One of the strangest elements of the tax amendment rules in 2017 in Hungary was undoubtedly the financial allowance given as part of the cash benefit system, which qualifies as a fringe benefit and as such is subject to favourable taxation.
Until 2017, the purpose and provision method of the individual fringe benefits were clear, but the cash benefit not exceeding HUF 100,000 (EUR 320) per year raises several issues. This summary is for those who have already boldly introduced the cash benefit, and also for those who are just considering it.
The fringe benefit system in tax laws
The fringe benefit system is not defined in any of the Hungarian tax laws. According to the brief and apt description of the Central Information Department at the NAV, a fringe benefit system is an optional flexible benefit system compiled by the employer which can be given to employees over and above their salary. The employer has to define the types of benefits it provides for its employees in its fringe benefit policy.
Why is the cash benefit system advantageous?
Section 71 of the Act on Personal Income Tax provides for fringe benefits. One common trait of the benefits is that they can be granted under favourable tax rates, and the tax is paid by the payer, in contrast to employment-related tax. The base of the tax payable by the payer is the given income x 1.18, which is then subject to 15 percent personal income tax. In addition to the tax, the payer also has a 14 percent health care contribution payment obligation on the tax base. All of this results in a 34.22 percent tax liability. In addition to the favourable taxation, it should not be ignored that the benefit results in no additional administration, apart from being aligned into the fringe benefit policy and defining the scope of beneficiaries (in the case of fringe benefits in 2016 for example, the provision of public transport passes or the back-to-school support clearly entailed more administration).
What should you look out for with the cash benefit system?
The annual allocation is HUF 100,000 (EUR 320) if the employment lasts for the whole year. If the employee is employed only for part of the year, then the HUF 100,000 (EUR 320) is paid in proportion to the number of days spent in the employment providing eligibility for the fringe benefits.
The employer can disburse the benefit either in one amount or in instalments, at its discretion. If the cash benefit exceeds the allocated amount, the excess portion becomes taxable based on the legal relationship between the parties, as income from employment, over and above the employment taxes and contributions. Consequently, an amount paid in one lump sum at the beginning of the year may result in additional administration if the employment of the employee is terminated during the year, and the portion exceeding the proportional amount has to be corrected and a self-revision is needed.
What kind of issues may arise?
During a potential tax authority inspection, can the Hungarian tax authority qualify the allowance under the cash benefit system as a hidden salary increase? Based on what factors will the tax authority inspect the fulfilment of the conditions of the cash benefit? Employers who gave a gross salary increase in 2017 for example, in addition to providing a cash benefit, will face a different risk level. There might be companies which previously had not used the fringe benefits system, but in 2017 would like to give the maximum cash benefit by rolling out a fringe benefit system, though not giving a gross salary increase at the start of the year. In their case, as the saying goes, it’s a close-run thing. The risk of re-qualification as salary income is more likely if there is gross salary decrease for employees parallel to the introduction of the cash benefit system.
So when making the distinction from the salary, the taxpayer has to pay special attention to documenting the benefit. One of the basic principles of the Personal Income Tax Act is that no fringe benefit or other benefit can be given as consideration for an (independent or non-independent) activity. When defining the tax liability of the benefit, the legal relationship between the parties and the circumstances of obtaining the income will always have to be taken into account.