Last updated on 7 de April de 2023
Hungary is one of the richest countries in Eastern European bloc, having attracted much international investment. We analyze the most important taxes in Hungary in an easy-to-understand manner to see how much workers, investors, and corporations pay.
Content
- Introduction
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- VAT
- Real Estate Transfer Tax
- Inheritance and Gift Tax
- Hungary Public Finances
- Conclusion
Introduction
With about 10 million people, Hungary is a rather small country in Central Europe, though it is still considered part of the Eastern European bloc.
It is one of the countries that have experienced the most economic growth over the last three decades. This has been made possible by an attractive tax regime and welcoming measures for foreign investors.
As the interest of both corporations and individuals increases, it becomes more important than ever to get familiar with the tax system in Hungary.
Hungary uses its own currency, the Hungarian Forint (HUF). Throughout this analysis we will mention the original tax amounts in HUF, as well as their equivalent in US Dollars and Euros, using an approximate exchange rate of $1 = €1 = HUF 400. Keep in mind, however, that the Hungarian currency is quite volatile in international markets.
Taxes on Earned Income
Income from labor is subject to social security contributions and income tax:
Social Security
Both workers and employers must make contributions to the Hungarian social security system.
Workers have to pay 18.5% of their gross salary in social security contributions. This payment is not capped, meaning it is calculated on the entire gross salary, regardless of how high that is.
When it comes to employers, the percentage they must pay is 13% of the worker’s gross salary. This payment is also uncapped.
Thus, in aggregate, workers and employers must contribute the equivalent of 31.5% of an individual’s gross salary to the social security in Hungary.
Income Tax
Income taxes in Hungary are relatively low and very easy to calculate. This is because Hungary uses a flat income tax rate of 15% for all income levels.
While higher-income earners do pay more than low-income earners, they all contribute the same percentage of their salary to the state.
Income tax is calculated on the entire gross salary. As a result, if we add the social security contributions, which we have discussed in the previous section, we end up with a total level of taxation of 33.5%.
In other words, the net salary is 66.5% of the gross salary. And this is true regardless of the income level, if we do not consider special personal circumstances that may be applied.
Capital Income Taxes
Let us now discuss how income from savings and investments is taxed in Hungary:
Interest Income
Most of the interest income we receive from our bank deposits or investments in fixed income instruments is taxed at 15%.
In certain circumstances, however, if we have maintained an investment or savings product for at least 3 years, the percentage is reduced to 10%. And, if we have kept it for at least 5 years, interest income would become tax-exempt. Thus, long-term saving is encouraged by the tax system.
Dividends
All dividends we receive, regardless of whether they come from Hungarian or foreign companies, are taxed at a flat rate of 15%.
Rental Income
In the case of rental income, the Hungarian tax authorities allow us to deduct all the expenses associated with the ownership and upkeep of the property, including a percentage of its value for depreciation. The final taxable income figure will be taxed at 15%.
Realized Capital Gains
Realized capital gains are also taxed at 15%. This percentage is applicable regardless of the asset in which we have invested or how long we have owned it before the sale.
In addition to everything we have discussed in this section, it is worth noting that Hungary does not have a wealth tax. This makes Hungary one of the most attractive countries in Europe for individuals with a significant amount of wealth.
Corporate Tax
As far as corporations are concerned, their profits are subject to corporation tax. Hungary has the lowest corporate taxes of all countries within the European Union, including Ireland.
The general corporate tax rate in Hungary is 9%. Therefore, companies only have to pay about a third of what they would have to pay in major European countries such as France and Germany.
This has allowed Hungary to attract much foreign investment over the last few years, thus creating many jobs in the country. The Hungarian government has stated its intention to maintain this corporate tax rate in the future.
VAT
The consumption of goods and services is subject to value added tax. Hungary has the highest VAT rate of all European Union countries.
The general VAT rate in Hungary is 27% and applies to all products and services that are not subject to any of the reduced rates. Three reduced VAT rates exist in Hungary:
The first reduced rate of 18%, is used for some food products and cultural events.
The second reduced rate of 5% applies to various goods and services, including some foods, medicines, press, books, restaurants, hotels and newly built homes.
Finally, the 0% exempt rate is used for international transport.
Real Estate Transfer Tax
The purchase of a home, regardless of whether it is an apartment in the capital Budapest or a house in the countryside, is also subject to taxes. The real estate transfer tax is dependent on the value of the transaction.
Thus, the first 4 million HUF ($10,000/€10,000) of the transaction are subject to a rate of 2%. Anything that exceeds that amount will be subject to a rate of 4%.
Inheritance and Gift Tax
Regarding the transfer of assets by inheritance or donation, taxes may apply depending on the relationship between the donor and the recipient. Though, in most situations, the tax bill will be very moderate.
In the case of first-degree relatives, such as partners, parents and their children, or siblings, no tax will have to be paid.
Transfers of assets that take place between individuals who are not first-degree relatives will be taxed at 18%, with a subsidized rate of 9% for residential properties.
Hungary Public Finances
Let us now take a look at the state of Hungarian public finances. This will allow to assess the sustainability of the current fiscal policy and determine if tax increases or spending cuts may be necessary in the near or medium-term future.
The graph below shows the level of public debt in Hungary relative to the size of its economy since the mid1990s:
As we can see, public debt in Hungary is relatively high, but much lower than in most Western or Southern European countries.
At the same time, the trend is not worrisome, as the level of public debt relative to the size of the economy has remained fairly stable for almost three decades.
Conclusion
Hungary enjoys a pretty attractive tax system. This can be analyzed from different points of view.
First, and most importantly, tax rates in Hungary are generally lower than in most European countries. This is valid for workers, investors, and corporations.
Secondly, the tax structure is very simple. This makes compliance with the tax system a much easier tax. It is in contrast with the tax systems of other developed countries that make it necessary for many individuals to hire an accountant to find out how much tax they have to pay.
Finally, the economic results that have been achieved can be considered very positive. Growth has been solid, employment strong, and salaries have continued to increase. This has led to a constant rise in the population’s standard of living.
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And if you want to learn about taxes in another Eastern European country, check out the following link:
Taxes in the Czech Republic – A Complete Guide
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