The Hungarian fringe benefit framework (the so-called 'cafeteria system') allows employees to choose between different types of benefit of a set value provided by employers.
Such benefits are subsidised by the state and are therefore beneficial to both employers and employees. Under the cafeteria system, employees can choose between:
- physical vouchers;
- electronic financial instruments (ie, bank cards to be used for specific purposes); and
- administrative benefits (ie, tax refunds).
Several amendments to the system are planned, mainly due to:
- a potential amendment to the personal income tax laws; and
- a recent European Court of Justice (ECJ) judgment.
EU law violation
The dominant position of French cafeteria companies Cheque Dejeuner and Sodexo ended in 2011 when the government essentially banned them from the market by force of law. Simultaneously, new Hungarian service providers entered the market (including the issuer of the so-called 'SZÉP card') and were supported by legislative measures. Due to the possible violation of equal treatment rules, the European Commission initiated an infringement procedure. After five years of litigation, the ECJ issued its final judgment in February 2016.
The ECJ's judgment accepted the Hungarian government's arguments, which were presented by the European Commission. The judgment pointed out that elements of the cafeteria system infringed EU law as they violated the freedom of establishment and the freedom to provide services. In addition, foreign service providers had been discriminated against, which ultimately resulted in their exclusion from the Hungarian market.
Hungarian law prohibited companies whose business administration centres were outside Hungary from providing meal vouchers or cards. In addition, the law prescribed that service providers issuing such vouchers or cards could operate only as registered Hungarian legal entities or their branches, and not as branches of foreign entities, which essentially excluded foreign companies from the market.
The judgment has left the government in a difficult position as French companies can sue it for damages, whereas the ECJ may impose monetary fines if the judgment is not followed by appropriate corrective legislative actions.
After the judgment was issued, it was first thought that the government would abolish the entire cafeteria system or significantly amend it. However, the proposal seems only to fine-tune the current system. For example, the name of the voucher (ie, Erzsébet utalvány) and bank card (ie, the SZÉP card) will not be removed from the Personal Income Tax Act. However, such amendments may yet be introduced.
At present, fringe benefits are mostly regulated by the laws governing the personal income tax system. The proposal aims to introduce several amendments to the system, which are discussed below.
New housing allowance rules
The proposal aims to introduce a new type of benefit aimed at supporting mobility. The so-called 'mobility accommodation support' is essentially a type of tax refund that employers can request. It is paid after housing allowances and amounts to:
- 40% of the minimum wage in the first 24 months;
- 25% of the minimum wage in the second 24 months; and
- 15% of the minimum wage for a maximum of 12 months following the first 48 months.
As this support is a tax reimbursement, the highest-qualified professionals – who pay the most personal tax and are difficult to hire – will likely receive it. The mobility accommodation support will also be extended to real estate that is owned or rented by an employer.
At present, those who travel from outside the administrative borders of the city in which their workplace is located can receive Ft9 per kilometre as reimbursement for their travel costs. This amount will be increased to Ft15 per kilometre. This will likely increase employees' mobility and may also be beneficial for an employer wanting to employ professionals living far away from its workplace.
Certain difficulties may arise when practitioners – in applying the new rules – try to identify which employees are entitled to certain forms of subsidised housing allowance, as several factors can influence this (eg, real estate types and sociological factors).
The difficulties will arise because the legal terminology differs to the normal legal terminology. For example, if an employee has a low-interest or state-supported real estate loan, the applicable government decree differs in terminology from the Personal Income Tax Act, which generally regulates fringe benefits. To resolve differences between the different regulations, the Personal Income Tax Act will need to be amended to include three key terms:
- 'accepted size of flat'; and
- 'family members living together'.
Renovation costs may be subsidised by employers by up to 20% of the total cost and the accepted size of the flat that can be subsidised will be increased to:
- a three-room flat for one or two persons; and
- a four-room flat for three or four persons.
The above will increase by one room per additional person in the case of a family living together.
At present, an employer must pay the full amount of tax for dual-learning employees (as opposed to students who attend state education courses). The proposal aims to amend this rule so that salaries for employees attending courses provided by their employers are exempt from personal income tax to the amount of the monthly minimum wage. In addition, the first theoretical part of such a course will also be exempt from healthcare tax. This – unlike mobility support – might also be beneficial for employees working in positions requiring lower qualifications.
An examination of the ECJ's judgment and the proposal suggests that the Hungarian legislature has not tried to fulfil the court's criteria. Instead, the amended benefit system seems to be a fine-tuning of the existing system. It remains to be seen whether any significant amendments to the system will be made in the future.
It is a good sign that after the initial indication that the system would be abolished the number of available benefits has been widened, leaving the door open for future amendments.
By Daniel Gera, Attorney at Law, and Matyas Zimmer, Associate, Schoenherr