Foreign Employment: Navigating Tax and Social Security Across Borders

As employee mobility grows, so does the complexity of international tax and social security obligations. When a Hungarian employee is posted abroad, the situation becomes far more nuanced than a domestic employment relationship, involving double tax treaties, social security agreements, and even risks of permanent establishment.

This article highlights the key tax and contribution considerations businesses must address when sending employees abroad.

Taxation: The 183-Day Rule — and Its Limits

Hungary currently holds double taxation treaties with over 90 countries, most based on the OECD Model Convention. These treaties typically stipulate that if the posting lasts less than 183 days, the employee:

• Remains under Hungarian tax law

• Continues paying Hungarian personal income tax (PIT)

However, this rule is not absolute. Foreign tax obligations may arise even before the 183-day threshold is reached if:

• The employee gains tax residency in the host country

• The foreign branch covers the cost of employment

• Costs are recharged abroad, e.g., for transfer pricing purposes

When a posting exceeds 183 days, the host country gains taxing rights. This may result in double taxation, which is often mitigated under treaty rules by:

• Exemption in Hungary of foreign-sourced income

• Or foreign tax credits applied against Hungarian PIT

Special care is needed where no tax treaty exists, such as currently with the United States. In such cases, even short postings can trigger local tax liability, and the Hungarian credit system may not fully eliminate double taxation.

Social Security: A Separate Matrix

Social security contributions are governed by entirely different rules than income tax.

• Within the EU, Regulation (EC) No 883/2004 applies.
  If the posting lasts up to 2 years, the employee:

  • Remains under the Hungarian social security system

  • Can use an A1 certificate to prove coverage abroad

  Postings exceeding 2 years may require shifting to the host country’s system.

• Outside the EU, bilateral social security agreements apply.
  Hungary has such agreements with countries including Canada, Australia, and the USA. These usually allow continued Hungarian coverage for postings under 2 years, but each agreement must be reviewed individually.

• If no agreement exists, employees may face double contribution obligations — registering in both Hungary and the host country, without necessarily receiving pension rights in both.

Additional Risks: Corporate Tax and Permanent Establishment

Beyond PIT and social contributions, foreign postings may trigger corporate tax exposure. For example:

• If an employee — such as a sales manager — maintains signing authority abroad

• If the employee’s presence is deemed to create a permanent establishment (PE) in the host country

This can happen even in the absence of a formal legal structure like a branch or subsidiary.

Determining the true tax and social security impact of international postings is rarely straightforward. Factors like: Posting duration, Host jurisdiction, Employee function, and Cost reimbursement structures, all shape the final tax position. A case-by-case analysis is not only recommended — it’s often essential.