In the same way, Hungarian taxpayers found it difficult to pay their taxes on income from crypto assets. However, from 2022, these difficulties seem to be resolved. The bill submitted in May by the Hungarian Ministry of Finance strives to clarify the taxation of income from crypto asset transactions.

What are crypto assets and crypto asset transactions?

The European Parliament and the European Council jointly developed the so-called draft MiCA (Markets in Crypto Assets) regulation that defines crypto assets as digital representations of value or rights which may be transferred and stored electronically, using distributed ledger technology (DLT) or similar technology.

Based on the bill, the Hungarian Personal Income Tax Act will also use this definition. Crypto asset transactions are ones in which the private individual “acquires financial assets other than crypto assets through the transfer of crypto assets” in a transaction available to anybody.

Taxation of crypto assets so far in Hungary

Given that the Hungarian Personal Income Tax Act currently does not include special requirements in connection with crypto assets, the income realised through these has to be taxed as other income. Other income forms part of the aggregate tax base and, accordingly, it is also subject to a 15.5% social contribution tax besides the 15% personal income tax.

If private individuals are obliged to pay the social contribution tax themselves, e.g. if the crypto asset is not acquired from a Hungarian financial enterprise, the base of the personal income tax and the social contribution tax is 87% of the income obtained with the crypto asset. So the overall tax burden in Hungary is 26.5%.

Let’s see how this will change if the bill is accepted. 

The new legislation

If the submitted bill is accepted by the Hungarian Parliament, the income realised through crypto asset transactions will qualify as separately taxed income. The taxation will be similar to that of controlled capital market transactions.

Generation of revenue

As mentioned above, taxation may arise if the crypto asset is exchanged for a non-crypto asset. So the cases when a crypto asset is exchanged for another crypto asset will not qualify as crypto asset transactions for personal income tax purposes, thus in these cases, no taxable income is generated. In the same way, no revenue is generated upon the production (mining) of the crypto asset.

Additionally, no tax has to be paid (no income assessed) if the revenue from the transaction does not exceed 10% of the minimum wage in Hungary. One additional condition is that no revenue should be generated from other identical transactions on the given date, and that the sum of these smaller revenues should not exceed the minimum wage in the fiscal year.

Defining income

When defining income, the revenue achieved from the transaction must be reduced by the amount used to acquire the asset.

What can qualify as an amount used for acquisition? When participating in mining a crypto asset or in the operation of a related system, the expense that arose in connection with such activity (e.g. IT devices, electricity) can be considered an amount used to acquire the asset. However, it is more common to acquire crypto assets through purchasing than mining. In this case, the amount spent to acquire the asset can be deducted from the revenue.

The transactional profits and losses established this way and realised in the fiscal year should be treated in aggregate. Taxable income is generated if the realised transactional profits exceed the sum of transactional losses as well as the fees and commissions related to the holding of the crypto assets, but not directly connected to the transactions of the fiscal year and the given transaction.

Tax equalisation in Hungary 

We can apply the loss carryforwards known from controlled capital market transactions in the case of crypto asset transactions as well. If we incur losses in the given fiscal year during the transactions, in the next two years we can reduce the tax payable by the amount of tax pertaining to the loss within the framework of tax equalisation.

Let’s look at this with a specific example:

Social contribution tax

Considering that the income achieved with the crypto assets will not be part of the aggregate tax base if the bill is accepted, it will not be subject to social contribution tax. This means the previous overall tax burden of 26.5% will fall to 15% in Hungary.

Transitional rules

For those who previously did not declare their income from crypto assets, the bill has a very favourable option in store. Previously unreported income can be declared as a transactional result of 2022, at a more preferential tax rate.

The tax advisory team of WTS Klient Hungary has significant expertise in personal income tax, and has supported its clients regarding the taxes of their foreign employees for decades. Should you have any questions regarding the revenues of a foreign employee from crypto assets and the related taxation, you can certainly count on our colleagues! Please feel free to contact us.

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As written in an earlier article, the Ministry of Finance in Poland published a draft act on 23 October 2018, which introduced a Polish withholding tax reform. The changes were to come into force on 1 January 2019, but the Polish Finance Minister deferred the effective date of key amendments of the Polish withholding tax reform first until 1 July 2019, then again until 1 January 2020. However, just a few days before this date, a further postponement was published in the Journal of Laws (Dz.U.2019 poz. 2528).

Elements of the Polish withholding tax reform already in force

According to the latest official publications, withholding agents will not have to apply the new withholding mechanism in Poland until 30 June 2020. This mechanism requires agents to withhold tax at the standard statutory rates (20% for interest, royalties and intangible services and 19% for dividends) when taxable payments made to the same taxpayer exceed PLN 2 million (roughly EUR 460,000) during a tax year.

The regulation deferring certain parts of the Polish withholding tax reform entered into force on 1 January 2020. However, it will not affect certain requirements that have already been in force since 1 January 2019, including those concerning:

• due diligence verification of conditions for preferential tax treatment, and
• identification of beneficial owners.

Changes in the Personal Income Tax Act

Another regulation was published in the Journal of Laws on 30 December 2019 (Dz.U. 2019 poz. 2529) with effect from 1 January 2020, i.e. the Finance Minister regulation of 23 December 2019 amending the regulation on the non-application or limited application of Article 41(12) of the Personal Income Tax Act. This one postpones the new withholding rules in the Personal Income Tax Act for the period from 1 January 2020 until 30 June 2020. Withholding agents are still required to apply the new Personal Income Tax Act withholding rules to payments made between 1 July 2019 and 31 December 2019.

If you would like to know more about the Polish withholding tax reform, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland.

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Phase-out of health-care contribution

The health-care contribution and social contribution tax are to be consolidated; therefore, a new act on social contribution tax has been introduced in Hungary (Act LII of 2018 on Social Contribution Tax), which will come into force on 1 January 2019. The new law is compliant with the two acts (on health-care contribution and social contribution tax) currently in force, and is practically a mixture of the two.

The rate of the social contribution tax remains 19.5% of the tax base. Although the health-care contribution will be phased out as a tax type, the social contribution tax will be payable in the future instead as follows:

in relation to income taxed separately under the Personal Income Tax Act:

• on fringe benefits [Section 71 of the Personal Income Tax Act],
• on other benefits not considered fringe benefits [Section 70 of the Personal Income Tax Act], and
• on income from interest allowances [Section 72 of the Personal Income Tax Act].

In addition to the above paragraph, a social contribution tax liability (incurring a 14% health-care contribution so far) will arise as follows:

• on income withdrawn from business accounts [Section 68 of the Personal Income Tax Act],
• on income from securities lending [Section 65/A of the Personal Income Tax Act],
• on dividends [Section 66 of the Personal Income Tax Act] and the corporate dividend base [Section 49/C of the Personal Income Tax Act], and
• on income from exchange gains [Section 67 of the Personal Income Tax Act].

The legislation contains a tax rate of 19.5% instead of the 14% health-care contribution so far.

Consequently, the tax payable on these incomes will increase in 2019. Currently, the health-care contribution is only paid until the aggregate amount of the health insurance contribution and the 14% health-care contribution paid in one fiscal year reaches HUF 450,000 (approx. EUR 1,400). From 2019 social contribution tax shall only be payable until the income of the natural person reaches an amount of 24 times the minimum wage in the reporting year. When calculating this income threshold, fringe benefits, other benefits not considered as fringe benefits and incomes from interest allowances have to be excluded. To be specific, 19.5% of 24 times the 2018 minimum wage (HUF 138,000 – approx. EUR 425) is HUF 645,840 (approx. EUR 2,000), which is significantly higher than this year’s ceiling. Additionally, this number will change further due to the change (increase) in the Hungarian minimum wage from 2019.

Changes to social contribution tax allowances

The new act on social contribution tax will partly do away with the tax allowances for employing the under 25s and the over 55s, and the tax allowance for businesses operating in completely free enterprise zones. Nevertheless, new tax allowances will be introduced; this way, allowances may also be claimed for employees with a reduced capacity to work and for civil servants, for example. Tax allowances for those entering the labour market will also be introduced.

Allowances that can be claimed in 2019:

• tax allowances for those working in fields not requiring specialist qualifications and those employed in agriculture
• tax allowances for those entering the labour market
• tax allowances for women raising three or more children and entering the labour market
• tax allowances for employees with a reduced capacity to work
• tax allowances for civil servants
• tax allowances for the employment of researchers
• tax allowances for research and development

Our article does not fully cover the new act on social contribution tax, it only tries to present the most significant changes. Feel free to contact our payroll staff if you have any specific questions regarding the amended act.

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Fringe benefits 

One important element in the fringe benefit changes in Hungary is that the value of the fringe benefit has to be multiplied by 1.18 and this is subject to 15 percent personal income tax and 14 percent health care. Thus the total tax burden fell from 34.51 percent last year to 34.22 percent this year.

From 1 January 2017 the range of fringe benefits that employers can provide was narrowed down, and several elements were transferred to other benefits. In the private and public sectors, the allowances subject to favourable taxation are HUF 450,000 (EUR 1,440) and HUF 200,000 (EUR 640) respectively. These are net values and apply to the amount of the benefit given. The Széchenyi Recreation Card can be granted with the known sub-accounts and limits, while cash can also be paid up to HUF 100,000 (EUR 320) with the same taxes.

Other benefits

A 15 percent personal income tax and 22 percent health care contribution are payable on the value of other benefits x 1.18. Consequently, the total tax burden fell from 49.98 percent last year to 43.66 percent this year.

The result of the fringe benefit changes is that several popular fringe benefits are subject to higher taxes in 2017, but they can be provided without limiting the associated threshold. For example, in addition to providing Erzsébet vouchers, back-to-school support, local public transport passes, workplace canteens, company-owned holiday resorts and formal training, the employer can contribute to a voluntary pension fund and a health fund without any limitation, subject to a 43.66 percent tax liability.

Tax-free benefits 

The range of tax-free benefits has remained, and indeed has been expanded. Tickets to cultural events, sports events, housing loan support and crèche services will still be available with slight modifications. Furthermore, housing allowance to facilitate mobility and the reimbursement of nursery care and services were also previously added to the tax-free benefits.

Still worth it?

Fringe benefits have lower tax burdens compared to salaries, it is a cost-efficient benefit which has tax-free and contribution-free elements as well (these tax-free elements can even be given even individually, independently of the fringe benefit policy). Fringe benefits typically result in cost savings since they are less of a burden for the employer in terms of taxes and contributions. Applying the system can be adjusted to the current financial situation, while usage can be measured and monitored continuously. In a transparent fringe benefit system, employees know the value of the elements as well as their available allowance, so they can easily select the combination that is right for them and meets their individual needs.

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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.

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