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Updated! Social contribution tax rate cut to 17.5% from 1 July 2019

The new Act on Social Contribution Tax effective from 1 January 2019 was basically novel relative to former regulation in terms of the integration of health contribution and the transformation of the system of allowances while the reduction of the tax rate with effect from 1 July made employment cheaper. A further 2 percentage point reduction is expected from 2020.

Companies had to pay special attention to four things in relation to social contribution tax allowances:

  1. which allowances based on former rules they can continue to make use of,
  2. which ones they can apply according to the new rules,
  3. which ones are eliminated
  4. and which allowances can be applied on a retroactive basis, even using self-revision.

The 2 percentage point social contribution tax rate cut during the year (with effect of 1 July 2019) has a favourable effect in many areas:

  • we obviously must mention that the public burdens on incomes included in the consolidated tax base (wages, wage-type benefits, service fees, income from professional sales of movables and real estate, incomes acquired under other titles etc.);
  • the public burden on fringe benefits (e.g. SZÉP cards) and certain specified benefits (e.g. business and small-value gifts, gifts presented at events etc.). As a result of the tax cut, employees will receive somewhat higher net benefits in the second half of the year than in the first in the case of employer applying a gross cafeteria limit.
  • in the cases when income included in the consolidated tax base is received by an individual not from a payer (e.g. from abroad or from a voluntary insurance fund) instead of the currently applied 84 percent rule, from 1 July, the tax rate is assessed as 85 percent of the income;
  • from separately taxed incomes, we have to point out by all means the reduction of the tax burden on dividend, of course only in the cases when social contribution tax payment obligation arises in this regard due to the personal income tax base not reaching 24 times the minimum wage;
  • in the case of payers of small business tax (KIVA),the impact of the social contribution tax rate cut will only appear with a delay, at the time of the 1 percentage point reduction of KIVA from 1 January 2020;
  • the 2 percentage point cut introduced during the year (and the further 2 percentage point cut expected from 2020 depending on the evolution of real incomes) also has an effect on the rate of social contribution tax allowances, which are detailed below.

In relation to the change of the social contribution tax rate, special attention must be paid to the transitional rules, i.e. the 19.5 percent social contribution tax rate must be charged, by all means, on the wages of June, however, in the case of fringe benefits, for example, the July credit to the SZÉP card will already be subject to 17.5% social contribution tax. The date of acquisition of the income must therefore be determined very carefully!

Social contribution replaced health contribution from 2019

With the elimination of health contribution, the traditional concept was transformed fundamentally, which differentiated between the tax treatment of individual types of incomes for tax purposes based on

  • whether the incomes related to the insured individual's activity under an employment relationship or
  • the utilization of certain elements of the wealth of the individual.

According to the former logic, until 31 December 2018, social contribution tax was payable under the main rule on the individual's incomes from independent and non-independent activities, however, the scope of social contribution tax did not extend

  • from the incomes of the individual from independent activities, to the letting of real estate and to the sale of real estate under economic activity,
  • to incomes acquired under other titles (e.g. payments of voluntary pension funds, dividend and interest received from low-tax-rate states etc.),
  • to certain separately taxed incomes (such as e.g. dividend, capital gain, income withdrawn from business or income from security lending etc.),
  • to incomes of foreign performing artists, certain specified fringe benefits provided subject to the payer's tax obligation and to income from tax credit.

The types of incomes mentioned as exemptions were previously subject to 14 or 19.5 percent health contribution although this did not always automatically represent and actual health contribution burden. The letting of real estate, for example, was not subject to 14 percent health contribution from 2018 and tax payment obligation did not arise in every case in the case of separately taxed incomes and the income of foreign performing artists either due to the HUF 450,000 cap on contribution payment.

The above outlined differentiation is eliminated from 2019 and a standard 19.5 percent and from 1 July 17.5 percent social contribution tax rate applies to all of the above-mentioned income types.

This has the following key consequences from a tax burden perspective:

  • from 1 January 2019, up to the income limit (see below),19.5 percent and from 1 July, 17.5 percent social contribution tax (instead of the previously payable 14 percent health contribution) is payable in addition to the 15 percent personal income tax on separately taxed incomes (e.g. dividend, capital gain) and on the income of foreign performing artists;
  • as a combined effect of the integration of health contribution and social contribution tax and the elimination of the 1.18 multiplier, the tax burden on fringe benefits (Széchenyi Recreation (SZÉP) card) increased from the previous 34.22 percent to 34.5 percent in the period from 1 January to 1 July 2019 and reduced to 32.5 percent from July 1; while the tax burden on certain specified benefits and income from interest credit (cut from the former 40.71 percent to 38.35 percent from July 1) and the tax burden on incomes acquired under other titles of 34.5 or 28.98 percent changes to 32.5 or 27.62 percent as a result of the tax rate cut.

In relation to separately taxed incomes and the incomes of foreign performing artists, we have to point out that actual social contribution payment obligation on these arises if the incomes of the individual included in his consolidated tax base, his separately taxed incomes and his incomes received as a foreign performing artists do not reach on an aggregate basis twenty-four times the minimum wage (HUF 149,000 from 2019) (HUF 3,576,000). Translated to the contribution payment limit, this means that the limit increased from the former HUF 450,000 to HUF 697,320. However, our practical experience shows that in the case of foreign performing artists, this typically does not result in exemption from social contribution tax.

The income limit therefore does not include the benefits that may be provided subject to the payer's tax burden. The above means that if, for example, the monthly wage income of the private person owner of a company exceeds twice the minimum wage, he will not have to pay social contribution tax on the dividend he receives.

Social contribution tax allowance system

In general, we can say that in 2019:

  • the rate of social contribution tax allowances increased as it is now tied to the minimum wage instead of the previous rate of HUF 100,000,
  • in the case of part-time employment, no proportioning is applied and
  • the use of certain allowances (e.g. that of new-entrants to the labour market) was also simplified in terms of administration.

The system of social contribution tax allowances was transformed substantially from 1 January 2019. The interim reduction of the social contribution tax rate obviously only concerns the contributions applicable under the new Social Contribution Tax Act from 1 January 2019. As presented in the table below, the allowances available under the new Act on Social Contribution Tax promote, above all, entry to the labour market, however, based on temporary provisions currently existing allowances are applicable from 2019 which were applied by the taxpayer on 31 December 2018. If the certificate necessary for the application of the allowance is not available for 2018, the allowance may be applied by way of self-revision.

Tax allowances that may continue to be applied, based on transitional rules, according to the "old Social Contribution Tax Act" after 1 January 2019 (on the basis of eligibility on 31 December 2018)

2-year allowance applicable with regard to a career starter employee under the age of 25 years in employment with at least 180 days of insurance obligation

The rules in force on 31 December 2018 are applicable in the period of eligibility if application of the tax allowance was already in progress on 31 December 2018.

2+1 year allowance applicable with regard to the employment of long-term job seekers

The rules in force on 31 December 2018 are applicable in the period of eligibility if application of the tax allowance was already in progress on 31 December 2018.

2+1 and 3+2 year allowance applicable with regard to employees receiving maternity benefit

The rules in force on 31 December 2018 are applicable in the period of eligibility if application of the tax allowance was already in progress on 31 December 2018.

tax allowance of enterprises operating in free enterprise zones

The rules in force on 31 December 2018 are applicable in the period of eligibility if application of the tax allowance was already in progress on 31 December 2018.

R&D allowance under Section 462/H of the old Social Contribution Tax Act

May be applied according to the rules in force on 31 December 2018 until the end of the application period provided that the amount of the tax allowance may not exceed the amount of tax liability remaining after the R&D allowance as defined in Section 16 of the new Social Contribution Tax Act in respect of employees working under employment and recognized under the direct costs of the research and development activity.

Allowances available from 1 January 2019 under the new Social Contribution Tax Act

public employees' allowance

Unchanged content relative to former regulation; Rate: 50% of the tax rate (8.75%) on 130% of the public employment wage but maximum the guaranteed public employment wage; no other allowances may be applied at the same time

allowance of workers employed in jobs not requiring qualification and in agricultural jobs

Group 9, sub-group 61 of group 6 and items 7/7333 and 8/8421 of the professions listed in the classification system FEOR-08; Rate: 50% of the tax rate (8.75%) on the employee's gross wage amount but maximum the minimum wage (HUF 149,000)

allowance of new entrants to the labour market

92 days of insurance relationship in the last 275 days (infant care fee, child care fee, child care support, public employment not included); re-entry to the labour market is eligible also; a certificate is required, HU TA will certify based on announcement or a request submitted in the return form 08; Rate: amount calculated applying the tax rate (17.5%) on the employee's gross wage amount but maximum the minimum wage (HUF 149,000) in the first two years of employment and 50% (8.75%) in the third year.

allowance of women raising 3 or more children entering the labour market

Rate: amount calculated applying the tax rate (17.5%) on the employee's gross wage amount but maximum the minimum wage (HUF 149,000) in the first three years of employment and 50% (8.75%) in the fourth and fifth year; Condition: a certificate from HU TA and family support authority; eligibility for the allowance is not affected by the mother's eligibility for family allowance ending during the period of applying this allowance.

allowance of employees with altered working capacity

Available for employees, private entrepreneurs and partnership with regard to their members; a rehabilitation authority certificate is required stating a max. 60% health condition (or the employee must receive disability rehabilitation benefit); Rate: amount calculated applying the tax rate (17.5%) on twice the tax base but maximum the minimum wage (HUF 149,000); the allowance is not applicable from the month following the termination of eligibility

allowance on the employment of researchers

Available under unchanged conditions; Rate: amount calculated applying the tax rate (17.5%) on the gross wage of employees with an academic degree but maximum HUF 500,000; amount calculated applying 50% of the tax rate (8.75%) on the gross wage of students or doctor candidates but maximum HUF 200,000

R&D allowance

Rate: amount calculated applying 50% of the tax rate (8.75%) on the direct wage cost of the R&D activity; corporate tax base allowance may not be applied at the same time

allowance of protected-age workers

Rate: amount calculated applying the tax rate (17.5%) on 4 times the employee's wage amount but maximum the minimum wage (HUF 149,000); a certificate is required

From 31 December 2018, the following allowances were eliminated - meaning that they are not applicable this year even under transitional rules: 

  • allowance relating to employees under the age of 25 and above the age of 55; 
  • Career Bridge allowance; 
  • allowance relating to the employment of holders of a rehabilitation card, 
  • allowance of part-time employees (relating to the employment of e.g. career starting youth, employees above the age of 50, job-seekers after a period of taking care of children or family members).

We note that from 2019, no vocational training contribution is payable in the cases when no social contribution tax payment obligation arises. No vocational training contribution is payable, for example, in respect of new entrants to the labour market or women raising 3 or more children entering the labour market in the first two or three years of employment. 

To all allowances, the theoretical restrictions will apply, which provide that the payer will only be able to apply one type of tax allowance on one natural person and that in the case of a change in the employee, the replacing employee may continue to apply the tax allowance for the remaining period. 

2019 changes also concerned KIVA (small business tax) taxpayers

Although from 2019, fringe benefits and certain specified benefits are also included in the base of small business tax as personnel payments, the annual amount of the allowance applicable on eligible employees still does not have to be considered when determining the small business tax base. 

Eligible employees are the persons with regard to whom allowances applicable to employees employed in agricultural jobs requiring no qualification, employees entering the labour market, women raising three or more children entering the labour market, persons with altered working capacity in an employment/membership relationship, researchers/developers having a doctoral or higher academic degree / academic title and students or doctoral candidates attending a doctoral course and allowances applicable on the basis of R&D activities. 

The new Act on Social Contribution Tax entering into force from 2019. Companies should pay attention: which allowances based on former rules they can continue to make use of, which ones they can apply according to the new rules, which ones are eliminated and which allowances can be applied on a retroactive basis, even using self-revision. 

What will happen to expats after Brexit?

In the shadow of the major changes discussed above, we find transitional rules relating to Brexit. According to these, in the case assignments started before Brexit, EU rules will apply until the end of the assignment but until 31 December 2020 at the latest, which means that British assignees will be exempt from Hungarian social contribution tax payment obligation with an A1 certificate. 

In the case of assignments starting after Brexit, the exemption rules relating to third party individuals will apply to British citizens also until a social security agreement is concluded between the United Kingdom and Hungary. 

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