The concept of the permanent establishment in Hungary

During our previous posts; we looked at the issue of corporate tax in some form. We talked about the global minimum tax; according to which large companies operating in the EU would be taxed with a global minimum effective tax rate of 15%. We also looked at foreign controlled companies; where the concept of a permanent establishment is an important aspect.

It is also important to emphasize that we will use the concept of permanent establishment according to the Act on Corporate Tax and Dividend Tax (hereinafter: CT).

Regarding the local business tax; we have already looked at whether the home of an employee working from home or in another country is considered a permanent establishment. Referring back to the previous thought process; in the event that the employee’s apartment is considered to be a permanent establishment due to working from home,

a tax arising as a result of this activity must be paid to the competent municipality where the employee works; not to the municipality where the business is headquartered.

Irrespective of the fact that in the latter case the company has fulfilled its tax payment obligation in its area of ​​authority; the municipality can identify the delinquent taxes; impose a fine and also determine a late payment fee for the delinquent taxes.

In the following; we will look at the case where an enterprise; which was established abroad, conducts economic activities in Hungary. On the assumption; is it has a tax liability and if so, what kind?

In such a case; the most important question
  • whether an international agreement for the avoidance of double taxation is in force between the country of the mentioned enterprise and Hungary; because then the provisions contained in this convention will be the governing rules;
  • if there is no such agreement; we use the provisions of the Act on Corporate Tax and Dividend Tax.
The CT defines two types of tax liability:
  1. Full tax liability: the tax liability of a resident taxpayer covers both domestic and foreign income.
  2. Limited tax liability: the tax liability of the foreign entrepreneur covers the income from the business activities conducted in the domestic location.
The concept of permanent establishment (not the complete list)
  1. A permanent business establishment; equipment; or installation where the taxpayer conducts business activities in part or in whole; regardless of the legal title used by the taxpayer; including in particular:
    • a place of management;
    • a branch;
    • an office;
    • a factory;
    • a workshop, and
    • a mine, an oil or gas well; a quarry or any other place of extraction of natural resources.

2. The location of the construction activity which duration (continuously or with interruptions) lasts at least three months in total; which must be taken into account for each construction area.

3. The foreign person must be considered as having a permanent establishment

    • in case of direct utilization of domestic natural resources;
    • the utilization of real estate and natural resources for a fee;
    • in the case of activities that another person undertakes on behalf of the foreign person;
    • if it carries out business activities through a branch office;
    • etc.

The law also mentions those cases that are not considered permanent establishment. Such case for example a facility used exclusively for the storage and presentation of the foreign person’s goods or products.