The taxation system in Hungary is created on two main pillars – the personal income tax system and the corporate income tax system – the latter refers to the taxation of all corporate entities operating in this country. The country harmonized its tax system with the EU directives, making it more convenient for foreign investors to adapt to the tax system.
It is important to know that foreign investors are welcomed here, as the country has one of the most developed foreign investment levels in its area; those who want to open a company in Hungary can choose one of the legal entities recognized under the Hungarian commercial law or they can choose to operate through a branch office or a subsidiary.
Hungary is a member of the European Union and the Schengen Area. Hungary is also a contracting state of numerous treaties for the avoidance of double taxation, and this is important for companies which obtain an income from activities developed in more countries – for instance, those operating through a branch office in Hungary will not be taxed at a global level for the income obtained here. The currency in Hungary is the Hungarian Forint.
Companies incorporated in Hungary are subject to corporate income tax on all their sources on income. The Hungarian tax system prescribes several types of business taxes, but also taxes that are charged only to the income of individuals who obtain a profit from various activities carried out in this country. Our Hungarian lawyers can offer you specific details about all the types of taxes in Hungary.
Corporate taxes in Hungary
Hungary imposes a corporate tax on all companies incorporated in the country. From a legal point of view, a company is seen as a Hungarian tax resident if it is incorporated in this country or if it has its main place of management established here; this is of crucial importance, as this determines the manner in which the company is taxed, as well as the place of taxation. Resident legal entities are taxed on their worldwide income and non-resident companies only on their income produced in Hungary. The corporate income tax in Hungaryis 9%.
Other business taxes in Hungary include the real property tax, the transfer tax, the gift tax, the local business tax (maximum 2%) and social security contributions. Withholding taxes on dividends, interest or royalties are applicable under certain circumstances. Hungary has a standard value added tax rate of 27% but lower rates of 18% and 5% are applicable to certain goods and services. VAT is levied on the supply of goods and services as well as on imports in Hungary.
The tax year in Hungary usually has a 12 months period, and is generally the calendar year, although it can be shorter in certain cases. The corporate income tax is evaluated on an annual basis. Hungary has signed treaties with numerous countries in order to avoid double taxation.
What is the transfer tax in Hungary?
As we mentioned above, Hungary applies a transfer tax as well. The transfer tax is charged on transfer of ownership during the sale of a property. The standard rate is of 4%, for properties that are sold at a gross value of maximum HUF 1 million; for any value above this sum, a tax of 2% will be charged, but only for the value that is above this threshold.
Foreigners can purchase properties in Hungary and if you need assistance on the documents that you must prepare, sign and obtain from the local authorities involved in the sale of a property, you can rely on our Hungarian lawyers; you must know that our lawyers can also represent you in the process of selling or purchasing a property in this country and our team can also be in charge with the real estate due diligence process, through which the property is verified to find out if it meets the legal standards for being sold.
Dividend tax in Hungary
In Hungary, the withholding tax is not levied on dividends paid to a foreign legal entity. The tax on dividends paid to foreign companies is regulated by double tax treaties. Currently, the country has signed more than 60 treaties for the avoidance of double taxation with other contracting states and thus, companies that reside in those countries and which also carry business activities here will not be taxed twice for the same income; the source of taxation is established under the regulations of each treaty and you can rely on our team of lawyers in Hungary for advice.
You can verify the current list of double tax treaties that are in force on the website of the National Tax and Customs Administration, the institution which is in charge with implementing tax regulations in accordance with the provisions of the law; if you need assistance on any of the double tax treaties available here, our attorneys in Hungary can help you.
Dividends received from other Hungarian companiesare not subject to corporate income tax or withholding tax, except for dividends distributed by a controlled foreign corporation. A number of treaties establish the percent of withholding tax rates for dividends between Hungary and other countries. In non-treaty countries, there are no withholding taxes on dividends for corporations. However, a 16% withholding tax rate applies on dividends for individuals. According to the existent treaties, the withholding tax on dividends for individuals can have values between 0 and 20%, as follows:
- Belgium – a 15% withholding tax rate on the taxation of dividends;
- Bulgaria – a 10% withholding tax rate applicable to the taxation of dividends;
- France – 5 and 15% withholding tax rate on the taxation of dividends;
- Italy – 10% withholding tax rate charged on dividends;
- Luxembourg – 5 or 15% withholding tax rate on dividends;
- Poland – 10% withholding tax rate on dividends and Egypt – 15 or 20% withholding tax rate on dividends.
For more details about these taxes in Hungary, do not hesitate to ask for the assistance of our Hungarian lawyers. Our law firm in Hungary can offer extensive information on the taxes that you must pay as a resident, as well as a foreigner who has arrived here for a determined period of time and who obtains income from wages, rent and other sources of income; a short description of the personal tax system is available below.
Does Hungary charge a building tax?
Yes, the building tax is applicable in Hungary, as per the regulations of the tax legislation. The tax can be charged to buildings designed for residential purposes, as well as for commercial purposes. This means that persons or companies that own a property have to pay, on a yearly basis, the building tax.
In Hungary, this tax can be applied by calculating the useful space of the building (in square meters), and it can be charged at a maximum value of HUF 1,100 per square meter or it can be established at a rate of maximum 3,6% from the current market value of the property. If you own a property here, or you are interested in purchasing a property for personal or business purposes, our lawyers in Hungary can provide more information on other taxes that you may be required to pay.
Personal taxation in Hungary
Hungarian residentsmust pay personal income tax on their worldwide income. Foreign individuals who are also Hungarian residents must also pay personal income tax on their income produced in the country. An individual is considered a tax resident in Hungary in each of the situations below:
- he or she is a Hungarian citizen and lives in Hungary;
- has a permanent home in Hungary and nowhere else;
- his/her vital interests are located in Hungary;
- the habitual abode is in Hungary (Hungary is the country where he/she spends the most time);
- he/she spends at least 183 days in Hungary during one calendar year (applicable for EEA citizens).
The personal income tax rate is 15% (for the financial year of 2021). The same rate applies to dividend income and bank interest. Employees in Hungaryare also required to pay social security contributions of 18.5%. Individuals in Hungary must file the tax returns on a self-assessment basis. Penalties apply for underpayment or late payment. Below, we will present the breakdown of the personal tax system applied when we refer to the income obtained from employment activities:
- from the income of the employee, a heathcare contribution of 4% is charged, as well as 3% for financial allowance;
- the pension contribution is set at a rate of 10% and the vocational training contribution is charged at a rate of 1,5%;
- the four categories of taxes payable by the employee are known as social security contributions and they have been unified under a single contribution starting with 1 July 2020;
- the employer is also required to pay a social contribution for each of his or her employee, which is charged at the standard rate of 15,5%, and the employer must also pay the 1,5% tax charged on vocational training;
- this means that the overall tax on the income obtained from a monthly salary is of 33,5%.
Other taxes in Hungary
Entrepreneurs who want to open a business in Hungary should know that the tax year in Hungary usually has a 12 months period and both the tax and accounting years must end on December 31st. The standard value of the Hungarian corporate tax is 9%, a tax rate that is charged to both domestic and foreign companies operating on the local market. Hungarian companies are required to make advance payments on the corporate tax. 50% penalties exist for underpayment.
Local taxes, local business taxes and building and land taxes may apply. For more information about tax compliance in Hungary, please contact our Hungarian lawyers. Our Hungarian law firm can provide more details about the main taxes in Hungary and also various legal services, including accounting planning and tax advice in Hungary or legal consultancy and assistance for company formation in Hungary. If you need additional information on the tax system applicable here, please refer to our lawyers in Hungary.