Guide to personal income tax in Hungary

Tax return1. 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. Categories of income are as follows (as set out in Personal Income Tax act, “PIT”)

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

Tax rate

Since 2011 the tax rate is flat 16 percent.

 2.1. Tax-exempt income

 Tax-exempt benefits are listed mainly in Article 7 and Appendix 1 of PIT. 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;
  • certain services of the insurance companies;
  • pension.

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 (ie. company), 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, 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 main rule, outside the framework of one-man businesses, income from independent professional activity shall be calculated as the difference of all revenues and expenditures. Private individuals with an independent professional activity including primary agricultural producers, lessors of property, appointed auditors as well as members of the European Parliament, the Parliament and of local authorities.

The taxpayer can choose between the two options of cost accounting:

  • actually arising costs,
  • 10% of revenues can be regarded as cost accounting

Within one fiscal year only one way of cost accounting can be applied.

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

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

2.4. Taxable allowances where the tax is to be paid by payer

These include among others allowances and services provided under the title of representation and business gifts; products and services given to all employees (or, based on employer’s internal regulations, to certain groups of employees) free of charge or at discount prices; meals and other services related to business travel. The tax base shall be 1.19 times the value of the allowance, to be paid by the payer / employer. The tax rate is 16%. Besides the personal income tax, the payer, employer is obliged to pay 27% health care contribution.

2.4.1. Fringe benefits

These include among others, with various thresholds per benefit, benefits provided by the employer free of charge or at reduced prices like:

•          tickets or passes for local public transport;

•          meals;

•          Erzsébet vouchers to purchase food prepared for immediate consumption and dining area with kitchen for catering services;

•          holiday services at holiday homes owned by employer;

•          certain amounts transferred to the benefit of private individuals to voluntary pension insurance and health insurance funds.

The tax base is 1,19 times the value of the allocation which has to be paid by the payer, employer. Tax rate is 16%. Besides the personal income tax, the payer, employer is obliged to pay 14% health contribution according to prevailing regulations in 2013.

2.4.2. Low interest rate loans

In case of interest free or low interest loan extended by the employer 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.

Income from interest allowance is tax-free in cases adjusted by the law.

2.4.3. Shares and options

If a company grants its employees shares under an employee stock option scheme approved by the National Tax and Customs Administration, 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

“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 Entrepreneurial Tax (EVA), from the 1th January 2013 for Fixed-Rate Tax of Low Tax-Bracket Enterprises and on Small Business Tax (KATA).

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 private entrepreneurs.

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

Self-employed individuals may carry forward their losses without a time limit but within the framework specified under the law provided that these losses were incurred in compliance with the principle of the proper exercise of law.

The rate of income tax for the self-employed is 10% up to a tax base of HUF 500 million and 19% above that.

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 percent, depending on the activities pursued. A progressive tax rate is applied to the income of the entrepreneurs opting for flat-rate taxation. Flat rate incomes shall be treated as parts of the consolidated tax base.

A 37% tax rate is applied to the income of taxpayers paying simplified entrepreneurial tax (EVA).

4. Capital gains

Dividend incomes shall be paid by the payer after the deduction of tax.

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 16 percent.

In respect of dividends from abroad received by Hungarian resident private individuals, the dividend tax paid abroad can be deducted from the 16 percent 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 percent must be paid as dividend tax in Hungary.

A 16 percent tax rate is applied to interest income as well. 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 16 percent tax rate is applied to income (traded price gains) from the sale of securities.The tax base is the difference between the sales price and documented costs, like the purchase price and transaction costs.

A 16 percent 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 16 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.

Unless otherwise provided by an international agreement or the principle of reciprocity, calculated tax is reduced by 90% of the tax paid on the income abroad or maximally by the tax calculated by applying the tax rate to the tax base of this income.

The list of double taxation treaties can be found here:

http://en.nav.gov.hu/taxation/double_taxation_treaties

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.

Source: National Tax and Customs Administration

BSPL Könyvelőiroda

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