Foreign companies having employees working in Hungary for a period of more than 183 days may have a service PE (permanent establishment) and be liable to tax obligation.
As of 1 January 2021, Act on Corporate Income Tax (CIT Act) contains an amended definition of what constitutes a permanent establishment in Hungary.
According to a new provision in the CIT Act, those foreign entities which provide services in Hungary through its own employee(s) or another natural individual(s) engaged by the foreign entity may create a permanent establishment for the foreign entity if the duration of the service (the aggregate physical presence of the personnel involved) exceeds 183 days.
This new regulation is based on Hungarian legislation, which is overridden by double tax treaties. Although, Hungary has only a handful of double tax treaties that explicitly include the same definition, in our view the new regulation affects the application of those double tax treaties as well. This means that with the help of the new definition the Hungarian tax authority can more effectively claim that there is a permanent establishment regarding the services provided in Hungary by a foreign entity, even if the specific double tax treaty does not include a Service PE rule.
A service PE of a foreign entity leads to the implications that the foreign entity should register a Hungarian permanent establishment for corporate income tax purposes, apply for a Hungarian tax number and should declare profits attributable to the Hungarian Service PE and pay corporate income tax accordingly in Hungary.
In addition, such a presence may lead to further tax liabilities, for example local business tax and VAT obligations.
The new rules mentioned above can be particularly important in the film industry, where foreign entities often send personnel to Hungary during an engagement in film production. Therefore, in those cases we recommend carrying out careful planning before the start to mitigate such tax risk.