What is Hungary’s “solidarity tax” and who has to pay it?

In a drive to bring down the country’s soaring budget deficit – which eventually amounted to 9.2% of GDP in 2006 – Hungary’s governing parties in July of that year pushed through Parliament a revenue-boosting tax package which – among other things – put a new levy on “successful” individuals and businesses called a különadó (“surtax”).

The tax became commonly known as the szolidaritási adó (“solidarity tax”) – because the government asked for “solidarity” from well-to-do taxpayers when drawing up the legislation – amounts to 4%, and is payable by most companies since September 2006, and since January 2007 on high-earning individuals.

At the time of its introduction, the tax was heavily criticized by many foreign companies, some of which (like carmaker Audi) threatened to leave Hungary because of the new burden. So who is actually liable for the tax, and how is it calculated and paid?

Individuals
Individuals who earn an income higher than the annual welfare contribution ceiling (this amount usually changes every year, and is currently Ft 7,130,000) must pay a 4% surtax on their taxable income above this amount. In practice, this amounts to a third income tax bracket of 40%, in addition to the existing 18% and 36% brackets.

Sole Proprietors
Self-employed individuals must pay the surtax on their business income and, if relevant, on any other personal income. In the case of the former, the 4% tax is payable on the pre-tax income of the enterprise, less subsidies and business costs, while in the latter the same rules apply as with other individuals. Sole proprietors may not write off the solidarity tax paid by their business against their other personal income. Sole proprietors who follow the simplified business tax (eva) system are liable to pay the solidarity tax only on their non-eva-related personal income.

Corporate Enterprises
Corporate enterprises (társas vállalkozás) – except ‘pre-companies’ (előtársaság), which have limited legal power to do business – must pay solidarity tax on their pre-taxed profit adjusted for some cost and income items.

In addition to the sting of having to pay an additional tax – and one that for some companies (including major manufacturers) amounts to a hefty charge – companies must do some complex calculations when determining what portion of their income is liable.

Corporate enterprises must include in their solidarity tax base certain cost items which can otherwise be written off. These include:

• Taxes on income earned abroad
• Book value of benefits, allowances, financial instruments and assets (including VAT) given away without recompense
• Assumed liabilities without recompense, otherwise accounted for as cost
• Services rendered without recompense

At the same time, businesses may write off some items, normally accounted for as income increments, against their pre-tax profits when calculating their solidarity tax obligations, including:

• Dividends earned either in Hungary or abroad
• Book value of benefits, allowances, financial instruments and assets received without recompense
• Assumed debt without recompense, otherwise accounted for as increment
• Services received without recompense

Foreign Income
For both corporate entities and individuals, income generated and retained abroad is not subject to taxation, and hence to the solidarity tax, unless an international agreement specifies otherwise.

For locally-domiciled individuals with partial income earned abroad, the solidarity tax must be calculated on the basis of the differential between the total income and the annual contribution ceiling (Ft 7,137,000). If the income earned in Hungary is less than this differential, then only the domestic income is subject to the solidarity tax. Otherwise the tax must be paid on the total income above the annual contribution ceiling.

Payment
For individuals, the solidarity tax is normally deducted by the employer from the individual’s monthly salary. If not, it must be declared and settled when an individual files his or her annual tax return. Businesses are also required to make an advance payment (adóelőleg) of their estimated liabilities every three months, based on their income for the previous business year.

Financial Institutions
Local financial institutions are subject to special regulations under the legislation which enabled the solidarity tax. For such firms, the levy is officially called an “annuity” (járadék), the rate of which is 5%. It is payable on any interest-related revenue of financial institutions arising from directly or indirectly-subsidized loans, such as home mortgages.