Foreign capital income – supporting procedure from the tax authority (NAV)
Hungarian individuals with securities accounts with foreign banks could experience supporting procedures launched by the tax authority in the second half of 2022 or early 2023. At that time, the tax authority was investigating the year 2018. Later years were expected to be covered sooner or later, and it seems that this moment has now arrived. In the first months of 2024, an increasing number of individuals will receive notifications of supporting procedures from the tax authority with an invitation to contact them.
Who can expect the supporting procedure based on their foreign income?
The Hungarian tax authority now initiates supporting procedures for individuals where they have identified a discrepancy between the foreign income data reported under the DAC2/CRS and the data declared by the individual for 2019.
But – as demonstrated below – in case of private individuals who had securities in their foreign bank accounts that were redeemed or were sold, this discrepancy is certain even if the taxpayer has complied with his tax filing and data reporting obligations in Hungary as required by law.
What is DAC2/CRS data reporting?
The tax authority receives detailed information on financial accounts from abroad, based on the Common Reporting Standard (CRS) introduced by the OECD and the EU DAC2 Directive. In a previous blog post we wrote about the DAC2/CRS data reporting in detail.
Lessons learned from the 2022 tax authority supporting procedures
In our experience, at the time of supporting procedures for 2018, the tax authority was still at a loss how to interpret the information received from abroad and how to reconcile the data with the income tax returns and the bank documents received from the taxpayers.
Several taxpayers were distressed to learn of the huge amounts of income reported to the tax authority from abroad, which bore no resemblance to the amounts of income they knew they had.
The main reason for this discrepancy was typically that all income from the sale or redemption of securities abroad in a given year was reported without considering the purchase price and the related incidental costs.
It is important for all taxpayers concerned to know that they have 30 days to clarify the data in the supporting procedure. This period cannot be extended; therefore it is advisable to prepare for the expected procedure as early as possible, so that all documents can be obtained in time and, if necessary, there is still time for the self-revision of the relevant returns at the latest by the end of the supporting procedure.
What does the tax authority inspect in case of income from abroad?
In the supporting procedures in 2022, we initially found that the tax authority only looked into simpler cases, such as interest or dividend payments, and if these were in order, they did not get involved in other transactions. Even more often, if the individual included the data in his tax return based on the summary data from the bank's statement, they accepted it. Alternatively, the administrator helped the taxpayer with the self-revision of the return based on the summary data from the bank statement if the original return failed to include the income from foreign investments.
Over time, an increasing number of professionals at the tax authority have familiarised themselves with the income tax rules on foreign capital income and have realised that the summary data on the foreign bank statement is typically not sufficient in itself to assess the Hungarian tax liability and can be very misleading.
In the case of a normal (not a long-term investment account) securities account, foreign banks are not required to consider the provisions of the Hungarian Personal Income Tax Act. A foreign bank cannot be expected to issue certificates that comply with the tax laws of each customer's country of residence.
Already in 2022, it was noticeable how the tax authority's knowledge base increased. They could see which certificates were issued by individual foreign banks and were able to specify exactly which certificates the taxpayer needed to obtain from the given bank.
In the course of the 2022 supporting procedures, the tax authority became more knowledgeable, so this year taxpayers can expect a more serious and comprehensive investigation.
Complex rules pertaining to foreign capital income
The rules on capital income are extremely complex.
The first step is to identify what type of income the given proceeds qualify as under the Hungarian Personal Income Tax Act. This will influence at what exchange rate the income is to be converted into HUF, whether the loss can be considered as a tax base decreasing item or whether the tax equalisation rules apply.
In addition, from 1 July 2023, interest income under the Personal Income Tax Act will in some cases be subject to a 13% social contribution tax (“szocho”).
As described above, the classification under the Personal Income Tax Act is not performed by foreign banks. For example, on the certificate they issue, income from the sale or redemption of securities is typically reported as capital gain.
How can taxpayers with foreign income prepare for the tax authority’s supporting procedure?
In order to identify the tax liability and accurately determine the taxable amount, it is essential to have a bank document that contains all the relevant data. This includes information on individual transactions and individual securities. In some cases, the type of income may also be influenced, for example, by whether the sale of the securities was a stock exchange or OTC transaction. If the summary statements do not contain all the necessary information, it may also be necessary to request individual transaction sheets.
The taxpayer concerned should also pay attention to the deadlines.
There are 30 days for the supporting procedure, which cannot be extended; therefore, it is advisable to prepare the documents as early as possible and, if necessary, to allow for the self-revision of the returns concerned at the latest by the end of the supporting procedures.