The end of the year is not only the time for annual closings, but this is also when decisions on the extent of annual bonuses are usually made. While these bonuses primarily serve as incentives, their tax implications should not be overlooked either, and so it is worth considering these, especially with a view to the upcoming deadline for filing personal income tax (PIT) returns.

In addition to traditional bonuses paid as salary, the significance of bonuses linked to the performance of the employer is also increasing. These can take various forms (e.g. stock options, phantom stocks, share-based payments) and typically include some form of vesting condition for employees. If this type of income is received by an individual from his/her domestic employer, the related tax and contribution obligations are borne by the Hungarian employer, and the individual is only obliged to file a tax return on the basis of the payer’s certificate.

However, if the benefit is not provided directly by the domestic employer, or the work is performed in more than one country during the vesting period, the individual may have tax and social security payment obligations in more than one country.

It is also important to consider the form in which the share-related payment is received by the individual. In this respect, it is worth paying particular attention to stock options where the individual does not generally earn taxable income when the stock option is acquired, only when it is eventually exercised.

Further caution is required in the case of stock options that, when exercised, are immediately repurchased by the issuer. Here, the tax liability from the exercise and sale of the option overlap in time.

There may also be cases where employees receive benefits similar to those of ordinary shareholders, but are still not considered as shareholders in the legal sense. In such cases, it is important to examine if the income earned satisfies the rules applicable to dividends.

If the bonus is calculated on the basis of the stock price of the company, it can generally be interpreted as traditional salary.

Income earned in this way is generally considered as income from employment, so in the case of a foreign payer, the individual may also be required to pay social contribution tax in addition to personal income tax. The latter payment obligation may also be assumed by the Hungarian employer from the employee. If this is not done, and the social contribution tax is not refunded to the individual, it may be taken into account in determining the tax liability. If the income is derived from abroad, it is not included in the draft tax return prepared by the tax administration, and the individual must supplement his or her tax return accordingly.

If the benefit relates to a period during which the individual worked in several countries or the income (e.g. dividends) is derived from another country, it is also important to consider whether there is a need to split the income between the countries, as well as how double taxation can be avoided.

Furthermore, it should be borne in mind that both personal income tax and social security legislation recognise the concept of reference period, which means that Hungarian rules may apply even if the individual was no longer employed in Hungary at the time of the benefit, and tax liability may arise in Hungary even then.

These last two steps are important not only for stock-related benefits, but should also be taken into account for benefits paid as salary, and – if necessary – these must be included in the Hungarian income tax return (or added to the draft tax return prepared by the tax administration).

We hope that you found the above information useful. If you have any further questions on this subject or need help in preparing your tax return, please do not hesitate to contact us.

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.