According to the government decree entering into force on 1 July, natural persons have to pay social contribution tax on the part of the interest income under Section 65 of the Personal Income Tax Act – with the exception of interest income from real estate fund units – that is taken into account as the basis for personal income tax on interest income.

What was the situation so far?

Previously, there were several types of taxable income on which no social contribution tax was payable. These included interest income, which is now subject to a 13% social contribution tax, or income from controlled capital market transactions and crypto currency income, which will continue to be taxed at just 15%. As a general rule determined several years ago, the tax liability on returns from securities held in a long-term investment account is lowered from 15% to 10% after three years, and to 0% after five years, meaning that after a certain time there was no tax liability at all, and under the new rules, no social contribution tax liability will be imposed on this income either. The same applies to long term pension saving accounts.

Who is affected by the new social contribution tax on savings?

The new social contribution tax on savings will mainly affect Hungarian individuals, and foreigners who are Hungarian tax residents. The government decree does not apply to companies.

What is it paid for?

The social contribution tax on savings is payable on deposits with banks, interest on sums held on current accounts, on bonds if interest is paid on them, and on the return from insurance settlements, so on almost every type of interest income.

What is it not paid for?

There will be no social contribution tax on savings in the case of government bonds, and the returns from real estate funds will not be subject to the 13% tax either.

Interest on member loans is treated differently from the above. The Personal Income Tax Act only includes cooperative member loans under taxable interest income. If a Hungarian company has extended a member loan to its Hungarian owner and pays interest to the individual on it, this counts as earned income in respect of this relationship. By definition, it is not interest, so it does not fall under the scope of the Social Contribution Tax Act on this basis, but the details of the member relationship must be examined and personal income tax and social contribution tax must be accounted for accordingly.

When do you have to pay?

The government decree enters into force from 1 July, so if your money is sitting on a current account, you will have to pay the 13% extra tax on any interest earned on that current account after 1 July. For fixed-term deposits, the additional burden applies to deposits fixed after 30 June, and in the same way for securities, to interest on securities acquired after the decree enters into force, furthermore, to insurance settlements of insurance contracts concluded after the decree enters into force.

Due to the nature of the tax changes brought in by this decree, and the lack of consultation and opinions given the swift decision process, there are still many uncertainties and unanswered questions surrounding the social contribution tax on savings. Our tax specialists, however, will be happy to provide more information to our clients and delve into the more complex tax situations. Feel free to contact us.

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Apart from the changes to the Slovakian VAT rules effective from this year, on 18 September 2019 the country’s Parliament adopted also a proposal of the Ministry of Finance of the Slovak Republic to amend the Slovakian Income Tax Act (Act No. 595/2003 Coll. on Income Tax). Most provisions of the extensive amendment became effective on 1 January 2020, while others take effect only from 1 January 2021 or 2022. Below we highlight some of the key changes of the Slovakian Income Tax Act which are already in force.

Non-taxable part of tax base for natural persons

According to the new Slovakian Income Tax Act, from 1 January 2020 the non-taxable part of the tax base increased from the minimum subsistence figure multiplied by 19.2 to the minimum subsistence figure multiplied by 21. The new minimum subsistence figure valid from 1 July 2019 to 30 June 2020 amounts to EUR 210.20 for one adult natural person. Thus, the new non-taxable part of the tax base for 2020 amounts to EUR 4,414.20, while for 2019 it amounted to EUR 3,937.35, meaning this change implies a decrease in tax and a simplified calculation.

Applying non-taxable part of tax base

In connection with the amendment to the Slovakian Income Tax Act, the application mechanism of the non-taxable part of the tax base for natural persons has been supplemented. The previous regulation did not specify the procedure. Under the new regulation, the non-taxable part of the tax base should first be applied to income from employment, and then only the remaining part can be deducted from the tax base stemming from business activities or self-employment.

Change of income tax rate for natural persons and legal entities

The amendment also lowered the previous 21% tax rate for entrepreneurs (both natural persons and legal entities) to 15% under the following conditions:

• Legal entities apply the 15% tax rate to the tax base reduced by a tax loss if their income (revenue) does not exceed EUR 100,000 over the taxation period; otherwise the tax rate of 21% shall be applied.
• Natural persons (entrepreneurs) apply the 15% tax rate to the tax base reduced by a tax loss if their income from business activities does not exceed EUR 100,000; the excess amount is taxed at 19% or 25% depending on whether or not it exceeds the minimum subsistence figure currently applicable multiplied by 176.8.

Others changes to the Slovakian Income Tax Act

Apart from the above-mentioned elements, further changes to the Slovakian Income Tax Act took effect on 1 January this year. To remove barriers to the sustainable development of the automotive industry in Slovakia for example, new rules for the depreciation of electric vehicles came into force. Furthermore, some measures of the Council Directive (EU) 2017/952 regarding hybrid mismatches with third countries (ATAD 2) have been implemented as part of the amendments.

If you want to know more about the details of the described changes or other amendments to the Slovakian Income Tax Act, we recommend you visit the website of Mandat Consulting, k.s. and contact the local WTS experts in Slovakia.

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