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As of 1 January 2021, the taxation definition of establishment tightens

Hungary: As of 1 January 2021, service provision of a foreign company by a natural person within Hungary can be considered an establishment

As of 1 January 2021, the definition of an establishment will tighten due to a change in legislation. If a foreign company provides services through a natural person acting in Hungary, then it may be seen as an establishment in the future, regardless of the legal classification of the employment. The only criterion is that provision of the service exceeds 183 days in 12 months, regardless of the calendar year. This is independent of whether its domestic presence is tied to a physical site or facility.

When calculating the duration of service, related and associated services must count together.

It is critical to know that an activity qualifies as an establishment due to the involvement of a natural person but not based on an employment relationship or engagement. So it does not matter whether the natural person concerned operates as a sole proprietor, an employee of a partner company, or as an own employee. In any case, it can be considered an establishment.

It is vital to pay particular attention because if, under the new law, contrary to previous practice, a given company has an establishment in Hungary, it may incur further taxes.

The new rule may affect many foreign companies doing business in Hungary. First of all, because it is not only companies with employees in Hungary that have to reckon with the change, but also those that engage a natural person in any other form. People who help foreign companies’ operations in Hungary can all belong to this category, such as customer service staff, sales managers, or local technical professionals. In order to comply with the law and avoid possible infringements, it is recommended to consult with NTCA in advance and prepare for new challenges.

Moreover, it is important to check whether there is a double taxation agreement between the country of the foreign company and Hungary that may override the governing rules in Hungary. According to the amendment, instead of the Hungarian rules, the provisions of the double taxation agreement define whether the presence in Hungary creates an establishment. However, this can lead to a different result than by applying Hungarian legislation only.

Source: Act LXXXI. of 1996, on Corporate tax and Dividend tax

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