Changes in personal income tax, social contribution tax and social security contributions

On 30 November 2023, Act LXXXIII of 2023 on the amendment of certain tax laws and Act LXXXIV of 2023 on additional taxes to ensure a global minimum tax level and amending certain tax laws in this context” (hereinafter jointly: the Autumn Tax Package) were promulgated. The Autumn Tax Package proposes to make comprehensive changes to the Hungarian tax system and introduces a number of new legal institutions. In order to give you a more detailed and comprehensive picture of the changes, the Autumn Tax Package is presented in a series of professional publications, this fourth part of which is devoted to changes in personal income tax, social contribution tax and social security contribution (the first part on corporate tax is available here, the second one on tax administration here, and the third part on VAT here).

Personal income tax (PIT)

Termination of the US-Hungary tax treaty

The consequences of the termination of the US-Hungary tax treaty on 1 January 2024 have been covered in detail in our previous newsletter. Given that this would result in a loss of revenue for the Hungarian budget, the Autumn Tax Package includes several provisions related to the above.

The rule on offsetting tax paid abroad is amended. Pursuant to this amendment, foreign tax paid on separately taxable income (e.g. capital gains, including dividends in  particular) earned by an individual of with tax residency in Hungary abroad according to the place of source of the income may be offset. However, this will not be possible in the case of separately taxable income earned in the country of residence. Further, tax levied and paid in respect of income the source of which is the country of residency can be taken into account as tax paid abroad.

There are some further amendments that were necessary in the context of the termination of the US-Hungary tax treaty:

• The rules on other income do not apply to income from securities issued by a resident of an OECD member state, nor to interest paid by a resident of an OECD member state.
• After the termination of the tax treaty, the income tax liability of performing artists must be determined on the basis of the provisions of the Personal Income Tax Act of Hungary. The amendment affects the concept of the place of where income is earned, as a result of which performing artists who conclude contracts for their activities to be carried out here through a single-member company would also be liable to pay tax in Hungary.

Deductions from the consolidated tax base

The Autumn Tax Package contains several changes to the deductions available from the consolidated tax base:

• The law introduces a new upper limit for young people under the age of 25 and mothers under the age of 30 to use a deduction up to the amount of the average gross salary at the national economy level (the average gross salary of full-time employees as published by the Central Statistical Office in the Official Gazette) for the month of July of the year before the year in question in case of full-time employees.
• In order to claim the benefit for mothers under 30 years of age, the taxpayer must also submit a declaration with the appropriate content (including the title of entitlement to the tax deduction, the name of the child(ren), their tax identification number, the period of pregnancy in the case of a foetus, and the date of the opening or closing of the entitlement to the deduction, in case it did not exist for the entire tax year).
• Persons aged 18 or over who are in receipt of a disability allowance instead of the higher family allowance are also considered to be permanently ill or seriously disabled and are entitled to the higher family allowance.

Fiduciary asset management

Instead of the input taxation previously applied to fiduciary asset management, output taxation will be introduced from the day following the promulgation of the law in cases where income is transferred to the beneficiary from the initial capital value of the assets managed or from private foundation assets and where the assets transferred were revalued within five years prior to the transfer of the income in order to benefit the assets managed or the foundation assets (i.e. an increase of asset value occurred). The new rules may also be applied as a transitional rule for transfers of assets made after 11 September 2023.

Start-up companies

A new definition of start-up companies is introduced. The term will be used in the same meaning as defined in Section 9/A (6) of Act XXXIV of 2004 on Small and Medium-Sized Enterprises and on Support for their Development (SME Act). As of 1 January 2024, a share (quote, stock) or the right to acquire the same obtained free of charge or at a discount as an employee or executive officer of a start-up company is not considered as income if it is granted in accordance with the requirement of the proper exercise of rights and the acquired share is not sold for at least three years after the acquisition of the share or, in the case of the acquisition of rights, after the right to exercise the right is exercised.

Quarterly tax return on fringe benefits and certain defined benefits

In the future, payers will have to assess, declare and pay taxes on fringe benefits and certain defined benefits on a quarterly, instead of a monthly basis.

Small-value gifts up to three times a year

Currently, a gift of a small value may be given once a year as a specific benefit, up to a maximum of 10% of the minimum wage. As a new provision, from 1 January 2024, the number of times that a reduced rate of tax can be applied to a small-value gift will increase from one to three.

Tax-free gift of wine products

Among non-pecuniary benefits, bottled wines with a protected designation of origin/protected geographical indication, purchased directly from a winery licensee initiating the placement on the market of such products pursuant to Article 9 (1) of Act CLXIII of 2020 on viticulture and the wine industry, for the purpose of entertainment for representational and non-representational purposes, business gifts or gifts of minor value are exempt from tax.

It is important to note that the provider of such benefits must keep a record of the products acquired for the above purposes, which must also show the source of the acquisition and the way in which the product was used.

Date of receipt of revenue

Under the current rules, there are difficulties in determining the tax liability for various services at the time the revenue is received (e.g. the receipt for the service is not yet available). Under the amendment, the date of receipt of the revenue is deemed to be the date on which the accounting document concerning the service becomes available.

Tax-free winnings

In order to encourage participation in traditional numerical games of chance (lottery, keno, putto), the Autumn Tax Package exempts winnings from VAT on such games.

Social security contributions (TB)

Contribution base for third-country nationals

Under the Autumn Tax Package, in the case of the posting of a third-country national to Hungary, the income earned in the month in question as remuneration will be considered as the contribution base and thus also as the basis for the social contribution tax. Therefore, the preferential contribution base rule applicable to this category of persons in the case of posting – according to which the contribution base is the basic salary, but at least the average gross salary – will be abolished.

Reduction of contributions for flat-rate taxpayers

Under the previous rules, if the income of a sole trader using the flat-rate scheme was already taxable, he or she could not claim a reduction in respect of the contribution payable on the minimum wage. However, the aggregation method used for determining the contribution base often resulted in the flat-rate taxpayer sole trader being already taxable on his/her income but still having to pay contributions on the minimum wage, and therefore, the new rules now also provide that in such a case the contribution reduction can also be claimed with respect to the taxable part of the income determined under the flat-rate scheme. As a transitional provision, this favourable rule can be applied retroactively to income for the month of January 2023 and subsequent months.

Social contribution tax (Szocho)

Tax relief in case of workers newly entering the labour market

As a new provision, the tax relief in case of workers newly entering the labour market will be available not only for Hungarian citizens, but also for workers that are nationals of non-EEA countries bordering Hungary (Ukraine, Serbia).

Persons qualifying as foreigners under the Social Security Benefits Act

Income paid in arrears with a view to employment in Hungary (e.g. bonus, reward) will be subject to social security contribution and social contribution tax, and the general exemption rules cannot be applied.

Tax relief for vocational education and dual training

Under the Autumn Tax Package, the tax relief for vocational education and dual training for workers with reduced working capacity will no longer be pro-rated and all days of training will be taken into account.

Tax relief for R&D activities

The social contribution tax relief for research and development activities is not available if the payer has opted to apply the corporate tax credit for research and development activities for the given tax year.

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.