Health contribution terminated from 2019, only social contribution tax remaining
With the elimination of health contribution, the traditional concept is 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- to certain separately taxed incomes (such as e.g. dividend, capital gain, income is withdrawn from business or income from security lending etc.),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% 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 will be eliminated from 2019 and a standard 19.5 percent social contribution tax rate will apply to all of the above-mentioned income types.
Value limit of the social contribution tax burden
This will have the following key consequences from a tax burden perspective:
- from 1 January 2019, up to the income limit, 19.5 percent social contribution tax (instead of the previously payable 14 percent health contribution) will be 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) will increase from 34.22 percent to 34.5 percent while the tax burden on certain specified benefits and income from interest credit (40.71 percent) and on incomes acquired under other titles (34.5 or 28.98 percent) is stagnating temporarily.
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. 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. 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 a social contribution tax on the dividend he receives.
What social contribution tax allowances are available in 2019?
In general, we can say that from 2019:
- the rate of social contribution tax allowances increases 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 was also simplified in terms of administration.
The system of social contribution tax allowances is transformed substantially from 1 January 2019. The allowances available under the new Act on Social Contribution Tax promote, above all, entry to the labour market, however, based on temporary provisions 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.
Social contribution tax changes also concerning 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 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.