Hungary's Tax Policy: Taxes for Individuals and Legal Entities

Hungary has long attracted foreigners with its favorable tax climate and predictability in tax policy. Tax rates here are not just a lure for foreign investors, but also support for local entrepreneurs and citizens.

Taxes in Hungary: the big picture

Hungary's tax system is a complex yet flexible mechanism. Although the total number of taxes in Hungary approaches twenty, there are only a handful of key obligations that make up most of the country's tax revenue.

The key ones are:

• personal income tax;
• VAT;
• corporate income tax;
• capital gains tax;
• stamp duty.

These taxes in Hungary form a substantial part of the country's domestic product and have a major impact on the overall economic situation.

It's worth noting that Hungary's tax system is split between the federal and regional levels. This provides for a more precise distribution of tax obligations and expenditures. These levies fill a third of the federal budget, making Hungary one of the leaders in tax revenue among European countries.

Among other features of the tax regime, it's worth noting that Hungary does not exchange information about tax violations with Russia. This can be a decisive factor for Russian citizens and companies considering Hungary as a potential place for business or life.

Thus, the Hungarian tax system is characterized by flexibility and balance. With low rates on most taxes, it ensures a steady flow of funds into the state budget while creating favorable conditions for business development and citizens' lives.

Personal income tax in Hungary

Personal income tax, or the tax for individuals, is one of the key components of Hungary's tax system. The results of the 2013 tax reform allowed for a flat personal income tax rate of 15% for all working residents of the country. This means that regardless of income level - whether it's an employee's salary, a sole proprietor's income, or in some cases profit from capital gains and dividends - the personal income tax rate will be the same.

The following are added on top of income tax:

• pension contributions (10%);
• health insurance contributions (7%);
• unemployment tax (1.5%).

This ensures a certain level of social protection for the population. As a result, the total tax burden for employed citizens reaches 33.5%.

Personal income tax applies not only to wages but also to other types of income, including profit from the sale of property, interest, and in some cases dividends. Personal income tax also applies to income received by Hungarian tax residents outside the country. In this case, the double-taxation treaty applies.

Income accounting and personal income tax calculation in Hungary are done based on the results of the tax year. Taxpayers are required to file a return and pay the tax by May 20 of the following payment year. A filing extension is possible, but a penalty may be imposed for it.

Hungary provides benefits for families with children. Families with one child, for example, can use a tax credit of HUF 62,500, which is excluded from the personal-income-tax calculation. If a family has two or three children, the credit amount is tripled.

Thus, Hungary's personal-income-tax system can be described as both simple - thanks to the uniform rate for all categories of taxpayers - and fair, given the social payments and tax breaks for families with children.

Corporate taxes in Hungary

In Hungary, corporate tax is the form of tax for legal entities. It is levied both on Hungarian resident companies and on foreign organizations operating in the country through subsidiaries or branches. Entities subject to corporate taxation in Hungary include:

• joint-stock companies;
• limited liability companies;
• public foundations;
• law firms;
• universities;
• other legal entities.

The corporate tax rate in Hungary can range from 9% to 19% depending on the amount of profit. This is one of the lowest rates in Europe, which makes Hungary attractive for entrepreneurship. Specifically, the profit tax rate is 10% on a tax base up to HUF 500 million. If the amount is higher, the rate is 19%.

Hungarian law provides for a number of tax breaks. For instance, companies that invest more than a billion HUF in Hungarian projects and create new jobs can qualify for tax relief. Benefits may also be granted to businesses that support sport.

Hungary also allows for exceptions to the general tax procedure. For example, dividend income can be exempt from taxation if the company has the relevant benefits. In the case of a sale of shares to a resident of a country with which no double-taxation treaty has been signed, the rate can be 19%. In other cases, a 10% rate usually applies.

Another feature of corporate taxation in Hungary is the possibility of carrying forward losses.

Corporate tax reporting in Hungary is filed at the end of the tax year, which can be shorter than 12 months, though matching it to the calendar year is preferred.

Thus, corporate taxation in Hungary is characterized by flexibility, an accommodation of the specifics of companies' activities, and a range of incentive measures that make the country convenient for doing business.

Features of Value Added Tax (VAT) in Hungary

Value Added Tax (VAT) is a key source of revenue for Hungary's budget. In 2012, Hungary set a record VAT rate among EU countries, raising it from 25% to 27%. This move meant Hungarian VAT exceeded even the levels in some Scandinavian countries, where the rate ranges between 24-25%.

Despite the record VAT rate, Hungary has reduced rates for certain categories of goods and services. Medical services and equipment, books (including e-books), magazines and some other services are subject to a 5% rate. An 18% rate applies to:

• milk and dairy products;
• corn;
• flour;
• certain commercial services.

VAT rules also have particular features when it comes to real estate. Since 2008, VAT has been abolished in Hungary on the sale, purchase or use of certain types of immovable property. This applies to the sale of undeveloped and developed land plots (except when the sale takes place before construction work is complete or within two years of the use permit being issued), as well as to leasing real estate.

However, it's worth noting that if an individual is regularly engaged in selling certain types of real estate, they may be recognized as a VAT payer. This applies to the sale of developed land plots whose use permit was issued less than two years ago, as well as to the sale of building plots.

VAT payers in Hungary include both legal entities and sole proprietors. If a taxpayer is not registered in Hungary but carries out VAT-taxable activity, they are required to obtain a Hungarian tax number.

Despite certain particularities and complexities, VAT application in Hungary remains standard for EU countries. As a rule, taxpayers are required to file a tax return every quarter, except in certain special cases where it is done monthly or annually.

Social taxation in Hungary: obligations of employers and employees

In Hungary, as in most developed countries, employers are required to pay social contributions for the benefit of their employees. This set of mandatory payments made by the employer supports the country's social security system.

The total amount of these mandatory contributions is 27.5% of the employee's salary, distributed as follows:

• 24% goes toward pension provision;
• 2.5% is allocated to health insurance;
• the remaining 1% goes to the employment support fund.

However, employers are not the only ones who pay social taxes in Hungary. Employees also provide for themselves, deducting 18.5% of their earnings into social funds. These payments are distributed as follows:

• 10% - pension contributions;
• 7% - health insurance contributions;
• 1.5% - employment support fund.

In addition, employers in Hungary are also required to pay a training-fund contribution equal to 1.5% of their employees' remuneration. This is aimed at encouraging professional training and skills development for employees, which in turn boosts their competitiveness in the labor market and stimulates the country's overall economic growth.

Overview of real estate and car taxation in Hungary

Like other countries, Hungary applies various types of taxes, including taxes on real estate and cars. These taxes provide the lion's share of the state budget and also play a role in regulating the relevant sectors of the economy.

In the area of real estate, Hungary's tax system provides for several types of taxes. One of them is the land tax, which is levied on owners of private homes and amounts to 1.0-1.5% of the property's value.

When buying property, whether new-build or on the secondary market, a property acquisition tax is levied. This tax ranges from 2% to 4% and depends on the value of the property, its purpose, and other factors. However, there are special rules for property worth up to EUR 55,000: in this case, no transfer tax is payable. When the value exceeds this threshold, the obligation is calculated using a complex scheme with different rates for different value ranges.

For cars, Hungary applies a taxation system based on engine power, where the tax ranges from HUF 140 to HUF 345 per kilowatt of power.

In addition, there is a registration tax, which is levied on import, on purchasing a car within EU countries, or on modifying a vehicle. This tax can range from 0 to HUF 4.8 million depending on the car's year of manufacture, its environmental class, and technical specifications. Note that a standard registration tax of HUF 76,000 applies to hybrid and electric vehicles.