In an earlier article we outlined how to determine the tax residency of employees. Now, with the help of a double tax treaty between Hungary and the other country concerned, we can establish the country employees have to pay personal income tax in for their incomes earned abroad. Of course, this all applies to the cases where there is a double tax treaty between Hungary and the given country (if there is no such treaty, then specific Hungarian rules must be followed).
For the various types of income, the treaties determine precisely which country is entitled to tax the income – the source country or the country of residence. This does not always mean tax is actually paid, because clearly the given income could be exempt from tax in the country in question.
Let us take a look at the most common types of income.
The first problem often comes when determining the type of income received. Foreign tax certificates frequently do not indicate what type of income we earned. It is often not clear whether the gain on our foreign security is a dividend or interest. Yet we cannot just decide not to define the types of income because this influences the taxes and levies payable. While a dividend generally incurs Hungarian personal income tax of 15% along with a health care contribution (eho) of 14%, the eho payable on interest was just 6% in Hungary until 2016, and from 2017 there is no eho payment liability for interest at all. There is no health care contribution payment liability for securities listed on stock exchanges either.
It is important to know that if a foreign employee does not pay contributions in Hungary because these are paid in another EU Member State (and this is proven), then no eho has to be paid on capital gains either.
In accordance with the double taxation treaties, tax essentially has to be paid in the country of residence on income from interest and exchange gains. This also means that if tax was deducted from interest in the source country, the tax deducted can be reclaimed there. We can avoid the deduction of tax in the first place by submitting a certificate of residence to the foreign bank, verifying Hungarian residency.
There are special provisions for dividend income. While income from dividends is also taxed in the country of residence, the source country has the right to tax this income as well to a certain extent. Depending on the treaty this generally means 10 or 15%. Taxes paid abroad must be taken into account in Hungary. This essentially means for example that if we earn dividend income in Germany, then Germany has the right to deduct tax of 15% under the German-Hungarian double taxation treaty. If this tax is indeed paid and 15% is deducted from our dividend, we can deduct this in turn from our tax payable in our Hungarian tax return. As the Hungarian rate of personal income tax is 15%, this means no further tax has to be paid on the German dividend.
Income from use of immovable property
In the case of income derived from immovable property, the treaties award the taxation right to the country where the property is located. This means that if a foreign employee lets out his home property while working in Hungary, the rental must be taxed in the country where the property is situated, irrespective of whether or not the individual qualifies as a Hungarian resident during his stay in the country.
The same applies to income derived from the sale of property.
Our next article looks at the third main group, income from employment.