Expats at greenfield investments – a potential 'permanent establishment' issue?

Over the past decade, several foreign investors have chosen Hungary for greenfield investments due to the country's central location, investor-friendly environment and advantageous tax regime.

When such a large investment project is started, people from the head office usually come to Hungary to oversee the start-up phase. Although a Hungarian subsidiary will employ the local workers, the investors often bring in foreign engineers, project managers and supervisors to assume functions while staying in Hungary for periods of time that range from a few days to several years.

As a result, the taxation status of people the company group sends to Hungary to oversee an investment project also needs careful evaluation.

In our experience, the question as to whether the activities of such people create a 'permanent establishment' for corporate income tax purposes and/or a fixed establishment for VAT purposes can only be decided on a case-by-case basis.

Attention should be paid not only to the main activity of the foreign company, but also the company's relationship with the Hungarian investment. An in-depth analysis would be necessary of the foreign company’s role in the Hungarian investment project and of the specific tasks expats are performing in Hungary.

There may be less risk if expats are sent to Hungary for a longer term under a secondment agreement and are placed on local payroll, or if their activities are only of a supportive and preparatory character. The situation becomes more complicated if expats with key roles in the foreign organisation also perform significant functions in connection with the investment.

We recommend careful prior planning of staff and functions allocated to the Hungarian project from other companies in the group. Companies usually give adequate focus to the personal income tax and social security of foreign employees, but the potential ‘permanent establishment’ aspect is often ignored, despite the fact that it may have even more significant financial impact and influence than the conclusions reached on the personal income taxation of any expats.

For more information on taxation issues involving expats and greenfield projects, please contact one of our local CMS experts.