Taxation in Hungary
The problematic of taxes can be crucial in any stage of business. A favourable tax structure can spare a fortune for your business and on the other hand, the mistakes made in tax declarations could lead to serious troubles.
Therefore, it is in place to be extremely careful with preparation and choice of your tax consultant. In this article we shall focus on the bedrock of each country tax-system on so, the Personal income tax and social contributions, Corporate income tax, Taxes on individual income and lastly the biggest contribution of each state’s budget, the Value added tax.
Article of Ján Mrázik – Faculty of Law of Comenius University / dr. Papp Gábor tax advisor [Legitstart Consulting] and attorney at law / dr. Dobos István attorney at law
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The taxation in conditions of Hungary is divided into central and local taxes. Meanwhile central taxes contribute to the state budget, local taxes are providing support for the municipalities.
We can divide central taxes into general and special categories. General taxes include the most traditional types of tax, for instance personal income tax, corporate income tax, value added tax, while special taxes consist on tax types levied on specific fields, such as levies on financial organisations, income tax of energy utilities, credit institution contribution, public utility tax, energy tax, public health product tax, telecommunication tax or advertisement tax.
In conditions of Hungary dominates the principle of self-assessment. Enterprises and individuals are obliged to pay, assess and declare all the taxes by themselves. Apart from self-assessment, in some cases, the authority could charge taxes based just on filing. For instance, tax is charged in the case of VAT on imports of goods, communal tax registration tax, local and building tax, while the levy applies in the case of transfer of property or procedural stamp duty.
Advantage of Hungarian tax system is that there is harmonised value added tax, customs and excise regime. One of the advantages and reasons to invest in Hungary is undoubtedly the low corporate income tax base, the broad range of tax stimuluses (especially in investment and development tax area) and the ongoing reduction of tax burden on employment, in order to create a pleasing tax environment for investors.
2. Personal income tax and social contributions
Both resident taxpayers and foreign individuals bear responsibility to tax their revenue obtained in Hungary which includes all their incomes.
These two categories, consisting of resident taxpayers (taxpayers with Hungarian citizenship and persons acquired with the exception of dual citizenship, taxpayers coming from European Economic Community who stays in Hungary for the period longer than 183 day and finally the citizens of third countries who were obtained with residence permit) and taxpayers who are not residents (persons who either earn income in Hungary or their income is taxable in Hungary in accordance with international convention.
The personal income tax in Hungary has a rate of 15% of the tax base. For resident taxpayers it will represent the tax based on their whole income, meanwhile in the case of taxpayers who do not have residence in Hungary, it will represent their locally taxable incomes.
As mentioned, in conditions of Hungary the flat rate personal income tax applies in 15%. The contributions which are generally accepted to be payable by employee are following:
Health care contribution in kind with flat rate of 4%
Health care contribution for financial allowance with flat rate of 3%
Pension contribution with flat rate of 10%
Vocational training contribution with flat rate of 1.5%
By the employer on the other side payable: Social contribution with flat rate of 17,5% and Vocational training contribution with flat rate of 1.5%.
The amount of the total tax burden (counting together tax and contribution) in case of normal earning is 33.5%, thus the general level of net earning is 66.5% of gross earning. From the year 2019, all specific incomes are subject to (SZOCHO) instead of Health Care Contribution (EHO). Mentioned Social Contributions Tax is payable in flat rate of 17,5% until the natural person reaches in its income twenty-four times the mandatory minimum wage for the actual tax year.
In the conditions of Hungary are becoming the passive incomes (for instance capital gains or dividends) together with the benefits in kind for employees subject to 17,5 % contribution, as well.
4. Corporate income tax
Another group represents corporate income tax which is applicable both to resident and non-resident companies. Resident taxpayers are subject to all-inclusive or unlimited corporate income tax liability. Non-residents are subject to corporate income tax on their income from business activities in the territory of Hungary.
The tax base both for local and foreign enterprises is the pre-tax profit modified by Act 81. of 1996 on corporate income tax counting loss carried forward, provisions, depreciation, declared share, declared intangible goods, dividends, received royalties, or research and development.
5. Taxes on individual income
Personal income tax (PIT)
We could conclude the purpose of personal income tax as the duty for private individuals to contribute to public bodies and to ensure tax revenues for the society and regional budgets. The Tax liability is affecting the total revenues of resident taxpayers, the revenues obtained in Hungary by foreign individuals or other incomes that are taxable by law, in Hungary.
Taxpayers could be both residents (Hungarian citizens with exception of dual citizen without Hungarian residence, European Economic Community member state citizens with exceeding 183 days of staying, third country citizens with residence permit and persons only with Hungarian residence) and non-residents (if they earn income from Hungary or according to an “International Convention” they have income that is taxable in Hungary).
Hungary has a personal income tax rate of 15% of the tax base. For resident taxpayers the tax base is their whole income, while in the case of non-resident taxpayers it represents their locally taxable incomes.
Simplified contribution to public revenues
In the following part, we will introduce the special group of taxpayers, consisting of actors, writers, journalists, artists, directors, musicians and circus artists who obtain a yearly income under HUF 60 million and athletes or trainers with a yearly income under HUF 250 million, can choose this favourable tax form.
This tax exempts from the personal income tax, contribution to the pension, health insurance contribution and social contribution tax with exclusion of taxes and contributions on the minimum salary. Their individual’s revenue on tax rate (if the private person is liable to pay it) with the value added tax. The applicable tax rate applicable in this case is 17,5% for the payer/employer, 15% for private individuals and lastly 11,1% for pensioners.
6. Value added tax
The Value added tax (VAT) general tax rate in Hungary for the year 2020 is 27%, as it is in accordance with the EU VAT directive. Nonetheless, there are two reduced VAT rates in use: 5% and 18%.
VAT returns are required to be submitted monthly, quarterly or yearly. Deadline for filing the return is the 20th day of the month following the given period. The yearly return of VAT shall be submitted by February 25th following the given tax year.
There could also occur specific cases such as for instance the distance sale. In that case, the companies registered in other member states only need to be registered by Hungarian tax authority if their total net sales to Hungarian non-taxable customers exceed 35000 EUR.
7. Reduced VAT rates
Previously mentioned reduced VAT rates shall be explained in the following subchapter. Certain products and services are granted with lower VAT rates. The 5% rate applies for instance to some type of milk, poultry meat, fish fillets and other fish meat, fresh eggs, medicine, books, magazines, specific large live animals, district heating services, instrumental live music performed by artists at private events, commercial accommodation services, restaurants and internet. The 18% rate is applicable to dairy products, products made from milk, corn, starch and open-air events’ service providers.
Please note that VAT of certain groups of services and products are not deductible, similar like different types of fuels and motorcycles, passenger cars, taxis, parking services, gastro services, services related to catering and residential properties and connected activities to renovation of these buildings.
As you may have noticed, the problematic of taxes may vary in every single state around the world. Consolidation of your taxes is highly recommended to consult with experienced experts who will prevent any problem arising from this complicated scheme to occur. Feel free to contact us in the case of any questions!
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