Monday, 4 January 2016

TAXATION OF EMPLOYMENT IN HUNGARY

In the following guideline we will provide detailed information about the taxation of employment in Hungary. If you are considering doing business in Hungary, or you need a reliable partner in tax advisory, accounting, payroll or auditing, don't hesitate to contact us! We are dedicated to help our clients with our high quality, tailored services to find the best economic solutions.










Resident employees
An individual is tax resident in Hungary if he/she has the Hungarian nationality or if he/she has a permanent residence in Hungary. The individual will also become a Hungarian tax resident if he/she is a citizen in the European Union or the European Economic Area and spends more than 183 days per calendar year in Hungary. Any home is permanent if it is permanently available for the individual’s use. If the tax residence cannot be determined based on the above criteria, the decisive criterion is the centre of vital interests i.e. where the individuals personal and economic relations are closest. If this test is not met either, then residence is determined by the place of habitual abode i.e. where the individual spends more than 183 days. Hungarian tax residents are subject to Hungarian personal income tax on their worldwide income (unlimited tax liability).

Employment
Based on Hungarian legislation, income earned from an employment relationship (Hungarian or foreign) qualifies as employment income. Employment income includes all wages, remuneration or honorariums received for such activities but also bonuses or cash payments (redundancy payments) in connection with the employment relationship.

Principles for the determination of the tax base
Employment income is deemed to be income from dependent activities. It constitutes part of the individual’s consolidated tax base and is taxed at a flat tax rate of 15%. Ordinary and necessary employee business expenses borne by the employer (e.g. business travel and accommodation expenses, etc.) are not considered income for Hungarian personal income tax purposes. Housing provided to a seconded employee is generally tax free if the foreign employment relation is maintained (no Hungarian employment contract is concluded) and appropriate contractual arrangements and invoices are in place.

Tax rate, assessment and social security contributions

Personal income tax
The applicable tax rate to the consolidated tax base is 15%. In Hungary the annual salary is paid in 12 equal installments. The personal income tax has to be withheld by the employer from the gross salary of his employees and paid to the tax authorities on a monthly basis until the 12th of the month following the calendar month.

For lack of a Hungarian disburser to withhold the prepayments of personal income tax, the individual has to settle the personal income tax due on the employment income on a quarterly basis. The personal income tax advances should be transferred to the Hungarian tax authorities and should be credited on the individual’s tax account by the 12th of the month following the calendar quarter (i.e. 12 April, 12 July, 12 October and 12 January of the following year in which the income was received).

Personal income tax withheld by the employer/disburser is considered to be a prepayment on the employee’s final income tax and is credited against his assessed income tax liability. Individuals liable to Hungarian personal income tax should file an annual income tax return whereby the deadline is 20 May of the year following the calendar year concerned. Employees may request their employers or the tax authorities to assess their annual taxable income and the personal income tax obligation. Any difference between the annual tax liability and the prepayments must be paid by the employee by the filing deadline. Any excess tax payments must be refunded by the tax authorities within 30 days from the date the tax return was submitted. Employees may, under certain conditions defined by the Hungarian personal income tax rules, deduct certain tax credits and allowances (i.e. family allowance, allowance for first-time married couples as of 1 January 2015) from their personal income tax base.

Social security contributions
As from 2012 the social security contribution payable by the employer was replaced by what is known as the social tax. Social tax’s rate has been reduced to 22% (from 27%) as of 1 January 2017 and as of 2018 further 2-2.5% (depending on the performance of the Hungarian economy) reduction is announced. The employer is also obliged to withhold employee-side social security contribution from the gross salaries paid to the employees and is also liable to pay social tax and vocational training contribution on his behalf on the employer-side over the gross salaries. Please note that as from 2013, several groups of privileged persons (e.g. young or old employees below 25 or above 55 years, parents returning from child-care leave, highly-educated personnel engaged in R&D activities) entitle the employer for a reduction or exemption from the above social tax and vocational training contribution. In 2017, 15% of the unused family allowance balance which exceeds the personal income tax base is enforceable in the form of family’s contribution allowance by reducing the health care and pension fund contribution.

For 2017 the social tax and social security contribution rates for employed persons and the training contribution rate are:



BY THE EMPLOYER
RATE
BY THE EMPLOYEE
RATE
Social tax
22%
Pension contribution
(as from 1 January 2013 is not capped)
10%
Health insurance and labor market contribution
8.5%
Vocational training contribution
1.5%



Rehabilitation contribution
In 2016 the amount of the rehabilitation contribution is HUF 1,147,500 (approx. EUR 3,700) per person (below the mandatory employment ratio) per year. Companies employing more than 25 persons are obliged to pay the rehabilitation contribution if the number of employees with disabilities does not exceed 5% of the total labour force (mandatory employment ratio). The annual amount of the rehabilitation contribution must be calculated by multiplying the number of employees under the mandatory employment ratio by HUF HUF 1,147,500. The contribution advances must be paid in the first three quarters by the 20th of the month following the quarter. The difference between the advances paid and the annual contribution obligation must be paid for the tax year by 25th February of the following year.

Non-cash benefits
As of January 2017 the scope of cafeteria (i.e. in-kind) benefits became substantially simpler while being significantly narrowed down. The tax base multiplicator is reduced to 1.18 percent (from 1.19 per cent), accordingly the tax base will be the value of fringe benefits multiplied by 1.18.


The non-cash benefits are taxed as follows:

Fringe benefits with advantageous employer-side taxation
Certain non-cash benefits listed in the Act on PIT are subject to preferential taxation of 15% PIT plus 14% health care contribution over the super-grossed  amount  (multiplier:  1.18;  effective  tax rate altogether: 34.22%).

As of 2017 there are only two types of fringe benefits allowed: cash up to HUF 100 000 (approx. EUR 320) provided annually, and in excess the so called “SZÉP” card benefits.

The aggregate annual amount of cafeteria subject to the preferential employer’s tax rate of 34.22% is HUF 200,000 (approx. EUR 640) for public employees, and HUF 450,000 (approx. EUR 1.450) for people employed in the private sector.

The three sub-accounts for SZÉP card benefits remain unchanged: annual HUF 225 000 for accommodation, HUF 150 000 for hospitality, and HUF 75 000 for leisure activities.

Fringe benefits exceeding the abovementioned caps will qualify as »certain specified benefits« and will still be taxable by the employer at higher rate (see below).

Certain specified benefits payable by the employer
Further non-cash benefits are subject to 15% PIT plus 22% health care contribution over super-grossed amount (multiplier: 1.18; effective tax rate altogether: 43.66%) next to the benefits provided in the preferential category (see above), the following are applicable: representation expenses and business gifts, entitlement to private use of company mobile phones, taxable insurance premiums paid by the employer, benefits granted to all employees under the same circumstances or on the basis of a company policy.

“Certain specified benefits” further are meal vouchers for catering, the Erzsébet voucher, the school start contribution, the local public transport pass, school training costs, payments to voluntary mutual pension funds, health insurance /self-help funds, and occupational pension schemes, returnable vouchers. 

Non-cash benefits payable by the employee
Those non-cash items which are not subject to the above two categories will be taxable as part of the consolidated tax base (15% Pit, 10% employee’s pension contribution, 8.5% health insurance and labor market contribution and 22% employer’s social tax plus 1.50% vocational training contribution).

Tax-exempt benefits
The scope of tax-exempt benefits has been extended. The following benefits will remain tax-exempt in 2017: tickets for cultural and sport events, housing credit support and nursery services. In addition, the following will be included in tax-exempt benefits:

  • monthly benefits paid to employees participating in professional training or higher education training up to the amount of the current minimum wage
  • housing assistance for labour mobility purposes: 40% of the minimum wage (Minimum wage is HUF 127,500, approx. EUR 410) in the first two years of employment, 25% in the subsequent two years, and 15% in the years to follow
  • research scholarship
  • in order to further promote labour mobility, the tax-exempt amount of travel cost reimbursement for commuting to and from the place of work by motor vehicle will rise from HUF 9 to HUF 15 per kilometer
  • accommodation facilities for workers, company housing offered - under certain conditions - in a real property owned or leased by the employer
  • kindergarten services in addition to nursery services.
We may call the attention to a change effective as of January 2018 concerning the tax exemption of certain life insurance fees, in detail: according to the amendment the regular monthly fee of life insurance services (either paid by the contracted person itself or any other person reported to the insurance company as payer) will be taxable if the life insurance is dedicated solely for the event of death, concluded for an indefinite period of time, and is not qualified as risk precaution.

Representation costs and business gifts

Representation costs and business gifts are also taxable within the personal income tax system. The value of these benefits is subject to 15% personal income tax and 22% health care contribution, payable by the provider (multiplication 1.18; effective tax rate: 43.66%). These costs qualify as deductible expenses in the system of corporate income tax.

Daily allowances
A daily allowance paid by the employer in the case of domestic business trips is fully taxable in the hands of the employee (i.e. part of the consolidated tax base). There is an exemption applicable for truck and bus drivers.

Daily allowances paid for foreign business trips are exempted from taxation up to 30%, but maximum EUR 15/day. Daily allowances provided to truck drivers are tax exempt up to the amount of EUR 60/day.

Non-resident employees
Non-resident individuals are subject to Hungarian personal income tax on their Hungarian source income, i.e. income received from activities performed in Hungary (limited tax liability). The rules regarding the determination of the tax base, tax rate, assessment, social security contributions and social tax are similar to the treatment of resident employees. In certain cases social security taxation may not be effected over non-resident employees, subject to specific conditions and procedures to fulfil.

If you need a reliable partner in tax advisory, accounting, payroll or auditing, don't hesitate to contact us!


LeitnerLeitner

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