Personal income tax

 

1. Taxpayers

Private persons resident in Hungary are subject to tax liability in respect of all their income whether earned in Hungary or abroad. The tax year is identical with the calendar year.

 

2. Taxable income

Save the exemptions provided by law, all types of income of private individuals are subject to income tax. The Personal Income Tax Act (Act CXVII of 1995 and its amendments) distinguishes between the following categories of income in the case of private individuals:

•  incomes to be consolidated: income from activities other than self-employment, income from activities of self-employment and other incomes to be consolidated;
• incomes taxed separately:  (e.g. in-kind benefits, capital gains, income from private businesses and income from rental of real estate)

In case of combinable income – except some special incomes such as pension – the tax base is increased by the amount of the tax base supplement, which is the amount calculated with the general social security contribution rate of 27 percent, and the 27 percent rate of health contribution after incomes that belong to the combined tax base. In practice the tax base is 127 percent of the income.

The rate for the combined tax base that is under 5 million HUFs is 17 percent, for the part over 5 million it is 32 percent.

A different tax rate applicable for the given type of income is to be used for income from other categories. No tax base supplement is to be considered in case of separately taxable income.

 

2.1. Tax-exempt income

 Tax-exempt benefits are listed mainly in Article 7 and Appendix 1 of Act CXVII of 1995 on Personal Income Tax. Among others, such benefits include:

• some forms of state support for fostering and raising a minor;
• scholarships paid by non residents to students studying in a foreign educational institution or researchers working abroad;
• some forms of support related to the purchase of real property;
•  services of insurance companies.

 

2.2. Income from activities other than self-employment

Income from non-independent activity includes activity carried out in employment, the activity of the leader of an economic organisation, and the activities of the private individual who is an owner of a company.

Income from activities other than self-employment includes, in particular, salary and remuneration received by private individuals in payment for such activities, any taxable insurance premiums paid by the private individual’s employer and income paid for personal participation and for activities as senior officers and elected office-holders. As a rule, these costs cannot be deducted from the tax base.

 

2.3. Income from self-employment activities

As a rule, income from self-employment activities, not pursued in the scope of a private business, is calculated as the difference between the total amount of revenues and the total amount of costs. Agricultural producers, lessors and appointed auditors, Members of the European Parliament, to Members of the Hungarian Parliament and to representatives of local self-governments qualify as private individuals engaged in self-employment activities.

Taxpayers may decide on applying a 10% cost rate, rather than establishing incurred costs.

Income from royalties at its original holder is taxed in accordance with the rules applicable to income from self-employment activities.

Income from the rental of real property is subject to 25% tax payment liability; taxpayers (lessors), however, may select taxation rules applicable to incomes to be consolidated.

Agricultural producers may – just like individual entrepreneurs – choose flat rate taxation.

 

2.4. In-kind benefits

The law lists in-kind benefits in an itemised manner, which include, among others, entertainment services and gifts provided by payers to private individuals for promotional purposes; gratuitous or preferential goods or services provided to all employees (or, based on the employer’s internal regulations, to a group of employees); catering and other services in connection with business trips. The general tax rate after benefits in kind is 54 percent, payable by the payer or employer.

 

2.4.1. Preferentially taxed in-kind benefits

The tax rate of 25 percent applies for certain in-kind benefits: they include – depending on the legal thresholds – the gratuitously of preferentially provided:

• tickets and passes for public transport,

• boarding or the specific vouchers applicable for this end;

• recreation or the specific vouchers applicable for this end;

• money transferred to voluntary pension or healt care funds for the benefit of the employee.

 

2.4.2. Low interest rate loans

In case of interest free or low interest loan extended by the employer, a single 54 percent tax rate is applicable for the profit arising from the unpaid interest, payable by the payer or the employer. When profit from interest-free or low interest rate loans is established, the base rate of the National Bank of Hungary plus 5 percentage points serves as a benchmark to which the interest actually charged must be compared.

 

2.4.3. Shares and options

If a company grants its employees shares under an employee stock option scheme approved by the Ministry of Finance, no taxable income is generated if the total regular market price of the securities thus acquired is lower than HUF 1 million.

 

2.5. Pensions

Pensions are exempt from income tax unless a private individual earns, in addition to his/her pension, other income to be consolidated in the given tax year. If, however, the private individual also earns other incomes to be consolidated in the given tax year, the amount of pension constitutes part of the consolidated tax basis. Nonetheless, the tax payable on the amount of pension, under the tax table (17% or 32%), need not be paid. “Pension” means

• state pension,
• pension payments provided by a private pension fund,
• income defined as pension in the provisions of treaties on the exclusion of double taxation.  

 

3. Income from private entrepreneurial activities 

Entrepreneurial withdrawals (the actual remuneration of a private entrepreneur) originating from business activities and recognised as costs must be recorded among incomes to be consolidated. Private entrepreneurs are subject to entrepreneurial income tax payment liability and entrepreneurial dividend tax payment liability. The private entrepreneur may, provided that certain statutory conditions are met, opt for flat-rate taxation or simplified business tax (EVA).

The tax base of entrepreneurial income is the difference between the total income and total costs. With effect from 1 January 2007, the law stipulates a minimum income tax base and a minimum contribution base for self-employed private entrepreneurs.

The rules governing depreciation write-offs are similar to those applied by companies.

Individual entrepreneurs may carry their losses over without a time limit if the losses were generated while in compliance with proper legal practice.

The tax rate applicable to entrepreneurial income is 19%. Under certain conditions, a 10% tax rate applies to income up to HUF 50 million and a 19% rate to the sum above HUF 50 million.

Entrepreneurial dividend tax is payable in addition to entrepreneurial income tax. The tax rate applicable to the entrepreneurial dividend tax base is 30%.

Entrepreneurs opting for flat-rate taxation pay tax on the difference between their total income and a fixed proportion of costs ranging from 40% to 93%, depending on the activities pursued. A progressive tax rate is applied to the income of the entrepreneurs opting for flat-rate taxation.

A 25% tax rate is applied to the income of taxpayers paying simplified entrepreneurial tax (EVA).

 

4. Capital gains

Dividend income is taxed separately in a manner that the payer deducts the amount of the payable tax from the sum automatically. The tax rate applicable to dividend income is 25%.

The tax rate on dividends of securities listed at the stock exchange of any EU Member State is 10%. The relevant treaty on the exclusion of double taxation provides for non-resident private individuals’ tax payment liability on dividends paid by Hungarian companies. In the absence of such treaty, the applicable tax rate is 25%.

In respect of dividends from abroad received by Hungarian resident private individuals, the dividend tax paid abroad can be deducted from the 25% tax if evidence of such tax payment is provided. In the absence of an international agreement on the exclusion of double taxation, at least 5% must be paid as dividend tax in Hungary.

A 20% tax rate is applied to interest income. Interest income means, among others, interest paid on savings account deposits as well as interest on and other income from publicly offered and traded debt securities and investment fund shares.

A 25% tax rate is applied to income (traded price gains) from the sale of securities unless such income qualifies as interest or as other special income type. The tax base is the difference between the sales price and documented costs, like the purchase price and transaction costs.

In case of financial or commodity transactions (securities, foreign exchange, some indices, etc.) with an investment service provider, the tax rate after such income is 20 %. A special feature of this type of income is that it is to be established not by transactions, but by combining the profits and losses of all transactions.

A 25% tax rate is applied to income from property withdrawal from a business.

Any interest, dividends or traded price gains paid by a legal person or other organisation established in an offshore state is/are taxable as consolidated income.

It is worth paying attention that under certain conditions also a 14 percent health contribution is payable after income from dividends with a 25 percent tax burden, after exchange gain, and after income withdrawn from the business.

 

5. Exclusion of double taxation

The exclusion of double taxation is based on the provisions of double taxation treaties or, in the absence of such, the Hungarian law.

If there is a double taxation treaty in force, the provisions of the relevant treaty must be applied to income earned abroad.

Taxable income of private individuals who are not residents in Hungary become taxable as per the rules on taxable income in Hungary applicable to Hungarian residents under the convention to avoid double taxation. Income of private individuals who are residents in Hungary that are liable to tax outside of Hungary based on the convention (typically except for dividends) is exempt from taxes in Hungary on the condition that if this income belongs to the combinable tax base, this can be considered when calculating taxes after the rest of the income taxable in Hungary of the individual.

Unless an international treaty or reciprocity stipulates otherwise, calculated taxes are reduced by 90% of the income taxes paid abroad, but, at most, by the amount of the income tax calculated in accordance with the average tax rate of the Hungarian tax table. The same rule applies to the abroad earned taxable income of taxpayers opting for flat rate taxation.

 

6. General administration (filing of tax returns, payment of taxes)

The completion of tax returns is based on self-assessment. Private individuals not engaged in entrepreneurial activities may, if they qualify under the applicable statutory provisions, request the assistance of the Tax Authority with the completion of tax returns. Employers and payers are obliged to deduct taxes and/or tax advances from wages and other payments. Private individuals are obliged to pay income tax and/or income tax advances themselves if their income is from sources other than payers or employers.

Resident individuals must file their annual tax returns by the 20 May of the year following the given tax year, private individuals required to pay VAT and individual entrepreneurs must file by the 25 February of the following year. The possible outstanding taxes are also to be paid by these dates, taking the already withheld tax and paid tax advance into consideration.