Tax Guide for US Expats Living and Working in Hungary
Who Is Liable For Income Taxes in Hungary
Residents are subject to income tax on worldwide income, regardless of whether the funds are transferred into Hungary. Nonresidents are taxed on income from Hungarian sources only. However, tax treaty provisions may override the domestic rule.
Hungarian citizens are considered residents. A dual citizen is not a Hungarian tax resident if he or she does not have either a permanent home or habitual abode in Hungary.
The following individuals are also considered Hungarian tax residents:
- European Economic Area (EEA) nationals who spend at least 183 days per year in Hungary
- Third-country (non-Hungarian and non-EEA) nationals with a permanent residence permit
- Foreign individuals who have a permanent home in Hungary only
Individuals who have permanent homes in Hungary and another jurisdiction or do not have a permanent home anywhere are deemed resident if their center of vital interests is located in Hungary. If tax residency cannot be determined by either the “permanent home test” or the “center of vital interest test,” the individual is deemed to be a Hungarian tax resident if he or she stays in Hungary at least 183 days in the calendar year.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Gross employment income includes all compensation and most allowances, employer contributions to an employee’s pension fund and most insurance policy premiums paid by an employer for an employee. Most benefits in kind are taxed at the company level.
Rent and other housing allowances provided to an expatriate can be exempt from Hungarian taxes, under certain circumstances. Education and in-kind health care benefits from the Hungarian state system, as well as ordinary and necessary employee business expenses borne by the employer, are not considered income for income tax purposes.
The “benefit in kind” category is replaced by two new categories, effective from 1 January 2011. These new categories are “certain specific benefits” and “fringe benefits.” The tax base is 1.19 times the arm’s length value that was not reimbursed by the individual, and the tax rate is 16%. Consequently, the effective tax rate is 19.04% of the arm’s length value of the benefit. In general, “certain specific benefits” (for example, telephone services for private purposes) are also subject to a 27% health tax. However, “fringe benefits” (for example, hot and cold meal vouchers) are not subject to health tax. They are subject only to personal income tax at a rate of 19.04% (16% personal income tax applied to 1.19 times the value of the benefit). Both the personal income tax and 27% health tax are payable by the Hungarian employer.
Several benefits that were taxable to employers in the context of an employment relationship, are now taxed as regular employment income. These include, among others, vouchers for sports services, transport, and those elements of cafeteria systems that are not specified in the law. Consequently, for these benefits, the payer will have to calculate advance tax and pay the tax to the tax authorities even if it cannot be withheld from the employee. Benefits provided by foreign employers are generally considered taxable income of the employee.
Non-Hungarian tax residents who work in Hungary are generally subject to personal income tax on their income relating to their Hungarian workdays.
Foreign individuals are generally taxed on their wages, salaries and other remuneration for services performed in Hungary.
Income from independent activities. All activities that are not included in employment (dependent) activities and for which an individual receives income are considered to be independent activities (for example, activities of private entrepreneurs and agricultural producers).
Investment income. Dividend income from Hungarian sources is subject to a final withholding tax at a rate of 16%. Capital gains are subject to the same tax rate.
Royalty income is included in ordinary taxable income, and is taxed, after the deduction of expenses, at the normal rate (20.32%) after the deduction of expenses.
Income derived from the renting out of real estate is considered part of the consolidated tax base. Depreciation of the property is deductible for tax purposes.
Non-Hungarian residents who are residents of treaty countries are subject to Hungarian withholding tax at the reduced treaty rate (certain treaties provide for no withholding tax) if specified administrative requirements are met (for example, certificate of residence).
Directors’ fees. Directors’ fees are generally subject to tax at the same rates as employment income. Directors’ fees are sourced in the country in which the payer company is resident. Tax treaty provisions covering directors’ fees generally state that if a resident of one treaty country receives a director’s fee from a company resident in the other treaty country, the fee may be taxable in the other country.
Other income. Other income includes certain types of income listed in the Hungarian tax law, such as amounts paid by a voluntary or a private pension fund as a benefit (excluding pension payments), taxable insurance premiums paid by a payer that is not the employer, interest or dividends paid by a legal entity located in a low-tax country and student wages.
Taxation of employment-related stock options. Employment-related stock options are taxed at the time of exercise. The taxation of the option income is determined by the relationship of the provider and the recipient and the circumstances of the acquisition. If the employee of a Hungarian company receives his or her other employment income directly from abroad, the employee is subject to tax at regular income tax rates on the market value of the stock at the date of exercise, less the strike price and the acquisition and transaction costs, if any. Foreign-source stock option income is also subject to health tax at 27%, payable by the employee. However, health tax may be assumed by the Hungarian employer. If the employee’s stock option income is paid through a local Hungarian company, the local company must withhold personal income tax and employee social security contributions and pay employer social security contributions regarding the income.
Capital gains. Capital gains are taxed at a flat rate of 16%. In determining taxable capital gains, substantiated transaction expenses may be deducted. Losses derived from transactions carried out on regulated capital markets can be set off against capital gains arising from other transactions conducted on such capital markets. The following are transactions that fall into this category:
- Transactions regulated by the Hungarian Financial Supervisory Authority
- Transactions performed in other EEA member states or in states with which Hungary has entered into a tax treaty, and a mutual agreement on information exchange has been entered into by the Hungarian Financial Supervisory Authority and the other country’s respective supervisory body.
Rates. The taxation of Hungarian residents and foreign individuals for 2011 is described below.
Effective from 2011, a 16% flat personal income tax rate applies to both the consolidated tax base and investment income. The tax on the consolidated tax base continues to be payable based on the super gross tax base (gross income must be multiplied by 1.27). Consequently, the effective personal income tax rate on gross income is 20.32% in 2011.
Nonresidents are subject to tax on income derived from Hungarian sources at the rates that apply to residents.
B. Inheritance and gift taxes
Resident foreigners and nonresidents are subject to inheritance and gift tax on assets located in Hungary at rates of up to 40%. Inheritance and gift tax on assets transferred between lineal descendants has been abolished.
C. Social security
As a result of Hungary’s accession to the European Union (EU) on 1 May 2004, new social security rules apply to citizens of the EEA and expatriates from outside the EEA, effective from that date. These rules reflect the EU’s social security coordination regulations.
Coverage. In Hungary, social security contributions cover health, pension and unemployment insurance. Participation in the Hungarian social security system is mandatory for all individuals who work in Hungary under an employment contract, regardless of their nationality. A third-country national (non-Hungarian, non-EEA and non-totalization agreement country national) seconded to Hungary, by a foreign employer not registered in Hungary, is not required to participate in the social security system. Effective from 2012, this exemption will apply for two years only. If an individual qualifies for exemption, and if he or she leaves Hungary but then returns, this exemption applies again only if at least three years have elapsed between the end of the individual’s previous stay in Hungary and his or her return.
Individuals holding a valid E101 or A1 certificate of coverage are not required to contribute to the Hungarian social security system. If income is paid by a non-Hungarian company to persons insured in Hungary for their work performed outside Hungary or if the employee is employed by a non-Hungarian company in Hungary, in general, the non-Hungarian company must meet its social security contribution obligations through a representative (Hungarian branch or financial representative). In the absence of such a representative, the non-Hungarian company must register as an employer in Hungary. If it does not do so, the individual must eventually meet the statutory obligations.
Contributions. For 2011, employers must contribute at a rate of 28.5% (27% social security contribution consisting of a 24% pension contribution, 2% health care contribution and 1% labor force contribution, and 1.5% training fund contribution) of gross salary. In most cases, the social security base equals taxable income (no super-grossing applies). No ceiling applies to the amount of income subject to social security contributions by the employer.
For 2011, each employee is subject to a 17.5% social security contribution (10% pension contribution and 7.5% health care and labor force contribution) on wages from his or her principal employment. For employees, income in excess of HUF 7,665,000 is exempt from the pension component (10%) of the social security contribution.
For 2011, in addition to the above contributions, a 14% health tax is payable on capital gains, income from securities borrowing, dividends and the total amount of income from real estate rentals exceeding HUF 1 million. If the total amount of the annual Hungarian employee health care contribution (6%) and the 14% health tax paid during the tax year exceeds HUF 450,000, the 14% health tax is not payable.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, Hungary has entered into totalization agreements, which usually apply for an unlimited time period, with Austria, Bosnia-Herzegovina, Bulgaria, Canada, the Commonwealth of Independent States (CIS), Croatia, the Czech Republic, Germany, Korea (South), Macedonia, the Netherlands, Poland, Quebec, Romania, Serbia and Montenegro, the Slovak Republic, Slovenia, and Switzerland. However, the EU social security rules generally override the totalization agreements that have been entered into with the EEA member states. Hungary has concluded a new totalization agreement with Montenegro which is not yet in force. In addition, Hungary has entered into a totalization agreement with India which is not yet in force. Hungary has entered into health care agreements with Angola, Cuba, Finland, Iraq, Jordan, Kuwait, Mongolia, Norway, Sweden and the United Kingdom.
Double tax relief and tax treaties
Most of Hungary’s treaties follow the Organization for Economic Cooperation and Development (OECD) model convention. Hungary has entered into double tax treaties with the following countries.
Albania
Iceland
Portugal
Armenia
India
Romania
Australia
Indonesia
Russian
Austria
Ireland
Federation
Azerbaijan
Israel
San Marino
Belarus
Italy
Singapore
Belgium
Japan
Slovak Republic
Bosnia- Kazakhstan
Slovenia
Herzegovina
Korea (South)
South Africa
Brazil
Kuwait
Spain
Bulgaria
Latvia
Sweden
Canada
Lithuania
Switzerland
China
Luxembourg
Taiwan
Croatia
Macedonia
Tajikistan
Cyprus
Malaysia
Thailand
Czech Republic
Malta
Tunisia
Denmark
Moldova
Turkey
Egypt
Mongolia
Ukraine
Estonia
Morocco
United Kingdom
Finland
Netherlands
United States
France
Norway
Uruguay
Germany
Pakistan
Uzbekistan
Greece
Philippines
Vietnam
Hong Kong
Poland
Yugoslavia*
* This treaty applies to Montenegro and Serbia.
Hungary has signed new tax treaties with the United States
To learn more about the history, culture, economy and other information about the Hungary
We have been preparing US income tax returns for US Citizens and permanent residents living in Hungary for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Hungary and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Hungary.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email