Short summary of the taxation of private persons in 2016
Personal income tax
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, hereinafter PIT) distinguishes between the following categories of income in the case of private individuals:
Since 2016 the rate of the personal income tax is 15 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:
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, 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 revenue.
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 include primary agricultural producers, private entrepreneurs, lessors of property, appointed auditors and employees in a commissioned employee status.
The taxpayer can choose between the two options of cost accounting:
- itemized accounting,
- 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.
Special rules apply to private entrepreneurs.
Primary agricultural producers may opt for flat rate taxation instead of the itemized accounting or the 10% expenditure rate.
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 15%. 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:
• Season tickets for local public transport;
• 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 contributions by the employer transferred to the benefit of private individuals to voluntary pension insurance, self-help 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 15%. Besides the personal income tax, the payer, employer is obliged to pay 14% health contribution according to prevailing regulations in 2016.
2.4.2. Low interest rate loans
In case of interest free or low interest loan extended by the payer is payable by the payer or the employer. The tax base is 1.18 times the interest allowance, the tax rate is 15%. 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, no taxable income is generated if the total regular market price of the securities thus acquired is lower than HUF 1 million.
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), or 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. 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).
Taxpayers paying the Fixed-Rate Tax of Low Tax-Bracket Enterprises and on Small Business Tax (KATA) will, as a main rule, pay a specific monthly tax of 50,000 HUF – or 75,000 HUF as of 2014 and if they choose to do so.
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 15 percent.
In respect of dividends from abroad received by Hungarian resident private individuals, the dividend tax paid abroad can be deducted from the 15 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 15 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 15 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 15 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 noting that under certain conditions and for individuals defined as domestic individuals in accordance with the Act on the Eligibility for Social Security Benefits and Private Pensions and the Funding for These Services (henceforth: Tbj), a 14 percent health contribution is also payable on incomes from dividends with a 15 percent tax burden, on exchange gains, and on incomes withdrawn from the business.
A health contribution of 6% is imposed on incomes from interest – aside from the exceptions stipulated in law. An individual defined as foreign individual may reclaim the 6% health contribution subtracted by the payer.
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.
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.
Private 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.
The obligation to file a tax return must be performed on the 1653 form for year 2016.