Taxation of Hungarian companies and private persons
Personal income tax and VAT were introduced into the Hungarian tax system in 1988. This was a first step in a long process of tax reform. The next major step, undertaken in 1991, was the modernization of the corporate income tax system.
In 1993, the VAT legislation was further modified to conform, at least in principle, to the VAT systems used in the European Union. 1995 witnessed the introduction of a two-tier corporate tax system, comprised of a standard rate and a supplementary tax. New legislation, which came into force in 1997, left the standard rate untouched while replacing the supplementary tax with a withholding tax.
With Hungary’s accession into the European Union, several changes have been implemented in the Hungarian tax legislation during the past few years to comply with the EU tax directives (e.g. parent-subsidiary directive, mergers directive, sixth VAT directive).
The current, significant taxes and levies imposed in Hungary are:
– Corporate Tax
– Personal Income Tax
– Value Added Tax
– Customs Duties
– Excise Duties
– Property Transfer Tax
– Local Taxes
– Social Security Levy
– Contribution to the Rehabilitation Fund
– Contribution to the Vocational Training Fund
– Contribution to the Cultural Fund
– Death, Gift and Inheritance Taxes
– Environmental Protection Levy
– Innovation Contribution
– Energy Tax
The Hungarian taxation system has developed in recent years is now close to the level of complexity found in Western Europe. Tax laws in Hungary are enacted by Parliament. The Tax Authority provides only interpretative and administrative guidelines for these laws. Court decisions currently play an increasing role in interpreting tax laws and, as a result of Hungary’s accession to the EU, European Court of Justice (ECJ) case law is also applicable.
Act XCII of 2003, severally amended, provides for the order of taxation and, within this, the uniform regulation of the rights and duties of taxpayers and tax authorities.
Hungarian taxation operates under a self-assessment system. Taxpayers are required to register, determine their tax obligation, make advance payments, file tax returns on their own behalf, make corrections to the tax returns as needed, keep records and supply information as required by law. Authorities randomly examine tax returns to enforce the self-assessment system. The Commissioner of National Tax and Customs Administration determines the target areas to be audited in each tax year. The tax year is the calendar year for individuals and the calendar year or the business year for companies. In general, tax returns must be filed annually. However, for VAT, payroll and withholding taxes, quarterly or monthly filing may be required.
Corporate income tax returns for companies are due by 31 May following the calendar year-end (or should be submitted within 150 days of the year-end with regard to companies whose business year differs from the calendar year).
Taxation of companies
Corporate income tax
Taxpayers: Business entities (including companies limited by shares, limited liability companies, general partnerships and limited partnerships, as well as local branch offices of foreign companies) – with the exception of private entrepreneurs – are subject to corporation tax.
Tax base: For domestic and foreign businesses alike, the corporate tax base is the earnings before taxation modified by the items identified in the Corporate Tax Act, such as
– Loss carried forward
– Provisions depreciation and amortisation
– Declared share
– Declared intangible goods and chattels
– Royalties received
– Research and development
– Costs and expenses not incurred in the interest of business operations
– Thin capitalisation
– Controlled foreign company (CFC)
Tax rate: The corporate tax is 10% of the positive tax base up to HUF 500 million, and 19% of the remaining portion of the tax base.
Tax filing and payment deadlines: In Hungary, business associations are required to file a corporate tax return every year (for each business year). Generally, the business year is identical to the calendar year, but companies may use a different business year and, in relation to this, a tax year different from the calendar year.Business associations are required to file their corporate tax returns and pay corporate tax by 31 May following the tax year. If the taxpayer opts for a different tax year, the filing and payment deadline is the last day of the fifth month after the last day of the business year.
Taxation of private individuals
Personal income tax
Taxpayers: Residents of Hungary are taxed on their worldwide income (unlimited tax liability), while non-residents are taxed only on Hungarian source income or income to which under a double taxation treaty tax may be levied (limited tax liability). Foreign source income may be taxed even if it is not transferred to Hungary.
Under Hungarian law Hungarian nationals are deemed to be tax resident. A foreign national is tax resident, if he/she has permanent home or habitual abode or the centre of his/her vital interests is in Hungary. Residence status may also be affected by the terms of a double taxation treaty. Tax treaties override the local legislation.
Tax base: Resident taxpayers shall be subject to tax liability in respect of all their income (all-inclusive tax liability). The tax liability of non-resident private individuals shall apply to income that originates in Hungary, or income taxable in Hungary on the basis of an international convention or mutuality.
With a few exceptions, all incomes of resident private individuals are taxable. Incomes may be classified in two main categorie:
– The consolidated tax base consists of income from self-employment activities, income from activities other than self-employment and other types of income. Based on the decision of the taxpayer, the income from self-employment activities may be calculated in one of two ways: itemised expense accounting or application of a 10% expense ratio
– Income taxed separately this includes income from the sale of real estate, from interest, dividends and long-term investments etc.
Tax rate: The tax rate is 15% of the tax base.
Tax filing and payment deadlines: Private individuals are required to file their personal income tax returns once each calendar year. The deadline for filing the tax return is 20th May of the year following the relevant year. For private individuals involved in business activities, this deadline is 25th February of the year following the relevant year.
If the individual’s income is from activities other than self-employment, in particular employment or a similar legal relationship, the individual’s employer is obliged to file a tax return about any tax advances withheld in each month by the 12th of the month following the current month.
Value added tax
Taxpayers: VAT applies to all natural persons, legal entities and associations of individuals and partnerships, which supply goods or services on a regular basis or business-like manner for profit. Foreign entities performing VATable business activities in Hungary are obliged to register for VAT and fulfill their VAT obligations under the Hungarian legislation.
Tax base: VAT is the most significant indirect tax in Hungary.The Hungarian VAT Act is consistent with the EU VAT Directive.The scope of the VAT Act covers the supply of goods and services in Hungary, the sale and acquisition of goods within the European Community, the exportation and importation of goods and the exportation and importation of services.
The consideration expressed in money terms received by the supplier of the goods/services. If the consideration is not expressed in money terms, the tax base shall be determined in money terms at the arm’s length price of the given product/service.
Banking services and certain other business activities “inter alia” insurance, real estate leasing, and general education are tax exempt.
Tax rate: The general VAT rate is 27% with two lower rates at 5% (medicine, healthcare equipment, books, e-books, periodicals and district heating) and 18% (milk and dairy products and products made using corn, flour and milk, as well as commercial accommodation services).
Tax filing and payment deadlines
Tax is levied by self-assessment. Tax returns must be filed monthly, quarterly, or annually, depending on the amount of VAT paid in the previous year. VAT payer is required to issue invoices in accordance with the specifications of the tax law regarding form and content. A foreign business registered in an EU country without its own VAT registration may apply to the tax authorities for a refund of the Hungarian VAT it has paid.
This type of tax is paid upon the domestic production and import of products liable to excise tax.
Excise tax is payable in Hungary in relation to the following products:
· Mineral oil
· Alcohol products: Beer; Wine; Champagne; Intermediate alcohol product
· Tobacco products:Cigarette; Cigar, cigarillo; Fine-cut smoking tobacco; Other smoking tobacco.
Excise duty is usually related to weight or quantity rather than to value. The general foundation of the excise tax requires that the tax liability be computed at the time the excisable goods enter the country or when produced in Hungary.
Each local authority has the right to levy local taxes within the confines of a centrally prescribed set of rules, systems and maximum rates. Local taxes are tax deductible for purpose of corporation tax.
These may include the following:
– property tax,
– utility tax,
– tourist tax and
– local business tax.
Motor vehicle tax is paid by the owners or users of most motor vehicles registered in Hungary (excluding motor vehicles registered in EU member states).
The tax rate depends on the year of manufacture and the power of passenger cars and it varies based on the weight of lorries and buses. The tax varies between HUF 140 and 345 per kilowatt for passenger cars.
The annual car tax is due in two instalments: by 15 March and 15 September of the relevant year.
Mid-size companies and large corporations are required to pay an innovation contribution in Hungary.
Innovation contribution is payable by every entity subject to the Act on Accounting. The base of the contribution is equal to the local business tax base.
The rate of the innovation contribution is 0.3%.
Environmental pollution charge
Entities emitting environment-polluting materials into the air, the waterways, or the soil must pay this tax in proportion of the type of materials emitted, their concentrations and the location as specified by the prevailing laws.
This tax must be paid in certain cases on natural gas and electric power (except population consumption). Under certain terms taxpayers may be entitled to tax reimbursement on consumed energy.
The tax base is the energy sales by energy traders, users or generators to non-retail consumers.The energy tax will be payable based on megawatts for electricity and on gigajoules for natural gas.
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