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May the Workforce be With You! – But With What Contract?

May the Workforce be With You! – But With What Contract?

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A common solution to the chronic workforce shortage seen in the entire region nowadays is that one company provides labour to another. However, one should be careful with these agreements: depending on the circumstances, the tax authority (NAV) may reclassify these contracts, which could result in major tax expenses.

Let is be security services, shelf-stacking or even seasonal agricultural work, many sectors in Hungary today lack a sufficient number of staff for the job. But it can also happen that a company is forced to find a temporary replacement for a female employee on maternity leave or a colleague who’s off work recovering from an illness. In such cases, an obvious solution is to use an external contractor to provide the missing personnel. This temporary arrangement often takes the form of a service or agency contract, whereby the contractor performs the requisite duties using its own employees – in most cases at the client’s head office or other permanent establishment.

The VAT problem

What could be the problem with such a contract? The fact that, upon a tax audit, the tax authority (NAV) may conclude that the contract is more of a workforce lending contract than a service or agency contract, and it may be tempted to reclassify it. However, service/agency contracts and workforce lending contracts are treated differently in terms of VAT. Whereas contracts belonging to the former category fall within the scope of the general VAT system, workforce lending services fall under reverse charge VAT.

These service/agency contracts entail, therefore, a significant tax risk for the client. If the tax authority (NAV) finds that the parties have in fact agreed to hire personnel, the client will not have the right to deduct the VAT charged by the service provider and will have a VAT shortfall as a result. If the service provider co-operates with the client during the tax audit and is willing to amend the invoice, the audit could lead to a smaller tax shortfall and a moderate fine. If, however, the contractor is no longer reachable, the contract in question dates back several years, the contractor was acting in bad faith or there is any other technical problem, it will be virtually impossible to avoid more serious pentalties.

When is it a workforce lending and when is it a service contract?

However, it’s not easy to determine where the boundaries of the two types of contract lie. On the one hand, a hint is provided by the Labour Code, which says that the employer has the right to second temporarily its employee at a different workplace or at another employer, as long as this secondment does not exceed forty-four days a year. Does this mean that employment beyond this period at another workplace or employer automatically classifies as the contract as workforce lending? Not necessarily. Other circumstances of the posting must also be taken into account, such as whether the employee was specifically recruited for that purpose.

Recent court rulings may also provide guidance on the matter. According to these, whether an agreement qualifies as a service contract or a workforce lending, it makes a difference whether the employee is only employed for a specific project at another workplace or to perform recurring tasks in general. When distinguishing between the two types of contract, it must also be taken into account whether the entrepreneur is represented at the client’s premises beyond the employee’s personal work. If the client is free to issue instructions to the employee without any restriction, that also reinforces the workforce lending character of the contract. It also makes a difference which contracting party organises the work of the employee, whether the contractor provides replacement in the event of illness or vacation, who provides the work equipment (e.g. who provides the cleaning tools) and, last but not least, the basis on which the parties calculate the contractor’s fee (on a project basis or in proportion to the number of employees posted). Unfortunately, in practice these conditions are not always coherent and therefore rarely point clearly towards one or the other type of contract.

How to proceed?

Workforce lending is an activity strictly regulated by law. The lender must be registered with the state employment body, and comply with various conditions. Therefore, unless the service provider expressly intends to pursue this activity on a commercial and regular basis, the parties should seek to formulate their agreement within the framework of an agency or a service contract. However, in order for this to stand the test of a tax audit – or even a labour inspection – it is advisable to avoid the above-described characteristics of workforce lending as much as possible

By Daniel Veres, Trainee, Jalsovszky

Hungary Knowledge Partner

Nagy és Trócsányi was founded in 1991, turned into limited professional partnership (in Hungarian: ügyvédi iroda) in 1992, with the aim of offering sophisticated legal services. The firm continues to seek excellence in a comprehensive and modern practice, which spans international commercial and business law. 

The firm’s lawyers provide clients with advice and representation in an active, thoughtful and ethical manner, with a real understanding of clients‘ business needs and the markets in which they operate.

The firm is one of the largest home-grown independent law firms in Hungary. Currently Nagy és Trócsányi has 26 lawyers out of which there are 8 active partners. All partners are equity partners.

Nagy és Trócsányi is a legal entity and registered with the Budapest Bar Association. All lawyers of the Budapest office are either members of, or registered as clerks with, the Budapest Bar Association. Several of the firm’s lawyers are admitted attorneys or registered as legal consultants in New York.

The firm advises a broad range of clients, including numerous multinational corporations. 

Our activity focuses on the following practice areas: M&A, company law, litigation and dispute resolution, real estate law, banking and finance, project financing, insolvency and restructuring, venture capital investment, taxation, competition, utilities, energy, media and telecommunication.

Nagy és Trócsányi is the exclusive member firm in Hungary for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+countries worldwide.

The firm advises a broad range of clients, including numerous multinational corporations. Among our key clients are: OTP Bank, Sberbank, Erste Bank, Scania, KS ORKA, Mannvit, DAF Trucks, Booking.com, Museum of Fine Arts of Budapest, Hungarian Post Pte Ltd, Hiventures, Strabag, CPI Hungary, Givaudan, Marks & Spencer, CBA.

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