Taxation of foreign individuals in Hungary
For foreigners staying, intending to settle, working or earning income from Hungary, one of the most important questions is where and how they will be taxed on their income earned as individuals.
Act CXVII of 1995 on Personal Income Tax states that, the provisions of an international treaty shall apply if an international treaty promulgated contains provisions that differ from the provisions of the Income Tax Act [Section 2(5) of the Income Tax Act].
This means that if there is a bilateral treaty in force between two states to avoid double taxation, the income of the person concerned must be examined on the basis of the provisions of the treaty.
Therefore, the application of the Hungarian Income Tax Act can only take place if it results from this double taxation convention that the person is taxable in Hungary either on all his/her income or on certain income of his/her. In that case, he/she will be taxed according to the relevant rules of the Hungarian Income Tax Act.
Double taxation conventions are designed to prevent some or all of an individual’s income from being taxed in two countries at the same time.
It follows that the personal scope of these conventions covers individuals who would be resident in one or both contracting states under the tax laws of both states.
Therefore, it is also advisable to examine first of all whether the convention presumably applicable is certainly applicable to the foreign person in question in relation to his or her income.
It is therefore also necessary to examine the possibility that the individual may not be a tax resident in a third state instead of in the other state. In that case, the tax treaty between Hungary and that third state on the avoidance of double taxation should apply.
If we are sure that we are applying the appropriate double taxation convention, then the convention will say which country is entitled to tax all or some of the individual’s income, i.e. in which country the individual is resident for tax purposes.
Typically, one of the most important parts of double tax conventions is to define what is meant by the tax residence of an individual by both states.
This ensures that in all aspects it can be excluded with absolute certainty that a person is considered to be a resident of both contracting states and thus tax resident in both states.
Thereafter, the provisions of the convention specify exactly which of the two states is the taxing state for all or some of the individual’s income, i.e. which state’s tax law is applicable.
If Hungary does not have a double taxation treaty with the foreigner’s presumed tax residence state, the consequence is that there is a possibility of double taxation, and the relevant rules of the Hungarian Personal Income Tax Act are applicable to the foreigner’s income.
As a first step, it must be established whether the foreign person is a foreign or a domestic tax resident under the Income Tax Act.
This is particularly important because the Income Tax Act extends to all income of all foreign and domestic individuals, just in a different way.
Personal Income Tax Act Section 2 (1) :
The scope of the Act covers the individual, his income and the tax liability relating to that income.
The 2 (4) of the Income Tax Act specifies how this is to be understood.
The tax liability of a resident individual covers all his income (full tax liability).
The tax liability of a non-resident individual extends only to the income derived from within the country by virtue of the place of source of income or otherwise taxable in Hungary under an international treaty or reciprocity (limited tax liability).
In the case of Hungarian tax residents, income earned anywhere in the world is taxable in Hungary and taxed according to the rules of the Income Tax Act.
In contrast, the tax liability of foreign tax resident individuals is limited: it covers only their income derived from domestic sources based on the place of source of income or otherwise taxable in Hungary under an international treaty or reciprocity.
2nd point of Section 3 of the Act defines who qualifies as a resident individual and 3rd point of Section 3 of the Act defines who qualifies as a non-resident individual.
Considered a resident
- a) a Hungarian citizen (unless he/she is also a citizen of another state and does not have a domicile or residence in Hungary as defined in the Act on the Registration of Personal Data and Address of Citizens);
- b) a natural person who exercises his/her right to free movement and residence for a period exceeding three months within the territory of Hungary for at least 183 days in a given calendar year, counting the day of entry and exit as a whole day, as defined in the Act on the Entry and Residence of Persons with the Right of Free Movement and Residence;
- c) a person with a settled status or stateless person within the scope of the Act on the Entry and Residence of Third-Country Nationals; and
- d) a natural person other than those referred to in points (a) to (c) who
(da) is domiciled exclusively in the territory of the country;
(db) has his centre of main interests in the territory of the country, if he does not have his permanent residence in the country or has his permanent residence in the country only;
(dc) has his habitual residence in the territory of the country, if he has no or not only a permanent residence in the country and his centre of main interests cannot be established;
the centre of vital interests is the State with which the individual has the closest personal, family and economic ties, and the permanent place of residence is the place of domicile where the individual has settled down to reside permanently and actually resides. Permanent residence does not change if the individual stays abroad temporarily for a longer period.
Non-resident is
a natural person who is not a resident individual, and – notwithstanding the provisions of point 2(c) – a person with a settled status falling under Article 35(1)(e) of Act II of 2007 on the Entry and Residence of Third-Country Nationals, provided that he/she stays in Hungary for less than 183 days in any 12-month period, counting the day of entry and exit as a whole day.
If, due to the absence of a double taxation treaty between the two states, the taxpayer would be taxed in both states on his income, the Personal Income Tax Act allows for the taxpayer to offset the tax paid abroad.
Personal Income Tax Act Section 32 (1) :
If the consolidated tax base for the tax year includes income on which the individual has paid tax abroad corresponding to income tax, the calculated tax shall be reduced by 90 per cent of the tax paid abroad on the income, unless an international treaty provides otherwise, but not more than the tax on the tax base of this income at the rate of the tax.
No amount shall be taken into account as tax paid abroad which is returned to the individual by virtue of a law, an international treaty provision or foreign law from the amount of tax paid on the income.
