard to its earlier other employment jointly reach the 75% of its income in the given tax year; furthermore, (ii) it is not entitled to identical or similar allowance in the other affected country.

Once, based on the above, the place of the tax obligation and the taxable income is defined the tax obligation must be fulfilled pursuant to the Act XCII of 2003 on the rules of taxation (“Art.”).

The payer providing taxable income is obliged to determine the payable tax, to deduct the tax advance, to pay and report it. The payable tax advance must be paid and reported until the 12th day of the month following the month of the payment.

With regard to a foreign executive officer, whose country of origin Hungary does not have a treaty with on the avoidance of double taxation, the payer must follow the rules of Art and fulfil the tax obligation accordingly, whilst the tax payment is subject to Hungarian legal provisions. Exception from the latter is that if the income cannot be taxed in Hungary based on reciprocity or other international treaty and the private individual proves with a certificate on residence its foreign tax residency (foreign official document and its Hungarian official translation is needed).

If the foreign executive officer cannot certify its tax residency with a certificate on residency and properly justify it, the payer is obliged to pay and report the tax not deducted during the payment of the income as arising tax obligation on the last month of the tax year the latest. 

III./ Rules pertaining to social security

1./ Determination and certification of the jurisdiction

Pursuant to the fundamental principles of the Act LXXX of 1997 on the Eligibility for Social Security Benefits and Private Pensions and the Funding for These Services (Tbj Act) the Hungarian social security system, except of the Hungarian citizens, extend to those who pursue work in Hungary.

During the determination of the insurance obligation the bilateral social security and social policy treaties (available at the website of the National Health Insurance Fund of Hungary and the provisions of the international treaties must be taken into account.

This means that prior to the application of the Hungarian law, it must be examined whether is there such an EU regulation or bilateral coordination treaty, which may be applied to the executive officer. If there exists such regulation, the jurisdiction of the state to which the affected person as insured pertains must be determined according to its provisions.

The EU’s community regulation applies the “one member state insurance” jurisdiction principle, which applies in such cases as well if a given person pursues work in more member states, it may have social security relationship only in one state, that is in the member state to which it has the closest relationship. Consequently, in the event of pursuing work in more than one member states, the affected person may become insured only in one state (except of the case of the so called marginal activity).

To decide the question as to with which member state has the person the closest relationship, thus which country’s legal order is applicable to it, is not the task of the employer, but the authority of the affected member state competent in social security matters and issues certification pursuant to the state’s internal law. In Hungary these are the country (metropolitan) government offices’ organs providing health insurance fund services decide in the question of the applicable law and the existence of the insurance obligation can be certified by the “A1” format.

The issues certification shows in which country is the private individual exclusively insured, thus if it can be defined with regard to another foreign country, tax obligation cannot arise in Hungary in lack of insurance obligation, contribution payment and social contribution pursuant to Tbj.

  1. Social insurance obligation

The definition of the executive officer’s legal status of social insurance is simultaneously the subject of the underlying legal relationship as well, that is whether it pursues the activity in employment relationship, or assignment contract.

  • In case of employment relationship the insurance relationship must be determined (Tbj. 5.§ (1) a)) and it exists from the beginning of the legal relationship until its termination.
  • In case of assignment contract, the insurance obligation can be determined if the income arising from this activity and the income constituting the monthly contribution base reaches 30% of the minimum wage, or one-thirtieth of the said minimum wage for each calendar day.

If the executive officer fulfils its office based on assignment and it does not pursue any other activity in the business association, it shall be deemed business partner with regard to the assignment, namely business partnership is established from social contribution aspect, within the confides of which it can be regarded as: (i) employed in full time, (ii) having so called multiple legal relationship, (iii) person pursuing supplemented activity (only the latter is not regarded as insured).

For any further fulfilment, reporting of the social contribution obligation the abovementioned circumstances must be preliminarily examined and it can be determined only based on those.

  1. Health contribution obligation

The health contribution is a percentage specified obligation of tax character, which arises only in connection to persons deemed resident pursuant to Tbj. Act, that is not in case of foreign private individuals, thus in such cases neither the payer, nor the private individual have payment obligation.


Our present summary provides a comprehensive guideline for the orientation in the basic rules; nevertheless, we definitely advice to turn to our professionals in full confidence with regard to questions arising in concrete cases.