Taxation in Hungary
Recently, Hungary has become increasingly popular in tax planning. It is not surprising, because this jurisdiction combines a European reputation that is not stained with “black lists” and flexible corporate taxation comparable to that of Cyprus. Entrepreneurs who open a business in this country have ideal opportunities to build schemes with dividends, loans and royalties. In addition to the standard tax rates, Hungary also applies reduced VAT rates for certain categories of companies and a simplified business tax.
Corporate tax
Since January 1, 2017, the corporate income tax rate has been reduced and amounts to 9%. In Hungary, companies are required to pay corporate income tax on income derived from business activities carried out for profit:
- income of resident companies received worldwide;
- income from Hungarian sources of non-resident companies that do not have a permanent establishment in Hungary;
- income received from the transfer or disposal of an interest in a company that owns real estate (a company is considered to own real estate if the value of real estate located in Hungary is more than 75% of the book value of assets at the reporting date, indicated in the financial statements of the taxpayer alone or together with its affiliates persons in Hungary or branches).
Subject to certain conditions, 50% of income recognized as royalties and direct research and development expenses are deductible from the tax base. Even related parties can attribute research and development to direct costs, reducing the tax base of other companies. Profit recognized as dividends received in the target year reduces the tax base, provided that it was not received from a controlled foreign company.
Withholding Tax
Hungary does not charge withholding tax on dividends, interest or royalties if the payment is made to a company. If payment is made to an individual, taxes are levied in accordance with the provisions of the applicable double taxation treaties.
Dividends
Hungary does not charge withholding tax on dividends, interest or royalties if the payment is made to a company. If payment is made to an individual, taxes are levied in accordance with the provisions of the applicable double taxation treaties.
Simplified business tax (EVA)
EVA provides an opportunity for companies whose annual sales do not exceed HUF 30 million (provided that the company had an income in the previous two years) to reduce both the administrative and tax burden. EVA replaces the following types of taxes: VAT, personal income tax of entrepreneurs, tax on the entrepreneur's dividend base, corporate income tax and personal income tax on dividends. The EVA rate is 37%. If the total amount of revenue and all items that increase income exceeds HUF 30 million, the EVA rate will be 50% of the part of the tax base that exceeds this amount.
VAT
The standard rate is 27%. A reduced rate of 18% applies to goods/services in the following categories:
- milk and dairy products (except mother's milk and products taxed at a rate of 5%);
- products made using corn, flour, starch or milk;
- commercial placement goods;
- occasional outdoor events;
- Internet services;
- food in restaurants.
A reduced rate of 5% applies to the following goods/services:
- medical services;
- medical equipment;
- books;
- e-books;
- magazines;
- pigs, cattle, sheep and goats;
- bird, bird eggs;
- milk (except mother's milk, as well as milk processed with ultra-high temperature or with an extended shelf life);
- district heating services;
- services of instrumental live music artists in enclosed spaces.
Financial and investment services are not subject to VAT.
VAT in HungaryMunicipal taxes
Municipalities may levy municipal and local taxes within their jurisdiction. Local taxes include local business tax, construction tax, land tax, personal utility tax and tourist tax.
The local business tax is the most common. Any permanent or temporary business activity carried out in the jurisdiction of this municipality is subject to it.
The maximum tax rate is 2% of the tax base. Municipalities can reduce the tax rate or even not levy tax on local businesses. In the case of temporary business activities, the tax rate is HUF 5,000 per calendar day. The tax base is net sales income, less the cost of goods and services sold, fees paid to subcontractors, direct research and development costs, and material costs.
Construction (real estate) tax applies to owners of both residential and non-residential premises, regardless of their intended purpose and use. Tax rates: maximum HUF 1,852.1/m2, or 3.6% of the adjusted market value.
Land tax is levied on registered owners of land plots as of January 1. The maximum tax rate is HUF 336.7/m2 or 3% of the adjusted market value.
Employer contributions
Employer's obligatory payments are social contribution, occupational contribution and rehabilitation contribution. The basis for the payment of the social contribution is the basic salary specified in the employment contract, or, in the case of signing a contract for services, the amount of remuneration determined by him. If the work is performed in accordance with an employment contract governed by foreign law, the tax base is the amount of the monthly remuneration. The tax rate is 22%. Tax incentives are provided to promote the employment of disadvantaged workers or the creation of jobs in poor neighborhoods, as well as the employment of workers who create high value added. In addition, additional tax incentives are provided for unskilled and disadvantaged workers, as well as those eligible for social benefits for the upbringing of children and researchers. The tax base of the professional contribution is the same as that of the social contribution. The rate is 1.5% of the tax base.
The professional contribution obligation can be fulfilled by organizing practical training or by paying the contribution amount. In the first case, the salary before deductions can be reduced in accordance with the basic norms established in the state budget (in 2017 it is 453 thousand forints / person per year). The employer is required to pay rehabilitation contributions to promote the employment of unemployed workers in hardship. Such an obligation for the employer arises when the number of employees in the company exceeds 25 people, and the number of disadvantaged persons employed in the enterprise does not reach 5 percent of the total number of employees. The amount of the rehabilitation contribution is nine times the minimum base wage paid to full-time employees on the first day of the current year (persons per year). This amount is HUF 1,147,500 / person. per year and must be multiplied by the number of staff missing up to five percent of the required employment rate, determined from the average size of the organization, rounded to the first decimal place, to obtain the annual rehabilitation contribution.
