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Taxation

Basic taxes

Regardless of the legal form of businesses, business profits are subject to corporation tax. Income earned by individuals is subject to personal income tax. The majority of business entities – with the exception of the smallest businesses – are also subject to value-added tax. In addition to the above, a number of other taxes are also levied.

Taxes – with the exception of local taxes – are collected by the tax authority, (Adó- és Pénzügyi Ellenőrzési Hivatal, or APEH), based on self-assessment.

Double taxation treaties override the local income tax legislation. To date, Hungary has entered into tax treaties with the following 63 states:

Albania, Australia, Austria, Belgium, Belorus, Brazil, Bulgaria, Cyprus, the Czech Republic, Denmark, South Africa, South Korea, Egypt, Estonia, Finland, France, the Philippines, Greece, Holland, Croatia, India, Indonesia, Ireland, Israel, Japan, Yugoslavia (valid for all successor states on a reciprocal basis until new treaties are signed), Canada, Kazakhstan, China, South Korea, Kuwait, Poland, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Morocco, Malta, Moldavia, Mongolia, Great Britain and Northern Ireland, Germany, Norway, Italy, Russia, Pakistan, Portugal, Romania, Spain, Switzerland, Sweden, Singapore, Slovakia, Slovenia, Thailand, Turkey, Tunisia, Ukraine, Uruguay, the U.S.A, and Vietnam.

The most important tax rules valid from 2006 are detailed under the headings to the left.

1. Taxation of corporations

Corporation tax

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 rates

  • Corporation tax - tax is levied at a single rate of 16 percent on taxable income. Business entities may apply a 10% tax rate for the amount of their tax base not exceeding HUF 5 million (approx. EUR 20,000) if they do not effect a corporate tax benefit, employ at least one person and pay their employees on average at least one and a half times the minimum wage.
  • Bank tax – Credit institutes and financial enterprises have to pay, in excess to corporation tax, a special tax (bank tax) based on the interest margin (the difference between received and paid interest). The tax rate is 6% of the interest margin. The taxpayer has the option of paying the bank tax based on pre-tax earnings, at a rate of 8%.

Taxable income

The corporate income tax base should be calculated by adjusting the accounting profit by add-ups and deductions as provided by the corporate income tax act. See below.

  • Dividends received (except in the case of controlled foreign companies) are tax free income.
  • The following are the major items of non-deductible expenses to be added back to taxable income: fines, late payment penalties and similar charges, provisions, loss of value, non-business related expenses, interest on loans exceed three times the shareholders equity

Depreciation

For corporation tax purposes tax depreciation adjustment is done as follows:

  • The following assets may be amortized for tax purposes in accordance with the method used in the financial statement: intangibles, utilities of industrial parks, assets used for basic research, applied research or experimental development, appliances not exceeding HUF 200,000 (EUR 800) in value, assets which may be amortized for tax purpose at a rate of 33%.
  • Buildings depending upon their construction: 2%, 3% or 6%.
  • Machinery, equipment: 14.5% or 33%. Computers, film- and video making equipment, as well as appliances installed after January 1, 2005 may be amortized within two years.
  • Vehicles: 20%
  • Land is not subject to amortization
  • Fixed assets rented or hire out: buildings 5%, other assets 30%.

Losses carried forward

Losses as from 2004 can be carried forward without time limit. Once a taxpayer has been in existence for four tax years, a large annual loss resulting from expenses exceeding twice the revenue received can be carried forward only with the approval of the tax authority. This approval will be given if the losses were unavoidable. Banks have no right to loss offset in other years.

Tax incentives

Tax incentives deductible from corporation tax base:

  • Development reserves - 25 percent of taxable income, but no more than HUF 500 million. Assets financed from development reserves may not be amortised. If development reserves are not appropriately invested within five years, tax (plus penalty) is payable.
  • Incentive for research and experimental development – total expenses (100%) of basic research, applied research and experimental development.
  • Capital gains realised on the stock market, interest margin, royalties received - profit making businesses (with the exception of banks and investment corporations), may reduce profit by up to a combined 50 percent of before tax earnings under the indicated three titles.
  • Practical training of vocational school students - Taxable income of businesses participating in the project may be reduced by 12 percent of the monthly minimum wage (HUF 7,500) or under certain conditions by 24 percent (HUF 15,000) per capita during the training period; after passed examination, during the first 12 months of the continuing employment, the employer's social insurance contribution (29%).
  • Employment of unemployed individuals - If a corporate taxpayer employs individuals previously unemployed in excess of 6 months, social security contribution (29%) may be deducted from the taxable income for one full year.
  • Local Business tax - Taxable income may be reduced by 100 percent of local business tax paid, provided that the corporation has no outstanding public debts at the end of the tax year.

Investment tax incentives

Transfer pricing

Just like in international taxation systems, the Hungarian taxation law provides that in case related parties do not apply the normal market price in their business transactions between each other, when and how they have to adjust the corporation tax base. An entity qualifies as related, if at least one person of the taxpayer plus another individual holds a controlling majority share in each other or a third person in both of them. A controlling majority – which may also be indirect – means a voting right in excess of 50 percent, or the right to appoint or dismiss the majority of leading office-holders and supervisory board members.

If related parties enter into a transaction, they have to report it to the tax authority. The economic entity (also foreigners) – except small enterprises – prior to the tax return, has to determine the method of fixing the usual market price. Taxpayers may choose between the comparable uncontrolled price, the resale price and the cost-plus methods as defined by OECD. If none of the three methods are appropriate, the taxpayer may choose another justifiable method. If the actual price is not the normal market price, the corporation tax base has to be adjusted.

Returns and assessments

The deadline for corporate tax returns is May 31 of the year following the tax year. This is also the time limit for submitting the annual report upon which the tax return was made. Advance tax payments must be made monthly or if the corporation tax due for the previous year was HUF 5 million or less. Advance payments must be brought up to the anticipated actual amount due for the year by December 20. If annual revenue in the previous year exceeds HUF 50 million, advance payments must be brought up to the anticipated actual amount due for the year by December 20 of that year. In the event that at least 90 percent of the final amount due was not paid by the previous December 20, the tax payer must pay fine of 20 percent of the difference.

Social security and other payroll taxes

Compulsory social security applies to employees, including contracted work, as well as other legal relationships involving the performance of work.

Social security paid by employers

  • social security: 29%
  • unemployment contribution: 3%
  • contribution to state training fund: 1.5%
  • health care tax: HUF 1,950 (EUR 7.8) per month per employee, but to be abolished from November 2006.

Social security of expatriates

Compulsory social security also applies to expatriates employed by Hungarian employer.
Employees on secondment (non resident employer):

  • EU rules (Council Regulation 1408/71) apply to EU nationals assigned to Hungary. Provisions of reciprocal agreements have to be applied to citizens of countries with which Hungary has entered into such agreements. (Bulgaria, Romania, non-EU member successor states of Yugoslavia, CIS countries, Switzerland, Canada).
  • Compulsory social security does not apply to expatriates (citizens of “third countries”) employed by non resident employers.

Simplified Entrepreneurial Tax (EVA)

EVA is a flat tax paid on sales revenue. Only private entrepreneurs and those business entities can opt for this form of taxation that have been in business for at least two years, with an annual income (including VAT) that does not exceed 25 million HUF (approx. 94,000 EUR), where all of the owners are individuals, does not hold shares in any other corporations (with the exception of publicly traded shares) and which have no EU tax number. EVA payers are not subject to corporation tax, dividend tax, company car tax, and value-added tax. The rate of EVA is 15 percent. EVA is levied on annual sales revenue adjusted by increasing or reducing items. EVA payer may not export goods to EU member states, and import of goods from EU may not exceed annually 10,000 euros.

For further details please consult Act LXXXI of 1996 On Corporate Tax and Dividend Tax, Government Decree No. 275/2003 and 85/2004 and Communication from the Commission No. C (2002) 315 (2002/C 70/04).

2. Taxation of individuals

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 has permanent home or habitual abode or the centre of his 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 rates

Most of the incomes (income from employment and independent business activities, other income) are aggregated and taxed at progressive rates. Others are taxed separately at flat rates.

Taxable income

  • Up to HUF 1,550,000 18 percent
  • Over HUF 1,550,000 36 percent

The minimum wage (HUF 62,500 per month, approx. EUR 250 as of 1 January 2006) is tax exempt.

Personal tax allowances

Personal allowances are granted as deductions from the progressive tax due on consolidated earnings.
The most important allowances are as follows:

  • Employment tax credit – made up of the basic and supplementary tax credit. The basic tax credit is 18 percent of the monthly wage, but not more than HUF 9 thousand (EUR 36) per month of entitlement, fully effectable up to an annual income of HUF 1.5 million (EUR 6,000). The amount of the basic credit gradually decreases over the entitlement limit, up to the amount of HUF 2.1 million (EUR 8,400), over which a tax credit may not be effected. The supplementary tax credit, ensuring the tax exemption of the minimum wage corresponds to 18% of the part of the wage in excess of HUF 50 thousand (EUR 200), but not more than HUF 2,340 (EUR 9). The maximum annual amount of the supplementary tax credit is HUF 28,080 (EUR 112), which may be effected in full if the annual income does not exceed the HUF 1 million (EUR 4,000) supplementary entitlement limit. The amount of the supplementary tax credit gradually decreases over the supplementary entitlement limit up to the annual income limit of HUF 1,561,600 (EUR 6,246).
  • Family allowance – Families with at least three children are entitled to a tax benefit of HUF 4 thousand (EUR 16) per month for each child, if the annual income of the private individual does not exceed HUF 6,000,000 (EUR 24,000). In relation to families with four or more children, the income limit increases by HUF 500 thousand (EUR 2,000) per child, up to the maximum amount of HUF 8 million (EUR 32,000).
  • Housing loan repayment – 40 or 30 percent of repayment (plus interest), limited to HUF 120,000 (EUR 480) per annum (annual income limit HUF 3.4 / 4.4 million – EUR 13,600/17,600).
  • Intellectual work – 25 percent (limited to HUF 50,000 – EUR 200) of annual intellectual work income.
  • Contribution to voluntary insurance funds – 30 percent of contribution, limited to HUF 120,000 (EUR 480) or, in certain cases HUF 150,000 (EUR 600) per annum at the most.
  • Donations – 30 percent of donation (limited to HUF 50000 – EUR 200, under certain conditions 100000/year – EUR 400).
  • 30 percent (limited to HUF 60000 – EUR 240 per annum) of Hungarian higher education tuition fees up to an annual personal income limit of HUF 3.4 million (EUR 13,600).

Certain incomes are taxed separately:

  • Dividend: 25 and 35 percent (25 percent up to 30 percent share of the equity capital).
  • Interest is normally not taxable.
  • Capital gains (eg. on the sale of shares): 25% (gains on stock exchange transactions are exempt of tax).
  • Real estate leasing – 25 percent.
  • Prizes – money 25 percent, object 33 percent.
  • Benefits in kind (under certain conditions) – at a rate of 44 percent (paid by the employer). Employer pays monthly fix tax for the private use of the company car – depending on purchase price and age the vehicle. E.g. for a HUF 3 million (EUR 12,000) worth car less than five years old, the monthly tax amounts to HUF 26,000 (EUR 104) per month.

Advance tax payment, tax returns (personal income tax)

Hungary operates a system of advance payments of tax, whereby employers and payers are required to deduct personal income tax at source and individuals are required to make advance payments on a quarterly basis on taxable income from abroad.

The tax year for individuals is the calendar year, the deadline of tax return is May 20, in the year following the tax year.

Social security and other payroll taxes

Compulsory social security applies to employees, including contracted work, as well as other legal relationships involving the performance of work.

Social security is paid by employers and employees:

Employee pays

  • pension contribution 8.5%, health care contribution (4%)
  • unemployment contribution 1%

Social security of expatriates: compulsory social security also applies to expatriates employed by Hungarian employer.

Employees on secondment (non resident employer):

  • EU rules (Council Regulation 1408/71) apply to EU nationals assigned to Hungary. Provisions of reciprocal agreements have to be applied to citizens of countries with which Hungary has entered into such agreements. (Bulgaria, Romania, non-EU member successor states of Yugoslavia, CIS countries, Switzerland, Canada).
  • Compulsory social security does not apply to expatriates (citizens of “third countries”) employed by non resident employers.

For further details please consult Act CXVII of 1995 On Personal Income Tax.

3. Indirect taxes

Value-added tax (general sales tax or ÁFA)

The VAT act is in conformity with the EC directive No 77/388 on the coordination of turnover tax laws of the EU. VAT is the most significant indirect tax in Hungary. Its major characteristics are as follows: besides the general tax rate of 20 percent, there are two preferential rates: 5 percent applies to certain medications and medical accessories, books, and a 15 percent rate applies to food items, mineral combustibles, in catering, etc. Banking services and certain other business activities “inter alia” insurance, real estate leasing, and general education are tax exempt. Businesses, other than banks and others with turnover tax exemption, can generally recover the amount of input VAT in excess of output VAT or it may be transferred for the next tax return period. The tax authority pays a tax refund if the amount of ÁFA sales exceeds HUF 4 million (approx. 16,000 euros) within the tax year, or if VAT paid on assets acquisition exceeds output VAT by at least HUF 200,000 (approx. 800 euros).

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.

Excise tax

Excise tax is imposed on the domestic production and import of petroleum products, alcoholic beverages and tobacco products at a percentage rate or fix amount. Some typical tax rates: lead-free petrol HUF 103,500 (EUR 414) per 1,000 litre, wine HUF 800 (EUR 3.2) per hectolitre, cigarettes at HUF 6,880 (EUR 27.5) /1,000 sticks and at 27 percent of the retail price, minimum HUF 12,630 (EUR 50.5)/1,000 sticks. Sales abroad are generally not subject to tax. Hungarian legal provisions are EU conform.

For further details please consult Act LXXIV of 1992 On VAT and Act CIII of 1997 On Excise Tax.

4. Other taxes

Local taxes

Each local authority has the right to levy local taxes within the confines of a centrally prescribed set of rules, systems and maximum rates. These may include the following: property tax, utility tax, tourist tax and business tax. Local taxes are tax deductible for purpose of corporation tax. Business tax, 200% of which is deductible from the corporate income tax base, is the only one of these taxes with a significant cost effect on businesses. Tax is levied on the sales revenue less cost of goods sold, material costs and fees paid to subcontractors. The rate is fixed by the local authority, but may not exceed 2 percent. Local governments may grant tax holiday or tax allowance exclusively to businesses whose income subject to business tax does not exceed HUF 2.5 million (EUR 10,000).

Motor Vehicle 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). Tax is levied on the empty weight, which is increased by 50 percent of load weight in case of trucks. The tax rate is annually HUF 1,200 (EUR 4.8) per 100 kg .

Innovation contribution

Corporations (excluding micro-businesses and new corporations) are liable to pay innovation contribution to the Funds of Research and Technological Innovation, promoting Ramp;D. The general rate of contribution is 0.3 percent in 2006, levied on sales revenue like with local business tax. Businesses may apply for grants at the Funds.

Environmental pollution fee

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.

Energy tax

This tax must be paid in certain cases on natural gas and electric energy (except population consumption). Under certain terms taxpayers may be entitled to tax reimbursement on consumed energy.

Registration tax

With our EU accession the former consumption tax was replaced by the registration tax, levied on cars, caravans and motorcycles. The amount of lump sum tax depends on the technical and environmental features of vehicles. Tax is payable by first domestic seller or importer.

For further details please consult Act C of 1990 On Local Taxes, Act XCII of 2003 On Tax Administration, Act LXXXIX of 2003 On Environmental Pollution Fee and Act LXXXVIII/2003 On Energy Tax.

Source: ITDH Hungary
Last updated 3rd July 2006

   

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