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4.2. Domestic PE of a Foreign Entity

The Hungarian “PE” definition is based on Article 5 OECD Model Convention but is broader (eg covers insurance risk or the rental of real estate). In situations covered by a tax treaty, the treaty definition prevails. This also means that as a  a general rule, a permanent establishment may be deemed to exist if meeting any tests provided for under a tax treaty even if no permanent establishment would have been recognized under domestic law.

The domestic law definition of permanent establishment includes:

  • Fixed place of business through which the business of an enterprise is wholly or partly carried out irrespective of the taxpayer’s entitlement to use them (physical PE);
  • A building site or construction or installation project (construction PE);
  • Direct utilization of natural resources in Hungary;
  • Utilization of real estate situated in Hungary for consideration (transferring, selling or contribution in-kind) (real estate PE);
  • Dependent agent (agency PE);
  • Provision of services in Hungary;
  • Insurance of risks occurring in Hungary; and
  • Business carried out through a branch.

Physical PE – the basic rule

A physical permanent establishment is defined as a fixed place of business (including for instance business facilities, equipment etc.) through which the business of an enterprise is wholly or partly carried out. The definition includes in particular:

  • The place of management;
  • Representative offices established with a Hungarian registered office;
  • Factories, plants, workshops;
  • Mines, crude oil or natural gas wells; and
  • Other facilities used to explore or exploit natural resources.

Construction PE

A building site or construction or installation project constitutes a permanent establishment only if it lasts more than three months (with or without interruption) which must be considered on the basis of the individual construction site irrespective of whether such activity is based on several independent contracts or whether it was commissioned by several parties. The construction site shall be recognized as one construction site if it constitutes one unit from an economic, business and geographical point of view. According to the domestic law, a “construction PE” also includes the related supervisory activities.

Real Estate PE

Utilization of real estate situated in Hungary for consideration (e.g. letting, transferring, selling or contribution in-kind) is deemed to be a permanent establishment. This domestic provision differs from the OECD Model Convention, according to which it is not a permanent establishment, but an independent rule on the income derived from the direct use, letting, or use in any other form of immovable property situated in Hungary, shall be taxed in Hungary.

Agency PE

An agency permanent establishment will be constituted when an agent acts in Hungary on behalf of a non-resident enterprise and has and habitually exercises an authority to conclude contracts in the name of the non-resident enterprise.

Hungarian agency permanent establishment will also be deemed to exist if an agent maintains stocks of commodities or products from which it regularly makes deliveries on behalf of the non-resident enterprise.

If the activities conducted by the agent correspond to the type of activities which do not generally constitute a permanent establishment (exempt activities, see below), then the agent does not constitute a permanent establishment.

Service PE

As of 1 January 2021, a PE may be created if a foreign person furnishes services through an employee or other personnel engaged by the foreign person for a period exceeding 183 days in any 12 months period starting or ending in the tax year (with or without interruptions).

Insurance PE

If an agent insures’ risks in Hungary on behalf of a non-resident insurance enterprise, it will be deemed to have a permanent establishment in Hungary. Re-insurance is excluded from this.

Branch of a Foreign Entity

As a general rule, if a business activity is carried out without setting up a subsidiary, then the foreign entity typically must establish a branch in Hungary. A branch is an organizational unit of a foreign entity having no separate legal personality. Branches are also considered as a permanent establishment in Hungary.  

Online Services

There are no special rules regarding the provision of online services.

General PE exclusions

The following do not constitute a permanent establishment in Hungary when engaged in by a non-resident enterprise:

  • A place for storage or display of goods only;
  • A place for maintenance of goods only or a place for maintenance of goods to be processed by another enterprise;
  • A place for purchasing goods or collecting information for a foreign entity;
  • A place for carrying on an activity of a preparatory or auxiliary character for the foreign enterprise; and  
  • Activities carried out by an independent agent (including commission agent), if he conducts activities in the course of his ordinary business activities.