Hungary offers you a more than attractive, 9% flat rate of annual corporate tax rate, which is one of the lowest among EU jurisdictions.
A successful business needs good planning and effective management to succeed. The cost of running a business includes not only your fixed expenses such as rent or mortgage, utilities, insurance, etc., but also variable costs such as inventory, raw materials, and labor costs. Taxes are one of the unavoidable expenses that you need to keep track of when operating a business.
Taxation is a significant cost of doing business in any country. The level of taxation, however, can vary significantly from one country to another.
In Hungary, businesses are subject to 25 different taxes like:
- personal income tax;
- corporate income tax;
- value-added tax (VAT);
- social security contributions;
- payroll taxes;
In this article, we will explore taxation in Hungary and what it means for you as an investor or business owner moving here or setting up a subsidiary here. You’ll also discover how taxes in Hungary are calculated and what benefits you might receive if you move here to work or open a business here.
Corporate tax is a tax on the earnings of a company. As a company owner, you will be liable to pay tax on your company’s profits. You can reduce your tax bill by taking advantage of deductions, credits and other tax-reducing strategies.
The corporate income tax applies to companies established under Hungarian law; foundations, associations and non-resident taxpayers performing entrepreneurial activities in Hungary.
Hungarian companies must register with tax authorities immediately after registration and automatically receive a tax number. Resident companies income is subject to corporation tax of a flat rate of 9%, whether obtained in Hungary or abroad.
If a company makes no profit, it still may have to pay corporate income tax on the income minimum as tax base. If the pre-tax profit or the tax base fails to reach the profit minimum, the taxpayer either has to make a statement, or apply the income minimum as a tax base that is generally 2% of the total revenue.
Dividends are tax-exempted if the owner is a corporation. The absence of taxes on dividends, along with the low rate of corporation tax gives Hungarian companies a unique tool for creating businesses.
Corporate Tax Rate
The corporate tax rate in Hungary is 9%, the lowest in Europe, and losses can be carried forward for 5 years with a limit of 50% of current year taxable income. Losses may not be carried back.
Corporate Tax Season
Here’s the most important rules of Corporation Tax:
- business associations are required to file their corporate tax returns and pay corporate tax by 31 May following the tax year
- if the taxpayer opts for a different tax year, the filing and payment deadline is the last day of the fifth month after the last day of the business year
- Tax credits: related to funding film making and performance arts (verified by professional authority)
- interest allowance for small and medium businesses (loan agreements for purchasing assets, where the amount of the allowance is the paid interest)
Corporate Tax deductions
There are generous rules concerning tax deductions, as all expenses incurred in the course of generating taxable income may be deducted (in addition to losses carried forward). Moreover, Hungarian companies can deduct 50% of their royalty income provided that this deduction does not exceed 50% of the company's total pre-tax profits.
There are no withholding taxes on payments of dividends, royalties, interests, fees or branch profits remittance made to non-resident companies, a 15% may apply on payments to non-resident individuals.
The lowest corporation income tax in the EU along with the Local Business Tax that can be 0% makes Hungary a prime business and investment destination, a real cost-effective base in Europe.
Value Added Tax (VAT)
In addition to income tax, companies will also have to pay Value Added Tax (or VAT). This is a consumption tax that is applied to the supply of goods and services.
What is VAT?
Basically, VAT is charged on the purchase and sale of goods in Hungary, with the goal of raising money for the government.
It might sound strange that a country exports goods (such as cars or food) and then charges VAT. But the goods are being bought and sold within the country’s borders. So the government can claim the tax unless the goods are exported.
Hungarian companies register for VAT (Value Added Tax), and receive their VAT number right after they have been incorporated. After receiving the Hungarian VAT number, the European VAT number and EORI number can be obtained.
The Hungarian VAT law is in line with the VAT directive of the EU. The scope of the VAT covers the following:
- sales of products
- providing services
- procuring products (and services) within the European Community and importing products (and services)
VAT rate in Hungary
The basic rate of VAT in Hungary is 27% which you might have to pay based on the below, after issuing an invoice, but there is a value of the deductible tax, which you can deduct from the paid VAT at the end of the tax assessment period.
- 27% (the general tax rate)
You could do VAT free business in Europe with a partner, once you both have an EU VAT number. Unfortunately, if you are doing business with someone in Europe who does not have an EU VAT number, you are not entitled to do VAT free trading for used services. Choosing VAT free trading, one will not have the opportunity to deduct the VAT from purchased goods and used services.
- VAT has to be paid between two Hungarian companies
- VAT has to be paid between a Hungarian established company and an individual anywhere in the world
- VAT free trading can take place between a Hungarian established company with EU VAT number and a company with an EU VAT number
- VAT free trading can take place with a Hungarian established company with EU VAT number and a US company with a tax number
VAT refund - frequency of filing VAT returns
- quarterly (general rule) – Starting Companies have to report VAT on a monthly basis.
- monthly, if the annual consolidated sum of the difference between the total tax payable in the second year preceding the relevant year and the tax deductible during the same year is positive and at least 1 million HUF and monthly for new corporations from 01.01.2015 in the first 2 years
- annually, if the aforementioned difference was less than 250.000 HUF (either positive or negative) and the amount of annual services and goods sold is less than 50 million HUF and the taxpayer has no community tax number
- the taxpayer is required to change from quarterly to monthly filing if the consolidated tax accounted from the beginning of the year is positive and has reached 1 million HUF
- deadline for filing VAT returns (and paying VAT / claim for refund): till the 20th day after the VAT period
- Intrastat report: monthly, if the procurements or sales reached 100 million HUF within the Community; deadline is the 15th day of the following month
GET YOUR VALID VAT NUMBER IN 48 HOURS!
The full on-line procedure during the company formation provides fast validation to the new company's European VAT number. We also assist you to get EORI number and personal Tax ID in Hungary.
Personal Income Tax
Tax season is a stressful time for many people. If you’re living in Hungary and are working there, you will need to pay attention to the tax laws of Hungary. There are different taxes that you will be responsible for paying, depending on your income and other factors.
What is personal income tax
If you are a resident or work in Hungary, you must file an income tax return with the appropriate government agency. Failure to file these returns can result in serious consequences, such as fines and other penalties.
Personal income and company taxes
- Taxpayers with Hungarian residence have tax-paying obligations for their income originating both from Hungary and from abroad.
- Non-resident businesses are only taxable on activities conducted at their Hungarian branches (foreign entrepreneur), and proceeds from the sale or withdrawal of their shares in a company that owns real estate.
- Resident for corporate taxation purposes
- business associations (such as public limited companies, private limited companies, limited liability companies and limited partnerships) including among others non-profit businesses and regulated real estate investment companies
- law offices
- foundations, public foundations
- institutions of higher education
Personal income tax rates - Single member companies
- Resident taxpayers shall be subject to tax liability in respect of all their income (all-inclusive tax liability). The tax liability of non-resident private individuals shall apply to income that originates in Hungary, or income taxable in Hungary on the basis of an international convention or mutuality.
- ‘Resident private individual’ means:
- any citizen of Hungary (with the exception of dual citizens without a residence or a place of stay in Hungary)
- citizens of EEC member states if residing in Hungary for more than 183 days in a year
- citizens of third countries with residence permits
- persons with residence only in Hungary
- tax rate is 15% of the tax base
- private individuals are required to file their tax returns for the tax year (identical to the calendar year)
- employers are required to file monthly tax returns for tax computed and remitted
Local Business Tax
The local business tax is payable by all entrepreneurs whose registered office or branch office is located within the jurisdiction of the municipality.
- tax base:
- net sales revenues
- cost of goods sold
- value of services sold (intermediated)
- value of subcontractors’ performance
- direct cost of research and experimental development
- material costs
- tax rate varies, but the max. rate of the local business tax is 2%
- The local business tax return has to be filed and paid by 31 May of the year following the relevant year.