How to Manage the tax Affairs of Foreign Managers
It often occurs that a multinational company employs a foreign manager based on an employment contract or secondment. In the first case, the Hungarian company is considered as the legal and economic employer, therefore the salary is payed directly by it. In the second case, the employee maintains the employment contract in the “mother country”; therefore, the salaries are still paid by the parent company (naturally the Hungarian company pays a “service fee” for the secondment to the parent company). The two cases differ from many points of view; therefore, an improper classification might trigger many issues.
First of all, a problem could arise respecting the legitimacy of classifying a relationship as a secondment. To be able to make a decision in this regard, a detailed analysis of all aspects should be performed. However, the place of taxation cannot be derived with certainty from this analysis alone.
In order to be able to decide about taxation, it is important to be familiar with the concept of tax residency, which indicates the sole country having rights to tax worldwide income. Irrespective of the source and type of income – salary, interest or other –, the individual is obliged to report it in some way to the competent tax authority.
Regarding salaries, the right of taxation is based on the principle of territoriality, and is applied to the “state of employment”, which is Hungary in this case. Although Hungary can only levy taxes after Hungarian workdays, every other workday should be taxed in the “state of residency” or in third countries. The income should be proportioned among the different countries where the individual is physically working, but this difficult calculation is only the tip of the iceberg! Every country has a different consideration regarding the tax base. In Hungary, this is the gross salary, whilst in Austria the tax base is the salary plus advisory fees, reduced by the social security contribution. There could, moreover, be other differences as well: for example, allocation may differ from country-to-country, taxation of fringe benefits, company cars, mobile phones etc. may also vary.
Another contradiction that could worry the advisors is the fact that many foreign managers would like to maintain their social security coverage in their homeland, but are also attracted by Hungary’s relatively low, 15% Hungarian personal income tax rate. Unlike Hungary, where the social security contribution is due without any cap, many states have a ceiling for contribution payments. Furthermore, managers often insist on their homeland social security coverage based on personal emotions; they trust more in the pension and the health care “back home”. The fact that services and pensions provided by the social security or other health care systems of the different countries are not harmonized at all makes this area more important for private individuals. Because the principles of taxation rules are different from those of social security contributions, after the place and amount of taxation has been decided, a separate process should be undergone with the contributions as well.
Mistakes could lead to tax shortages and tax penalties, but equally could result in overpayment of taxes by an individual. In order to comply with both difficult regulations and individual needs, and to avoid double taxation, an advisor with an international background having a “full picture” should be consulted regarding tax planning and payroll accounting. Many times the existing structures may have been misapplied for years; therefore, it is recommended revising both the employment structure and the practice in the framework of an auditing and regulatory compliance health check.
