Minimum wage regulated until 2027

From 1 January 2025, the minimum wage will increase by 9%, and the guaranteed wage minimum by 7% in Hungary. This means the minimum wage will be HUF 290,800 gross per month, while the guaranteed wage minimum will be HUF 348,800 gross per month. Agreements were also reached to increase the minimum wage by a further 13% and 14% in 2026 and 2027 respectively. The aim is to reach 50% of the average wage in three years. 

Changes to fringe benefit rules for housing

Perhaps the most significant change to the fringe benefit rules in Hungary is that employers can contribute to housing loan repayments and rental costs of employees under 35 years of age at a reduced tax rate on the grounds of a housing benefit. The benefit is granted based on the 28% tax rate applicable to SZÉP cards, up to HUF 150,000 per month, or the pro rata part of an annual sum of HUF 1,800,000. The benefit may not exceed the employee’s verified spending on such grounds. This element will be optimally integrated into fringe benefit schemes, thereby avoiding any inequalities that might arise between those eligible and those ineligible.

Also linked to this housing objective is the possibility in 2025 for employees to use the funds on their voluntary pension fund account as of 30 September 2024 to buy or renovate a home. Since this option applies to existing funds, it does not necessarily affect the 2025 benefit scheme, but it may be useful to inform employees about it.

The third amendment to the fringe benefit rules, also for housing purposes, is that 50% of the funds on a SZÉP card as of 1 January 2025 or transferred thereafter can be used for home-renovation projects. This could further increase the appeal of the already popular SZÉP card among employees.

Yet another change in the fringe benefit rules affecting SZÉP cards is that in addition to the general annual allowance of HUF 450,000, an Active Hungary wallet will be created, which can be credited with HUF 120,000 per year at a reduced tax rate. This amount can be used specifically for services linked to leading an active lifestyle.

Zoo and gym

Among the more limited changes to the fringe benefit rules, from 2025 – in addition to admissions to sporting and cultural events – it will now also be possible to offer tax-free admission to the zoo. Services offered by the payer through providing free or reduced-rate use of a sports facility (e.g. a fitness gym in the office building) and the sports equipment therein could also become tax-exempt in Hungary.

For more details and up-to-date information on the changes to the fringe benefit rules, as well as advice on how to incorporate them into your company’s benefit scheme, please contact the colleagues of our HR services business line!

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Accounting, taxation, dividends: all possible in foreign currency too

Inflation and the fluctuation of the forint exchange rate have an impact on all economic actors in Hungary. Companies in Hungary often choose accounting in a foreign currency to avoid unfavourable exchange rate changes. If possible, businesses tend to determine figures in their contracts in a foreign currency, which they then convert into forints upon the performance date, or, by agreement, they invoice in the foreign currency to their Hungarian or foreign clients.

Given the state of emergency, as a special measure the government allowed payments of corporate tax in US dollars or euros. Businesses have to report such changes to the tax authority by the first day of the month preceding the first day of the first fiscal year after 30 September 2022. The amounts of corporate tax or corporate tax advances paid in US dollars or euros are credited to the company’s tax account in HUF on the day the company’s domestic bank account is debited, at the exchange rate of the National Bank of Hungary on the given day. Companies can change their selection up to the last day of the fiscal year if they want to pay corporate tax or corporate tax advances in HUF again. 

As of 1 January 2023, in addition to corporate tax, local business tax can also be paid in US dollars or euros in Hungary.

Your company can pay private individual owners dividends or interim dividends as approved by the members’ meeting or general meeting by converting such into a jointly agreed currency, such as from HUF to EUR. What about salaries and wages? Can paying salaries in foreign currency be a viable solution for employers faced with the challenges of wage inflation? Did the situation change with the amendment of the Hungarian Labour Code in December 2022?

Salaries in foreign currency only for executives?

Pursuant to Article 154 of Act I of 2012 on the Hungarian Labour Code (Labour Code), salaries must be determined and paid in HUF in order to protect salaries. Deviating from this is only possible if working abroad, or if otherwise provided by law.

For executive employees, for example, a derogation is authorised under Article 209 of the Labour Code, based on which it is possible to determine and pay salaries in foreign currency too. In practice, this means that executives, company directors, managers, branch managers or other employees classified as managerial staff can have their salaries set in euros. However, since many aspects have to be taken into account (such as wage protection in light of currency fluctuations) and understanding the legislation is not a simple task either, you should not delve into amending work contracts before consulting with an expert.

It is important to know, however, that taxes and contributions deducted from salaries and paid on top of salaries must always be determined, deducted, declared and paid in HUF, even if the salaries are paid in foreign currency. For this conversion, the business entity must use the exchange rate published by the National Bank of Hungary on the 15^th day of the month preceding the month of payment, in accordance with the Act on Personal Income Tax. These rules are not affected by the amendment to the Labour Code adopted in December 2022, so they will remain in force this year.

So the situation has become somewhat contradictory: while a salary determined in euros would currently protect wages better, it is the rule on wage protection that is preventing this.

Instead of paying salaries in foreign currency, employers have no choice for non-executive employees but to compensate for wage inflation in the form of bonuses or other benefits, in forints of course.

The payroll team at WTS Klient Hungary has been carrying out payroll activities for large international companies for nearly 25 years, and has huge experience with taxation and accounting issues related to foreign employment too. If you have any questions regarding payment of salaries in foreign currency or any benefits, or if you would like to entrust us with the entire payroll activity for your company, please contact us for a proposal.

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Conditions of tax-free bicycle use

However, tax-free bicycle use is subject to strict conditions in Hungary. For example, it matters who gives the bicycle to whom. The tax-exemption is applicable for use ensured by the paying agent. The good news, though, is that tax-free bicycle use can be provided not just for employees, but also for their family members, private individuals engaged with the paying agent, as well as managing directors and members not in an employment relationship.

Another condition is what type of device can be handed over tax-free. The Act on Personal Income tax does not define the term “bicycle”, so we have to consider the definition set out in the Hungarian road traffic rules, according to which a bicycle “is a vehicle with at least two wheels powered by the user and potentially aided with an engine of up to 300W”. The tax-exemption does not apply to scooters and mopeds.

The legislator exempted the use of bicycles from tax, so if the employer transfers ownership of the bicycle to the employee or another individual, this will not be deemed a tax-free benefit. On the other hand, it is not necessary for the paying agent to own the bicycle: tax-free bicycle use is also lawful if the paying agent rents the bicycle or uses a bicycle sharing service. In the case of tax-free bicycles, the given bicycle does not have to be assigned to a specific user, it is also possible for the bicycles always to be used by the individuals who need them at a given moment.

If the above conditions are met, tax-free bicycle use could also be applicable even if the private individual uses the benefit exclusively for private purposes.

Tax-free bicycle use in other tax laws

Tax-free bicycle use appears not only in the Act on Personal Income Tax, the Corporate Tax Act of Hungary was also amended as of 1 January 2022. The costs incurred by acquiring and operating the bicycles are deemed business-related costs.

As a general rule, based on the Hungarian VAT Act, the VAT on purchased bicycles can be deducted by the company, if it has a right to deduct VAT and the product is used for business purposes. If a bicycle is used entirely for the business purposes of a company, for instance a courier company uses a bicycle for delivery services, the VAT on that can be deducted in full. If a bicycle is used for business as well as private purposes, the VAT can be deducted at the ratio the asset is used for business purposes. So for example, the VAT on bicycles received and used exclusively for commuting and free-time activities may not be deducted.

The payroll team at WTS Klient Hungary has been carrying out payroll activities for large international companies for nearly 25 years, and has diverse experiences with fringe benefit systems too. Feel free to contact us if you have any questions regarding tax-free bicycle use or any other issues related to tax-exempt benefits, or would like to entrust us with your company’s payroll activity.

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Grounds for refusal from small business tax

Firstly, it is worth clarifying what the grounds for refusal are that mean you shouldn’t waste your invaluable time with further calculations. When making calculations for transitioning to KIVA, the main factors you must consider are the headcount limit of 50 employees and the figures of your related companies. If you manage to negotiate these and some other, less deal-breaking conditions, you can start calculating the real tax-saving potential.

Framework conditions for 2021

We can make relatively safe calculations for the first half of 2021. The small business tax rate will be 11%, while corporate tax will presumably remain at 9% during this period in Hungary. So during the calculations you have to assess whether your gross wage cost or your corporate tax base will be significantly higher. This is because by choosing the KIVA you will most certainly “get rid of” the 15.5% social contribution tax and the 1.5% vocational training contribution (a total contribution burden of 17%). This way, with a roughly identical gross wage cost and corporate tax base, the 11% small business tax will be more beneficial even if it must be paid not only instead of the contribution burden but also instead of the 9% corporate tax. Your tax savings will be reduced, but not entirely eliminated, by the fact that in this case the 17% contribution burden will not reduce your pre-tax profit, which also qualifies as the KIVA tax base (assuming in all these cases that a dividend payment resolution has been issued on the final profit).

“Unfortunately”, in the second half of the year the social contribution tax rate may be reduced in Hungary, which is driven by the government’s agreements with employers and employees if certain conditions are met. If the social contribution tax is decreased by two percentage points, it will already eliminate some of the benefits of the small business tax. Yet the savings of the first half year are secure, while the reduction of the social contribution tax has – albeit with a half-year delay – previously reduced the small business tax rate as well on two occasions. This way you do not have to be worried even after one year that you will be negatively impacted by changing to the small business tax.

Items modifying corporate tax base and role of corporate tax allowances 

This scenario, i.e. that making the switch will most probably be beneficial if gross wages are identical or higher than the corporate tax base, is turned completely on its head by the distorting impact of the items reconciling the corporate tax base and possible corporate tax allowances. It suffices to think about the double (sometimes triple) deductibility of the costs of research and development activities, or the tax allowance for supporting spectator team sports, to see that it is not enough just to match the two amounts mentioned in last year’s annual financial statements to reach a decision. You have to thoroughly examine how your pre-tax profit and the actual corporate tax base relate to each other, and to what extent this impacts on your otherwise seemingly simple calculations.

Companies reinvesting profit – real tax benefit?

For our virtual calculations so far, we have taken into account the corporate tax base as one factor when determining the tax difference. It is also worth considering, though, what happens if your profit is not withdrawn from the company and disbursed in the form of a dividend, but is transferred to retained earnings and left in the company for development purposes in the coming years.

Since the KIVA base only comprises the profit defined as the dividend payment, it is clear that the small business tax represents a veritable tax saving if the dividend is not paid, as your company only pays the 11% wage cost instead of the 15.5% social contribution tax, the 1.5 % vocational training contribution and the 9% corporate tax. You should also note though that this saving is not final, since the profit held in the company and subsequently paid out as a dividend will also be part of the KIVA base, so here we are rather talking about an interest-free tax loan than a true tax benefit. On top of that, if the undistributed profit is used to finance investments, according to current rules it is possible as a corporate taxpayer to recognise the entire profit in the development reserve, which also results in an interest-free tax loan.

Small business tax from the government’s perspective

It is clear that the Hungarian government’s obvious intention is to increase the number of companies in the small business tax system. The reason for this might be that this tax type is much easier to calculate in terms of revenue flowing into the budget than corporate tax revenues, which fluctuate owing to the multitude of items reconciling tax bases as well as the tax allowances; what is more, this serves an important economic and political goal very well, namely, supporting parts of the SME sector which generate smaller profits but have high labour demands.

Despite all this, we suggest that before reaching a decision to switch you should make some thorough calculations for several years to support the move. You should also note that if you later want to return to corporate taxation, different rules will apply for that transition, meaning it can easily happen that an acquired tax benefit will be reduced or eliminated by the tax difference payable upon moving back.

Our taxation experts are happy to provide you with information about the rules for changing to the small business tax and about returning to corporate taxation, as well as about any other aspects for consideration when making the decision. Feel free to contact us.

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Special regulation for supply of goods and services free of charge during state of emergency 

Due to the coronavirus pandemic the Hungarian government declared a state of emergency for the entire country on 11 March 2020. In light of this, besides the tax laws related to the classification of free benefits, the regulations of Act CXCIV of 2011 on the Economic Stability of Hungary (Stability Act) also became applicable.

Pursuant to the Stability Act, any services or goods supplied free during the period of a disaster for people impacted by the disaster with the purpose of averting or mitigating the consequences of the disaster is considered an activity which the legal entity conducts as part of its business and economic activities. No tax payment liability arises if the entity reports this to the tax authority within 60 days that is competent regarding the payment obligation, and provides information on the description of the supplied service or goods and their quantities (it is worth remembering here that the state of emergency started on 11 March). No standard form is available for this report. It can be submitted in any format, by post or on the e-Papír app, with reference to the Stability Act. The 60-day deadline starts on the day the free supply is performed, with the provision that if it is a continuous supply, then the deadline starts from the day of the last delivery. To facilitate compliant reporting, the Hungarian Tax and Customs Administration will publish a sample reporting form on its website.

According to information from the NAV, the applicability of the Stability Act must be reviewed on a case-by-case basis, and the proper exercise of rights must be adhered to during the review. The fact that a state of emergency was declared in Hungary does not mean that every private individual is considered to be directly impacted by the state of emergency. Healthcare workers, students compelled to study in a digital system, or employees working from home instead of in an office are not treated the same way from this perspective.

Personal income tax

Compliance with the conditions set forth in the Stability Act must be examined on a case-by-case basis with regard to personal income tax too, and the reporting obligation must be considered when claiming tax-exemption as per the act too.

Healthcare

Disinfectants, masks, free shared car use and meals granted free of charge as well as accommodation provided cost-free for healthcare workers to facilitate their work during the state of emergency can be supplied free of tax.

Education

Providing laptops for students who are compelled to study under the digital education system due to the pandemic may comply with the rules of the Stability Act (for instance if a student is unable to study without the device). Private individuals who lost their jobs as a result of the state of emergency can be classified in a similar way, and providing a laptop for them could facilitate their retraining and re-employment.

Office work

For devices and products provided for employees carrying out their office work from their “home offices”, the application of the exemption rule is limited. For example, giving a laptop to an advisory-firm employee working from home (transferring ownership of the device) will most probably not help directly to avert and mitigate the disaster, while the person receiving the benefit may not necessarily be considered a person directly impacted by the disaster, so in this case the exemption rule cannot be applied. This is because transferring ownership of the laptop is not justified, since they can work just by being able to use the laptop too (use, however, is not taxable).

Commerce

If, for instance, an employer operating a retail store makes the wearing of masks and other protective equipment compulsory for its employees to prevent the spread of the virus, and supplies these free of charge, then no taxable income is generated for the employees with regard to this benefit in the given pandemic. If the same business places masks at the entrance and obliges its customers to wear them, the free supply of the masks does not entail a tax liability since the private individuals do not acquire the masks as assets with a purchase price and value, and they are freely available (without charge) for anyone (present in the store).

Corporate tax and small business tax

To treat expenses arising during the state of emergency as eligible costs, the above-mentioned statement must be submitted to the competent Hungarian tax authority.

The state of emergency conditions are not met with regard to the benefit:

• If the free benefit is received by the employee or the relative of an employee of the company (for instance the employer provides computer devices for the digital education of its employees) and this is recognised as other staff costs from an accounting perspective, the expense is an eligible cost under the CDT Act (i.e. deductible for tax purposes).
• If the person receiving the benefit is not an employee or a relative of an employee (private individual), then Appendix 3 of the CDT Act must be applied for classification as an eligible cost.

If the supply of goods and services free of charge is connected to the state of emergency, though not received by a private individual, but by an organisation (such as a company, a foundation, an association, a public institution), the deductibility may also be based on the Stability Act. If the conditions are fulfilled, the tax base does not have to be increased. For benefits not related to the state of emergency, the circumstances must be reviewed separately for each case since the deductibility of the cost may depend on who the beneficiary is.

Value added tax

In the Hungarian system of value added tax a complex analysis must be conducted with regard to the legal status of the provider (taxpayer or not, VAT-exempt or not), the beneficiary (exposed or not), and the detailed rules applicable for the benefit (definition of low-value gift, public donation, range of products ruling out tax-deduction right, etc.) to establish whether the benefit is subject to VAT and whether the VAT of the related acquisitions is deductible.

The Stability Act is applicable for VAT, which means that the supply of goods and services free of charge entails no VAT payment obligation if compliant (the reporting obligation, however, should not be forgotten here either). Exercising the right to deduct VAT with regard to the supply of goods and services free of charge must be reviewed individually for each case (supplies where VAT is not deductible anyway, e.g. hot meals, may not be subject to any VAT deduction under the state of emergency either, and the supplies of goods and services connected to the acquisitions must be recognised as taxable transactions anyway).

If a similar supply of goods and services free of charge has occurred at your company too in the last two months, we recommend you thoroughly review the taxation consequences. If you need an expert for the complex review, feel free to contact the tax advisory team of WTS Klient Hungary!

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Employee training may be a solution, particularly when training costs can be paid by businesses tax-free or under even more preferential terms.

Forms of employee training

Employee training can take place:

• when prescribed by the employer – in this case the employer makes a unilateral decision on the training and pays the direct training costs,
• based on a study contract – the employer and the employee agree jointly on the terms and conditions in writing,
• without a separate contract between the employer and the employee – in this case the employer only pays the fees it committed to.

The selected form of employee training is important not only for the purposes of applying labour law but also other laws and regulations.

Under Act CXVII 1995 on Personal Income Tax (the “PIT Act”) in Hungary, employee training can take place both within and outside of a school system. Only training outside the school system or training-on-the-job can be exempt from personal income tax (more precisely, no revenues are generated during its use), if the training complies with Section 4 (2a) of the PIT Act, i.e. if the training is used within the scope of performing work or an activity, as a precondition for carrying out the job.

It is possible for the education and training to take place in another city or even country, either because the given training is only available there or the desired results are achieved at the given training location more quickly (e.g. an intensive language course abroad). If the training complies with the terms of official business trips as per the PIT Act, then the travel costs and the accommodation costs (including the mandatory breakfast) may be exempt from personal income tax. Payments for other meals, programmes as well as mandatory or voluntary daily allowances, etc. may not be tax-exempt.

Computer use and library registration fees provided by the employer free of charge or under preferential terms can help people successfully complete their studies, but both benefits can be provided free of personal income tax, even independently of the training.

Based on Section 14 of Schedule 3 to Act LXXXI of 1996 on Corporate and Dividend Tax in Hungary, the cost borne by the payer qualifies as a business-related cost.

How can paying costs arising during the employee training be even more preferential than tax-exempt status?

A business-owner can settle the vocational training contribution not only by paying the contribution to the tax authority, but also by organising training for its own employees. In the case of training complying with the conditions defined in Section 5 of Act CLV of 2011 on Vocational Training Contributions and Support for Training Development, given that the costs specified in a separate ministerial decree can be deducted, the business can decrease the amount of the contribution or claim back any contribution that was already paid.

Practical training or traineeships organised as part of a basic course with a significant practical element or dual training are good opportunities to train workers in line with the needs of your business. Various tax and contribution allowances can be claimed in respect of the fees paid to those participating in such training.

WTS Klient Hungary continually monitors the changes to Hungarian laws and regulations regarding the obligations of employers and employees, and regularly reports on these in its articles. If you do not want to miss out on the latest news, please follow us on Facebook!

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