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TAX AND SOCIAL INSURANCE IN HUNGARY - 2007.

For better undersanding:

1 USD = 180 HUF

1 EUR = 250 HUF

The Hungarian tax system consists of two groups: "big" and "small" taxes.

1. "B I G" T A X E S :

1.1. COMPANY INCOME TAX (CIT or in Hungarian TAO):

The general rate is 16%. The starting point for the tax base is the profit before tax in the P/L calculated on accrual basis. There are numerous items increasing and decreasing the tax base:

mentioning just the more important ones. In case of related parties the tax authorities have the right to examine the price of intercompany activities if they are too far from the market prices (transfer pricing).

Beginning from September, 2006. a so called „Solidarity Tax” was introduced in Hungary with the rate of 4%. The base of this tax is the same profit before tax int he annual report, but the only deductible items are the R&D expenses. So the calculation of the two taxes are different, that is why we cannot say simply, that the profit tax rate is 20%

There is no dividend tax in Hungary when the dividend is paid out to any corporate owner . In case of private person owners there is tax deductible from the dividend, we discuss it later.

So if the profit is 100, and there are no significant tax-base modifying items, then the tax is 16 + 4, so the net profit is 80.

The dividend is free to transfer in any currency to the owner.

There is a possibility to drain the profit by rendering professional services (management fee, consulting services,...). Such invoices are fully tax deductible, if they are well supported by contracts and fulfillment reports.

There are numerous benefits, to reduce the tax, most of them connected with real investment in production facilities. If the value of the new production unit is over 10 Billions HUF (cca 38.5 Millions EUR), then the company has not got to pay tax up to a certain percentage of the eligible investment costs. The detailed regulations are defined in the association contract with the European Union.

1.2. VALUE ADDED TAX (VAT or in Hungarian ÁFA):

The system is very similar to the EC accepted regulations. The general rate is 20%, the exceptional rate is 5% (examples: medicines, books, periodicals). Export and connected services are levied by 0%, which means that tax is not payable but the input V.A.T. is deductible. Some sales are tax exempt ( and so the input V.A.T. is not refundable, for example: state education, post, insurance, bank services,...). For small enterprises the net amount of V.A.T. is payable on a quarterly or yearly, for bigger ones on a monthly basis. The refund is cashed only when a company has more then 4 million Forints (16.000 EUR) taxable sales. The claim is valid for 5 years, till the company reaches the limit. The V.A.T. is payable 20 days after the end of the month (or quarter), the refund's deadline is after 30 (or 45) more days. V.A.T. levied for imported goods is payable and deductible in the same V.A.T. return (if the import is used for taxable purposes). For the services, rendered by foreign ventures in Hungary, V.A.T. is payable and deductible in the same reporting period by the customer of the service (reversed taxation).

For manufacturing companies, exporting most of their goods abroad, VAT can cause a cash-flow problem.

1.3. PERSONAL INCOME TAX (PIT or in Hungarian SZJA):

Private persons resident in Hungary have to pay PIT for all their revenue, while foreign persons for the revenue derived from Hungary. In general the tax is to be calculated on a yearly basis by progressive rates of the following table:

Yearly income (HUF)

Fix part

Percentage

0 – 1.700.000

0

18

1.700.001 -

306.000

36

 

 

 

There are numerous deductions from the tax: employee benefit (18%, but max.9.000 HUF/month, 30% of pension fund contributions-max. 100.000 HUF/year, 30% of charity contributions,...). The companies always have to deduct tax advances from payments to private persons. In case of salaries, the monthly income should be multiplied by 12, the tax has to be calculated for the expectable yearly revenue and one twelfths of that amount should be deducted as a tax advance. In case of non regular payments the general advance is 36%, unless the private person gives a statement, that his/her yearly revenue does not reach 1.700.000 HUF. If so, the advance should be calculated according to the above table.

Some revenues are taxed on a linear basis:

- interest (paid by bank or public securities)              - 20%

- exchange rate gain                                                   - 25%

- sales of real properties                                             - 25%

- dividend                                                                  - 25% or 35%

- land or building rent                                                - 25%

For fringe benefits, such as: using company car, giving a loan to private persons with interest less then the prime rate (8% now), the income tax should be paid by the company, not by the private person. The general rate for this type of tax is 54%, in case of company cars the tax depends on the value and the age of the car.

The deducted income tax advance is payable on a monthly basis by the 12th after the month.

There are so called "private enterprises" , which are taxed under the PIT law, but the applied regulation is very similar to the company income tax system, so we omit the details about it.

2. "S M A L L" T A X E S :

2.1. Payroll related contributions:

2.1.1. Unemployment contribution, deducted from the employee: 1.5% of the salary

2.1.2. Unemployment contribution, paid by the employer: 3% of the salary

2.1.3. Professional education contribution, paid by the employer: 1.5% of the salary

2.1.4. Health tax, paid by the employer: 1.950 HUF/employee/month

2.1.5. Disabled fund contribution (for companies with employees over 20) : 7.000 HUF/employee/year

2.2. Local taxes

2.2.1. Local industrial tax: max 2% of the sales  – materials – cost of commercial goods sold – subcontractors

2.2.2. Real estate tax: max 900 HUF/m2/year for buildings and 200 HUF/m2/year for land or 3% of the market value

2.2.3. Communal utilities tax: 2.000 HUF/employee/year

2.3. Consumer tax

Payable by the manufacturer or by the importer of: alcoholic drinks, tobacco, fuel, car and jewelry. The rate is from 5 to 50%.

2.4. Environmental fee

Payable by the manufacturer or by the importer packing materials. The rate is 13.9 HUF/kg for plastic materials and 5.9 HUF/kg for paper, wood or natural textile.

2.5. Activity related contributions:

2.5.1. Cultural contributions:

Payable for publishing, music,entertainment and advertising services, manufacturing or import of music instruments and related electronic equipment, and for many related activities. The rate is from 0.5 to 10 % of the net sales, 25% for pornography.

2.5.2. Game tax:

Payable for operating game and winning machines, casinos. For game machines the tax is 60.000 – 100.000 HUF/year/machine, for casinos 40% of the income.

2.6. Fees and levies:

There are numerous events, when the state implies a fee, which should be usually paid in form of stamps. The main group of events:

3. GENERAL REGULATIONS ON PAYING AND REPORTING TAXES:

A separate act is regulating the general rules of taxation. The main points:

4. SOCIAL INSURANCE

4.1. Who is subject to social insurance in Hungary: everybody living and working in Hungary

4.2. What is subject to social security payments (SCP): all the taxable personal payments effected by employers, regardless of the form of compensation (money, product, service), if it is connected with a performance of work.

4.3. Rates:

The 8.5% deduction from the employee has its upper limit at 6.748.850 HUF/year income. In some cases not the full rate is payable. If a pensioner is working, then he/she has to pay 4% instead of 15.5% , but the company has to pay all the 29%. If someone gets a payment for creative activities (writer, painter, ...), then the part of the compensation for the executed work is charged by SCP, while the other part, connected with the sale of the rights is charged by 11% health tax. The parties are free to determine the proportion of the two parts, but it has to be reasonable.

Beginning from 1999. people can choose, if they want to pay all the 8.5% of the pension deduction to the state, or only 0.5%, and the remaining 8% can be paid to a selected private pension fund.

4.4. Services: for these payments the employee can hope for a very modest pension, maternity care and health care. The latest is narrowed year by year, making more and more medicines and services payable. The health care includes a sick pay, but:

4.5. Payments and reporting obligations: all the deductions and company charges have to be paid by the 12th of the next month. A registration card for each employee is to be maintained with all the salary, sick-leave and other social insurance related information for each year in employment, and these cards should be filed to the social insurance office by the 31st of March of next year. The payable charges and deductions for the employer are to be reported on a yearly, quarterly or monthly basis - depending on size of the company - to the tax authorities, but beginning from 2007. all the employers have to report monthly, electronically via internet and for each employees personally.

4.6. Typical salaries: the minimum salary in Hungary is 65.500 HUF/month in 2007. The average compensation was 158.300 HUF/month in 2005, and it is about 165.000 HUF/month in 2006. The salary for a secretary with good foreign language command is at about this average and for a manager from 400.000 – 3.000.000 HUF/month, depending on the size of the business. All these are gross salaries.

PAYROLL AND COST CALCULATION:

You can find the calculation of gross and net salaries, and the total expenses in an excel table free to download from here: Payroll 2007

 

BUDAPEST 20th January, 2007.