The deadline (22 May) for submitting personal income tax returns is fast approaching. For certain types of income it is not always easy to decide whether it should be declared in the return, and if yes, then how. This is particularly difficult for foreigners who are also obliged to submit a tax return in Hungary. In this article we will highlight some of the most common errors.
Personal income tax or property tax
In Hungary, as opposed to many other countries, there is no tax on property, you are only liable for tax on income (as well as paying a duty when acquiring certain properties). This means that properties (e.g. real estate) do not need to be included in personal income tax returns, as there is no tax payment obligation on them, or on any increase in their value.
It is a different matter entirely if you generate income using such property. If you rent out a real estate or sell it, and the income from the transaction exceeds the deductible costs and expenses, that income must be reported and taxed. However, you need to take the location of the property into account as well. If you rent out a property that is not located in Hungary, you need to pay the taxes abroad, since, as we mentioned in an earlier article, the conventions for the avoidance of double taxation essentially allow the income derived from real estate located in a country to be taxed in that country (in the absence of such conventions, there may be a risk of double taxation).
Capital income from abroad
What happens if one of your foreign investments yields income? Tax on such income is often already deducted abroad, therefore we naturally assume that we have nothing else to do here. Unfortunately though, this is not the case.
If a taxpayer qualifies as a Hungarian tax resident, income from interest, dividends or stock-exchange transactions are basically taxable in Hungary. This is true for Hungarian and foreign citizens alike.
Awareness of the double taxation convention between the source country and Hungary is vital of course, but generally speaking, interest and capital gains are taxable in the country of residence. For dividends, the source country also has the right to tax the income, but the rate of the deductible tax is limited.
The easiest way to avoid double taxation is to send an appropriate declaration to the competent foreign financial institution in good time. In this case they will not deduct any withholding tax, or only up to the permitted rate. Consequently, it cannot happen that 25% tax plus a solidarity contribution of 5.5% of the paid tax gets deducted from your interest obtained in Germany, before paying a further 15% tax on it in Hungary. In other words, instead of paying only 15% you are charged tax of 40%, which according to the convention can only be reclaimed through lengthy administrative procedures.
Declaring income taxable abroad
It is possible to find that although you are a Hungarian tax resident, some of your income is taxable not in Hungary but abroad, in accordance with relevant double taxation conventions. Nonetheless, you need to include this income in your Hungarian personal income tax returns too.
Private individuals who are tax residents in Hungary have an unlimited tax liability, which means they essentially need to pay tax on their income earned anywhere in the world. If any such income is not in fact taxable in Hungary pursuant to conventions, you still need to declare this income as tax-exempt in Hungary in your personal income tax return. This essentially means no taxes are paid on such income, but you are obliged to declare it to the tax authority nonetheless.
Income from the sale of movable property
Another common mistake is that we assume no tax has to be paid on the sale of movable properties. This is not always the case though. By law, no tax has to be declared or paid if you sell movable property of no more than HUF 600,000 (roughly EUR 1,900) per year. You are also not obliged to pay any taxes if your income from sales does not exceed HUF 200,000 (roughly EUR 640).
So, it is really important to bear relevant Hungarian, foreign and international legislation in mind when preparing your personal income tax returns.