Obligation to register, tax number

If somebody intends to let immovable property as a regular and/or business activity must first register with the Tax Authority in order to receive a tax number, which is a pre-condition for the commencement of this  activity.  This obligation to register with the Tax Authority can be fulfilled by completing form No. ‘T101 [1], which must be submitted in a paper-based format in 2 copies to the first instance tax authority with territorial jurisdiction or, alternatively, electronically via the Client Gate. A copy of the document(s) verifying the data provided on the paper-based form needs to be attached to the form, or alternatively if the form is submitted electronically, the document verifying the data provided can be attached as a scanned file.

Value Added Tax

As a rule, the let of immovable properties, with the statutory exceptions, qualifies as a VAT-exempt activity, which means that the lessor shall not pay VAT on this activity. However, the lessor does not have the right of VAT deduction, either.

In terms of VAT exempt let, the taxable person has the right, subject to the prior notification of the Tax Authority, to opt for VAT taxation (which, in turn, means that he also has a right of VAT deduction). Opting for VAT taxation may, depending on the taxpayer’s decision, pertain to all types of immovable properties that are being let or only to a restricted scope of such properties: immovable properties other than residential buildings. If a taxable person made his choice, it will bind him until the end of the fifth calendar year following the year of this choice.

Personal income tax liability

Income from the let of immovable properties is subject to personal income tax payment liability. Private individuals have the following options to establish payable taxes.

The first option is to consider the revenue from the let of real property as separately taxed income (i.e. income that does not need to be consolidated with other incomes e.g. like wages and salaries). In this case the revenue which also comprises the reimbursement of public utility costs, paid by the lessee to the lessor, is subject to a 25% income tax. In this case private individuals cannot deduct expenses.

The other option is in case of real estate property not considered to be arable land, that the income of the private individual generated by renting the property is considered as independent activity, meaning that tax obligations are complied with as per the rules applicable to combinable incomes. This means that income from renting the property and

other incomes (such as wages) must be combined. The amount thus established is increased further by the 27 percent tax base supplement. As for the tax base established as above, tax payment obligations can be calculated using the two rate (17%, 32%) tax chart.

In this latter case, income is either 90% of the revenues (rental fee + reimbursed utilities costs) or the actual difference between revenues and actually incurred, substantiated costs.

Private individuals pursuing this activity as private entrepreneurs cannot exercise this option.

The decision on the above options can wait until the filing of the annual tax return; however, it must be borne in mind that, in order to make the decision, continuous preparation may be necessary (e.g. collecting invoices substantiating the costs, etc.).

Taxpayers must pay tax/tax advance on their income from leasing immovable properties already during the tax year. The available two alternative options are as follows:

• If the lessee is a payer (e.g. a company or a private entrepreneur), and the private individual (the lessor) has filed a formal statement concerning his choice, the payer proceeds according to the rules on self-employment activities and withholds at least 17% as a tax advance. In the absence of such a statement, the lessee is obliged to withhold tax corresponding to 25% of the income and, taking into consideration the statement on the reach of the upper limit of the payment of social security contributions, another 14% as health insurance contribution. The payer is not obliged to withhold tax/tax advances if the lessor proves, that he/she performs the rental activity as a private entrepreneur, or if a real estate in common ownership is being let by community of proprietors. Lessees qualifying as payers issue to the private individual a certificate containing the data prescribed by law on the amount of rent paid and the taxes and tax advances withheld.
• If the lessee is not a payer or if the tax, tax advance and/or the health insurance contribution was not deducted for any reason, the lessor is obliged to pay these amounts by the 12^th day of the month following the relevant quarter.

Obligation to pay health insurance contribution

Private individuals resident in Hungary are obliged to pay 14% in health insurance contribution on the entire amount of their income in excess of HUF 1,000,000 originating from the lease of immovable properties. This obligation is not dependent on the fact whether the taxpayer establishes the revenue of renting real estates as part of the consolidated tax base or as indepenpendtly taxed income. This obligation continues to apply up until the upper limit pertaining to compulsory contributions (HUF 450,000) is reached.

This obligation does not apply to the person who rents out his residential property that is, at the same time, his permanent place of residence, unless the lessor rents the property out to a business undertaking run by him/her or a close relative (common-law spouse) living in the same household.

The 14 percent health care contribution can be deducted as cost if the taxpayer opts for tax payment according to the rules applicable to independent activities.

[1] The actually effective form No. ‘T101 for the given year; in 2010 form No. 10T101.