Tax & Legal Alert. Tax and exercise duty law amendments as of Personal Income Tax

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1 2010. December Tax & Legal Alert Tax and exercise duty law amendments as of 2011 Auditing and Consulting Phone: On 16 th November 2010, the Hungarian Parliament approved the packet of amendments on the tax laws as of In this document in a non-exhaustive form we will provide you a summary of the most important elements of these amendments. (Most of the amendments enter into force on the 1 st January Any date derogation is indicated separately.) 1. Personal Income Tax Progressive taxation is ceasing to exist, 16% flat personal income tax rate was introduced. Private individuals will have to pay this rate on all of their income: i.e. income comprising the consolidated tax base, as well as income taxed separately. Into the full income of private individuals, in case of self-employment, the following shall be counted: dividend base, income subject to simplified taxation, and as a new item, specified income that shall be incorporated here according to the law the following shall not be counted: income from the transfer of real estate; and as a new item, income from the transfer of property rights; the amount paid to the employee based on judicial decision- if the employment relationship was terminated in an unlawful way; interim dividend (if it becomes dividend, which comprises the income of the private individual in the year of the financial statements acceptance). Tax base addition (i.e. the super gross tax base) is gradually decreasing (shall be calculated for income comprising the consolidated tax base, shall not be calculated for income taxed separately): Remains to be 27% in % of the 27%, i.e. 13,5% in % after 2012 CHANGES: rental income (previous 74. ) as a category of income taxed separately is ceasing to exist. If the private individual- who lets his or her property- does not qualify as a private entrepreneur, the rental income will be taxable as part of the consolidated tax base rather than separately. (Taxation after the income derived from business activity of private entrepreneurs has been an option so far. For private individuals expenditures against revenues can be charged by using itemised deduction or a 10% flat rate. Nevertheless, tax base addition is to be taken into account when calculating the tax. The mandatory 14% of health care contribution has not changed).

2 Tax and exercise duty law amendments as of Personal income tax Auditing and Consulting Most common types of income taxed separately are the followings: The tax base - apart from some exceptions - is the actual income (i.e. there is no tax base addition, only if indicated separately). entrepreneurial dividend base of self-employed entrepreneurs (49/C. ), personal income tax rate remains to be 10%, respectively 19% (49/B. ), the amount of tax that is not yet payable on the income from transfer of movable properties decreases from HUF 50,000 to HUF 32,000 (58. ), income from the transfer of immovable property and immovable property rights ( ), interest income (65. ), securities purchased before the introduction of the interest tax until 31 st August according to the transitory regulations, or tax on yield/interest of deposits with definite duration interest period starting after 31 st August 2006 remains to be 0%. Tax on deposits without definite duration interest period, the interest until the 31 st August 2010 is 0%, interest earned and credited after this date will be taxed at 16%, income from long-term investment: 0% tax rate on longer than 5 year period; 10% tax rate on 3 years or longer than 3, but shorter than 5 years; 16% tax rate on shorter than 3 years period (67/B. ), changes on income from dividend (66. ): the law does not differentiate the source of dividend, dividend from securities listed on a stock exchange in an EEA Member State will be taxed at 16% instead of the previous 10%! income from exchange rate differences (67. ), income withdrawn from the business (68. ), income derived from preferential interest rate (72. ), the tax base will be calculated with the fold income from prize (76. ), both cash and non-cash, is taxable at 16% tax rate, although the tax base of non-cash prize is 1.19-foldof the common market value. The category of non-taxable earnings will be abolished (previous 3. point 72.), certain items (e.g. pension, family allowance, family benefit, etc.) have been shifted to Annex I. of the law as tax exempt incomes. The material contained in this alert is provided for does n o t c o n t a i n a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek speci f i c to thei r is accepted for acts or to receive Tax & Legal nevertheless, full amount of student wages and incomes will be taxable (until now up to twice the amount of the minimum wage it was tax free) service charge and tip have become tax exempt Family tax allowance previously decreased tax, now it will be deductible from the tax base, and it can be applied already after the first and second dependant children. Amount: per dependant and month in case of one and two dependants HUF 62,500 (i.e. the amount of tax allowance is HUF 10,000 / dependant) in case of three and any subsequent dependants HUF 206,250 (i.e. the amount of tax allowance is HUF 33,000/dependant) Oldal 2

3 1. Personal income tax Auditing and Consulting Phone: Conditions of entitlement, division between the members of the same household and applicability of the allowance in case of advance taxation have not changed. Although in a decreased amount, but tax credits on income from employment will continue to be available. The rate will be 16% of the total amount of salary and the tax base addition (i.e. the super gross tax base). Tax credits are capped at HUF 12,100 per month and will be fully available for annual incomes not exceeding HUF 2,750,000 and partly available (in staggered decreases) for annual incomes of up to HUF 3,960,000. Rules regulating the limitations of tax allowances will be abolished. From now on the amount of the annual consolidated income of the private individual has no effect on the availability. Certain tax allowances (on tuition fee and on home purchase loan payments) carried over to a subsequent tax year can be claimed in the 2015 tax returns at the latest. Regulations in force on 31 st December 2010 related to the personal contributors premium supplements for the year 2010 are not applicable for the tax liability of self employed entrepreneurs and personally participant members of the cooperate partnership. These regulations in their current form will be abolished from 2011; there will be no further obligation to apply them. Private individuals can fulfil their filing obligation as follows: employer tax assessment self assessment, which has three alternatives: A, simplified tax return which is prepared with the help of the Tax Authority B. tax return without the help of the Tax Authority C. NEW ALTERNATIVE: tax declaration (its conditions among others: total income of the private individual in the tax year is from only one employer and the difference between the tax withheld and the final tax liability does not exceed 1,000 HUF. Private individuals may also choose to submit a tax declaration if the taxpayer occasionally receives income not exceeding 100,000 HUF from a payer different from his or her employer and if the payer has deducted all the tax or tax advance). Private individual fund members can transfer 20% of their personal income tax (instead of the previous 30%) to voluntary mutual funds (the conditions remained the same). The material contained in this alert is provided for does n o t c o n t a i n a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek speci f i c to thei r is accepted for acts or to receive Tax & Legal The special taxation rules on small payments, the lump-sum redemption of annuities and tax liabilities on income from interests, royalty, or service fees paid to private individuals resident in a foreign country with which Hungary has no double tax treaty currently in force, have also been repealed. Rules on the taxation of certain benefits in kind and fringe benefits A. Benefits in kind will no longer be treated separately for tax purposes, non-cash benefits as a general rule are liable to tax as part of the consolidated tax base, therefore the personal income tax on the benefit is payable by the private individual, while both the private individual and the benefit provider is obliged to pay contribution. The grossing is applicable for tax calculation, even if it cannot be deducted from anything. This means that the payer will deduct the tax advance on contributions in a later payment; has claims against the private individual and immediately pays the non-deducted tax advance to the Tax Authority based on the tax return or draws the attention of the private individual on the certificate provided by the payer, to pay the non-deducted tax advance Oldal 3

4 Tax and exercise duty law amendments as of 2011 Belső cikk főcíme 1. Personal income tax Auditing and Consulting B. Certain benefits not regarded as fringe benefits, tax paid by the payer (70. ): the payer is obliged to pay 16% of personal income tax in addition, 27% of health care contribution is payable; nevertheless social security contribution and vocational training contribution are not payable, both the tax and the contribution base is 1.19-foldof the value of the actual benefit received by the private individual. These benefits are the followings: expenses borne by the payer for food, drinks or other services in connection with an official or business trip income from private use of company telephones (the calculation of the taxable part: either item by item separation or the 20% rule could be applied) fees of collective insurance subject to tax (if the insurance contract defines categories of insured persons not individually, but exclusively according to employment, position, time spent in work, age or other common characteristics) certain part of representation costs and business gifts for taxpayers not subject to corporate income tax (please note that the definition of representation and business gift has changed: from this year on only those gifts are regarded business gifts whose value do not exceed 25% of the minimum wage (goods, services, as well as vouchers that can be used exclusively for this purpose) gifts of small value provided no more than three times a year keeping a record of the given gifts is necessary (definition of small value gifts: goods, services, whose value do not exceed 10% of the minimum wage) the expenses borne by the payer for events organized free of charge or at a discount for several individuals (including business partners), if the circumstances indicate that the benefit is primarily hospitality, free time activities provided to the participants and the payer is not in a position to establish the amount of income per person. goods or services provided to private individuals by the payer free of charge or at a discount according to legislation benefits that do not qualify as promotional or other business gifts and whose value does not exceed 1% of the statutory minimum wage and the provider does not know personal identification data of the private individual who takes the gift if the provider provides more fringe benefits (point c) than set out by the law, the difference is subject to tax by the payer, along with health care contribution C. Fringe benefits subject to tax by the payer (70. ): the payer is obliged to pay 16% of personal income tax the tax base is 1.19-fold of the value of the benefit received by the private individual, these benefits are not charged by other contributions like health care contribution, vocational training contribution. Can be given by: employer, cooperate partnership Can be received by: employee, personally participant member of cooperate partnership, and their close relatives Oldal 4

5 1. Personal Income Tax Auditing and Consulting Phone: Types: holiday vouchers or holiday services up to the amount of the minimum wage per person in the tax year (can be given to vocational training school students, students and pensioners and close relatives, as well as close relative of dead employees, can be given by trade union too). cold, as well as hot meal voucher (or bank card exclusively for this purpose) up to a monthly amount of 18,000 HUF (can be given to vocational training school students, students and pensioners too) NEW: allowances (up to 3,000,000 HUF) paid by employers to an account associated with the Széchenyi Recreational Card. The card would function like a debit card, but it could only be used to purchase predetermined services supplied by certain service providers. (A separate government regulation will provide more details on it) Internet usage made available by the employer free of charge or at a reduced price or payment of the costs of Internet usage up to 5,000 HUF per month with the invoice on the employee s or close relative s name, also including the voucher which can be used exclusively for this purpose (BUT the computer usage provided by the employer free of charge remains income free of tax.) school start benefit up to 30% of the minimum wage per child (pupil) local travel pass with the invoice on the employer s name (cannot be given to close relatives) cost of school education up to two-and-a-half times of the minimum wage employers contributions (contribution to voluntary mutual pension funds up to 50% of the minimum wage, jointly to voluntary mutual health and self-help funds up to 30% of the minimum wage, to employer pension schemes up to 50% of the minimum wage 2. Corporate tax The material contained in this alert is provided for is accepted for acts or There remains to be two corporate tax rates in 2011 and % tax rate remains in force, which is applicable on the first 500 million HUF of the positive corporate income tax base without any further preconditions Tax base above this limit will be subject to 19% tax rate Corporate income tax will be a uniform 10% of the positive tax base from 1 st January Concerning taxpayers whose tax year is not in line with the calendar year, the following rules are applicable to the fiscal year ending in 2011: for taxpayers whose fiscal year of 2010 started before 16 th August 2010, 10% tax rate is applicable on compliance with certain conditions according to the already existing rules, namely up to 50 million HUF tax base for the whole fiscal year. The reduced 10% tax rate - without any further preconditions, up to HUF 500 million tax base - is applicable only for the fiscal year starting in for taxpayers whose fiscal year started on 16 th August 2010 or later, 10% tax rate is applicable up to 500 million HUF tax base without any further preconditions for the whole tax year. Oldal 5

6 Tax and exercise duty law amendments as of Corporate tax Auditing and Consulting Tax base modifying items are changing: 7. (1) dz) item has expanded as follows: the part of the revenues which exceed the expenditures - as a result of transfer as a non-cash contribution of the registered share - decreases the tax base 7. (1) z) item has expanded as follows: donations to the Hungarian Disaster Relief Fund (Magyar Kármentő Alap) decrease pre-tax profit by 50% (this can be applied also to the donations of the tax year started in 2010, the preconditions for deduction have not changed.) The top-up liability has changed: from this time on only taxpayers, whose total revenues calculated for the previous tax year have reached HUF 100 million have top-up liability. The new regulation is applicable already for the tax advance top-up due after 16 th December 2010, including the noncalendar year taxpayers. Two methods are listed to determine the arm s length price: the net margin method and the profit split method. Withholding tax liability regarding interest, royalty, service fee received by residents of non-treaty countries will be repealed, meaning that the 30% tax on these items is ceasing to exist. (Hungarian companies would not be liable to withhold tax from the amount of interest, royalties and service fees paid to these companies). Rules regulating the avoidance of double taxation are changing (28. ). Domestic taxpayers and foreign entrepreneurs, when calculating the corporate tax, must include in the tax base the interest gains from abroad. Up until now only 75% of interest gain was to be taken into account. 3. VAT 1) Changes concerning the entry to cultural, artistic, scientific, entertainment and sports services and services connected to the before mentioned if it is provided to the taxable person - place of supply is the place where the event takes place or the service is physically carried out in case of organization of such services for the taxable person, according to the general rule, the place of supply is the place where the taxable person concerned is established if the above mentioned services (organization, entry, additional services) are provided to nontaxable person, the place of supply is the place where the service is physically carried out from 2011 the so called cost-sharing group is to be regulated, as well as the conditions for tax relief to services provided by such a group to its members the scope of reverse taxation is expanding, the most important applications: sale of used batteries and used chargers above 100,000 HUF value service provision by taxable person being under liquidation procedure (previously only sales of goods belonged here). Oldal 6

7 3. VAT No changes in Tax rates: 5%, 18% and 25% Defining the date for the performance of fixed maturity transaction deals 2) The following VAT rates have not been changed: 5%, 18% and 25% Auditing and Consulting 4.1) BUSINESS TAX 4. Local taxes Changes in tax liability of construction activities An entrepreneur performing construction activity would be defined as a person, whose net revenue according to the law on accounting and values of its work in progress, semi-final products and products (accounted on the last day of the tax year) altogether are derived at least 75 percent from construction activities. Temporary tax liability remains to begin on 30 th day after starting the activity If the duration of the construction activity performed within the territory of a local municipality will last longer than 180 days, the taxpayer should register its activity as permanent. If it later turns out that the activity does not exceed 180 days, the activity would be considered as a temporary business activity. Tax return should be filed and the tax is to be paid by 15 January the following tax year at the latest, together with the potential late payment penalty interest. Regarding the tax base allocation methods, a new option for entrepreneurs performing construction activity is offered: 50% of the tax base is to be split between the headquarters and the establishments on the basis of personnel costs or according to a combination method, the other 50% is to be split between the establishments on the basis of revenue and inventory ratio. Taxation of telecommunication companies A telecommunication company is defined as a company, for which its net sales revenues are derived at least 75% of telecommunication activities in the previous tax year. The billing address of the customer creates establishment for the telecommunication company, so that they are obliged to register at every municipalities according to the addresses. Other changes Establishments created on the basis of the billing addresses have to split the tax base. Retail trade at markets and fairs would not be subject to local business tax on the temporary business activity basis, according to the law modification. If the entrepreneur has at least one establishment apart from the headquarters municipality and the tax base is to be split based on the personnel costs or according to the combination method, 10% of the personnel costs related to the executive director(s) must be recorded to the municipality of the headquarters Splitting method based on asset value cannot be applied, if asset value is not detectable in the municipality of the headquarters Oldal 7

8 Tax and exercise duty law amendments as of Local taxes Auditing and Consulting Considering that the business tax and the corporate top-up liabilities are aligned, the business tax top-up is due until 20 th December 2010, only if the annual net sales revenues of the company for the previous year have exceeded HUF 100 million For the first time in the year 2010, business tax top-up must be filed in the tax return at the time of payment. This form cannot be submitted through the electronic Client Gate, it must be sent by post to the local governments. 4.2) PROPERTY TAX Property tax rate is capped at HUF 1,100 HUF/m2 or at a 3.6% of the adjusted market value. 5. Social security contribution, Health care contribution, Rehabilitation contribution, Vocational training contribution 5.1) Social security contribution Changes The definition of minimum wage has expanded: sum of the minimum monthly wage of fulltime employees, on the first day of the month concerned, AND for the insured self-employed entrepreneurs and partnerships the sum of the minimum wage guaranteed for full-time employment for activities that require a secondary school certificate. The employer is liable to pay the contribution after the actual wage of the employed persons (payment liability after the double minimum wage is repealed). Social security contribution liability based on wages from the business activity performed is repealed for insured selfemployed entrepreneurs and partnerships, (liability retroactively for the year 2010 is not abolished, nevertheless according to the transitory regulations, no default penalty or tax penalty can be established in case of a tax audit for 2010), insured self-employed entrepreneurs and partnerships would have to pay social security contributions based on the actual income, respectively at least on the statutory minimum wage on a monthly average. Stipendium paid on the basis of scholarship employment is regarded as a taxable income The monthly amount of the health care contribution would be HUF 5,100 for self-employed entrepreneurs and partnerships. The employer is obliged to file return on contributions (dues) and pay the contributions (dues) chargeable to the insured even if it cannot be deducted from the income of the month concerned. The contribution (dues) advanced is registered as claims on the employee. The upper limit for the employee s part of social security contributions: HUF 21,000/day (according to the draft state budget law) Oldal 8

9 5. Social security contribution, Health care contribution, Rehabilitation contribution, Vocational training contribution Contribution relief connected to part-time employment (regulated by Act CXXIII of 2004): Instead of 27% of social security contribution 20% is payable by the employer, if the employee returning to work from child-care leave after 31 st December 2010 is employed on a 20 hours per week basis and another employee is hired for the remaining 20 hours per week, or the substitute employee is kept for a 20 hours per week working time The contribution relief is valid for a minimum of 1 and a maximum of 3 years. It is enforceable on a contribution base, which is equivalent to twice the amount of the statutory minimum wage. Rate of contributions Auditing and Consulting The rate of the social security contribution paid by the employer is 27 %, but contrary to the proposal, there will be no upper limit for the employer s social security contributions. The employee s pension contribution rate if the employee is not member of a private pension fund- is 10%; if member of a private pension fund: 10% to the state fund and 0% to the private pension fund (after the payments of December 2011 due in January the previous practice will be applied again, which means that private pension fund members pay 1.5% to the state fund and 8% to the private pension fund). Health care contribution and labour market contribution paid by the employee is 7,5% 5.2) Health care contribution Changes: 27% of health care contribution payable by the insured self-employed entrepreneurs and partnerships is ceasing to exist, not applicable for the tax year of 2010 either 27% of health care contribution shall be paid after the amount defined as tax base of the income, which is provided besides the tax chargeable on the payer. The health care contribution is due together with the personal income tax (Act on Personal income tax 70. ). Income from renting the permanent residence of the renter that exceeds HUF 1 million will no longer be tax exempt Fringe benefits subject to tax by the payer (Act on Personal income tax 71. ) are not liable to health care contribution Has not changed: 27% of health care contribution shall be paid after income comprising the consolidated tax base, on condition that it is taken into account at the calculation of advance tax base and after which social security contribution is not payable income derived from preferential interest rate Oldal 9 Oldal 9

10 Tax and exercise duty law amendments as of Social security contribution, Health care contribution, Rehabilitation contribution, Vocational training contribution Auditing and Consulting B. 14% of health care contribution shall be paid after income withdrawn from the business (Act on Personal income tax 68. ) income derived from securities lending (Act on Personal income tax 65/A. ) dividend (Act on Personal income tax 66. ), entrepreneurial dividend base (49/C. ), nevertheless dividends paid after securities listed on the stock exchange are tax exempt (Please note that until now dividend tax for foreign private individuals was usually lower than 25%, meaning that it was not subject to health care contribution on a percentage basis. The amount of the percentage however has been left out from the text of the law, which means that dividends paid to private individuals independent of residence (foreigner domestic) have become subject to health care contribution. (In our opinion up to the below mentioned upper limit.) income from exchange rate differences (Act on Personal income tax 67. ) total amount of rental income, which exceeds HUF 1 million (Act on Personal income tax 16. (1)) up to the total amount of health care contribution and the above listed items reaches HUF ) Rehabilitation contribution Compared to the year of 2010 it remains the same, 964,500 HUF/person/year. The contribution shall be paid by companies with more than 20 employees; after 5 % of the number of employees, from which the number of disabled workforce can be deducted. 5.4) Vocational training contribution The base of the vocational training contribution which is equivalent to rate of social security contribution and its rate (1.5%) has not changed. Oldal 10

11 6. Act on Accounting The following amendments are applicable to the financial statement of fiscal year that starts in 2011, but they can already be applied to the financial statements concerning the fiscal year that starts in 2010: Simplified annual reports can be prepared by: Private companies limited by shares Foreign companies Hungarian branches Companies applying financial year different form calendar year Companies involved in consolidation, not regarded as parent companies; which are not involved in the consolidated annual business report based on the Hungarian Act on Accountancy (i.e. IFRS based annual consolidated business report) if they comply with the simplified annual reports preconditions in terms of size Auditing and Consulting Simplified annual report cannot be prepared by: Parent companies According to the above mentioned, the public limited liability companies Company involved in the consolidation process, which is involved in the consolidated annual report based on the Hungarian Act on Accountancy Other amendments extended concept of bad debt: receivables where the cost of warrant for payment is not in line with the amount to be recovered will also qualify as bad debts (currently it was allowed only to enforcement procedures), the impact of exchange rate differences upon the year-end revaluation of balance sheet items (assets and liabilities) is to be recorded not only if the effect is significant, if the taxpayer s chosen credit institution records exchange rates more than once during a day, the exchange rate which is set in the accountancy policy shall be taken into account at the time of the foreign currency valuation (up until now it was provided for by the law that the last recorded rate must have been taken into account), companies that use only buying or selling exchange rates for their records are not obliged to show the quantified effect of the difference to the mid rate in the supplementary notes of the financial statements, it is not obligatory to indicate the amount of the fees charged by the auditor in the supplementary notes of the simplified financial statements. It is enough to list the services provided and their distribution according to title if the auditor provides detailed information to the Audit Oversight Committee upon request, for Hungarian parent companies which are exempt from preparing consolidated annual report, official Hungarian translation of the foreign parent company s annual report would not be needed - a simple translation will be enough (but publication obligation in Hungarian remains to be in force!). The deadline for publishing the consolidated annual report of the foreign parent company will change from 180 days from the balance sheet date to 60 days after the approval of the parent company s annual report. Oldal 11

12 Tax and exercise duty law amendments as of Tax imposed on certain industries Auditing and Consulting Central phone: efinition of the energy supplier company has been specified: a company is regarded energy supplier if at least 5% of its net sales revenues for the previous year are derived from this activity. concerning retail companies not only the net sales, but revenue from services provided to the supplier of the goods- in relation to marketing the purchased goods- as well as the revenue from the discount given by the supplier are also taken into account when calculating the tax base 8. Rules of taxation From 1 st January 2011 the tax and customs, as well as the investigations in connection with certain financial offences are carried out by the newly established National Tax and Customs Authority (NTCA) which comes into existence by merging the Hungarian Tax Authority (APEH) and the Hungarian Customs and Excise Authority. Amendments to the Rules of taxation were published on 19 th November 2010 along with Act CXXII of 2010 on the National Tax and Customs Authority. Most important changes: The material contained in this alert does n o t c o n t a i n a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek prof essi on al advice situation. No liability is accepted for acts or omissions taken in reliance upon the the tax authority shall issue a tax certificate requested within 8 days on arrival of the request, companies are obliged to register with the Tax Authority every establishments where economic activities are carried out, and which are not indicated in the articles of association and are not regarded as registered offices, but comply with the definition of establishment set out by the law, the taxpayer is subject to default penalty up to HUF 500,000 if its published financial statements do not comply with the regulations of the Act on Accountancy, private individuals, as well as their direct superior - whose job obligation includes to register the insured persons - are no longer subject to default penalty (the taxpayer remains to be punishable), direct superior of the taxpayer s employee, representative and private individual participating in marketing is not subject to default penalty for failing the obligation of invoice or receipt issue (the company and the person who actually failed to issue invoice or receipt remains to be punishable). to receive Tax & Legal the following address: pa Oldal 12