On 1st January 2010 new taxation rules have been applied in Hungary. In a nutshell this means that the 18-36% graded personal income tax has been reduced to be 16% direct tax, and families having children may achieve further significant decrement. The change will increase the net salaries by 10-100% (!) in the field of IT, but in special cases it can give more. On lower wages it is in the other way around due to other changes, but now I’m focusing only on IT sector in Budapest.

So, there will be a huge increase on the net salaries. Fine, we are happy.

But.

The tax changes are applied only on staff employed on the lawful way. You may say that most of the international companies employ their workforce legally, but it is not true. I don’t know how it works in Western Europe, but in Hungary companies outsource tax evasion by using leased resources.

Normally leased resources are used to cover peaks in your resource needs. They are a bit more expensive than others, but no long-term contract is made, they may be laid off even today. Multinational companies often bring their strict “no tricky business and bribery” policies from their headquarters, but locally they lease resources from (Hungarian) companies, which have tricky business and bribery as core strategy. They don’t employ the people they rent, or they employ them on a reduced salary, and give them the rest as “zsebi” (“pocket-money”), what can be up to 80%.

Let’s assume you have both employees and leased resources in your specialist team.

Employees make gross HUF 600k, pays 300k tax, so the net is 300k (roughly). Leased ones make gross HUF 150k, pays 70k tax, and somehow they find another 220k in their pocket every month. This is also net 300k. The wages in your team is according to your pay grades, and very well balanced.

Then 1st January arrives. Ceteris paribus the employee will make 600k, but pays no tax, because he has 3 children, so his net salary will be 600k, what is 100% increase. Your leased resource will make 150k, pays no tax as he has a half kindergarten at home, and receives the 220k pocket. So he earns 370k, that means 23% increase.

Both of them have had a large increase, but your pay grade system has exploded. 600k >> 370k

You will need to be prepared to resolve this conflict. I’m sure that the body-leasing firm won’t handle the difference. The strategy is up to you, but I’m sure companies need to be more flexible in headcounts if they want to keep their long term leased resources. Or, according to the Hungarian way, you need to fire all, who have children. Both ways work, and probably many others.

The choice is yours, but you have to build your strategy rapidly, because people get they pay checks in early February, and the bomb starts the destruction.

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