Hungary tax: 2010 hungary tax law changes

Summary

In order to reduce state budget deficit, the Hungarian government accepted that significant changes should be made in the personal income tax regulations effective of 1 January 2010. This NewsFlash aims at summarizing the most important changes that may be of relevance for companies assigning employees to Hungary.


Employee Benefits

Tax base and tax rates – The consolidated tax base will include a tax base adjusting (increasing) item equivalent to the employer's social security contribution (which would make up a total of 27% after 1 January 2010).

According to the tax table effective as of 1 January 2010, the personal income tax rate of the lower category will be reduced to 17%, with the annual tax base being raised to HUF 5 million. For a consolidated tax base exceeding HUF 5 million in 2010, the personal income tax rate will be 32%, with the 4% supplementary tax being abolished and incorporated into the tax rate of the upper category of the personal income tax.

Benefits in kind and other taxable benefits – In kind benefits, for instance holiday vouchers, voluntary pension and health fund conditions, local travel passes and hot meal vouchers typically given to local employees will be moved from the current tax (and social security) exempt status to a taxable benefit in kind category subject to "preferential" taxation where the provider of the benefit (i.e. disburser for Hungarian tax administrative purposes) is liable to settle 25% benefit in kind tax (the current benefit in kind tax applicable to taxable benefits amounts to 54%).

Some further currently tax free or partially tax exempt benefits will also become fully or partially taxable, such as daily living allowances (30% exemption rule is abolished).

Tax credits – Almost all tax credits will be abolished (including, for example, the tax credits on insurance premiums), with the exception of family tax credits and tax credits related to payments made to voluntary mutual insurance funds and pension savings accounts.

In kind benefits typically provided to Hungarian employees within the flexible benefits schemes become taxable in kind benefits, so unless appropriate planning takes place when determining the employee compensation elements for 2010, much of the advantage available earlier, could now be lost or significantly reduced.


Investment Income

Other income – Subject to various conditions, the portion of the after-tax profit of controlled foreign entities which is not distributed, and which is attributable to a Hungarian tax resident individual as the direct or indirect owner, qualifies as other income (being liable to tax at progressive rate and potentially 27% health tax).

Other income will also include any interest obtained by Hungarian tax resident individuals from countries that have not signed a Treaty with Hungary on the avoidance of double taxation.

Tax withholding – The total amount of interest (with the exception of interest paid and credited with respect to bank deposits), royalty and certain service fee paid to non-resident individuals will be regarded as income subject to 30% withholding tax, provided that Hungary has not concluded a Treaty with the individual's country of residence for the avoidance of double taxation. The tax should be withheld and paid to the tax authority by the disbursers (or paid by the disbursers themselves in the case of non-cash benefits).

Consideration should be given to compensation structures where a controlled foreign company is involved. Individuals seconded to Hungary from a country that has not concluded a Treaty for the avoidance of double taxation could be subject to 30% withholding tax on interest, royalties or service fees.


Social security

As of 1 January 2010, Hungarian employees are to pay social security contributions of 28.5 % (no caps) instead of theformer 33.5%.