It is important to underline that while for other separately taxed income where a social contribution tax liability arises there is a cap on the tax payable (dividends, capital gains, income from securities lending, income withdrawn from a business), the social contribution tax on interest income is payable without limit.
In which cases is social contribution tax payable on interest in Hungary?
Below we explain how and from when each type of interest income under the Personal Income Tax Act will give rise to a social contribution tax liability:
- For term deposits, social contribution tax is payable on the interest on the deposit tied up after 30 June 2023. Thus, in the case of a deposit tied up before 1 July, no social contribution tax will be payable even if part of the term falls after 1 July 2023.
- On the basis of a contract with a payment service provider, social contribution tax will be payable on the interest due for the period after 30 June 2023 on the balance of the payment account.
- In case of securities whose yield qualifies as interest income (typically publicly issued and traded bonds and several investment units) and where the income from the sale or redemption is interest income (e.g. redemption, sale of publicly issued and traded bonds, redemption of investment units, OTC sales),the relevant time will be when the private individual acquired the securities. Social contribution tax will only be payable on securities acquired after 30 June 2023. No social contribution tax will be payable on securities acquired before 1 July 2023, regardless of when the yield is paid on the security or when the security is sold or redeemed. In the case of securities acquired after 30 June 2023, it is worth noting that the social contribution tax is payable on the yield that qualifies as interest income under the PIT Act even if the security is listed on an EEA stock exchange (while no social contribution tax is payable on the yield that qualifies as dividend on an EEA listed security).
- Assets acquired after 30 June 2023 as interest income on winnings or securities drawn on a prize-linked deposit account are subject to social contribution tax, on 1.18 times the fair value of the assets.
- The insurance settlement, which is interest income, is subject to the social contribution tax if the insurance policy was taken out after 30 June 2023.
- It is important to point out that the interest on a member's loan referred to in Government Decree No. 205/2023 (31.V.) does not refer to a member's loan in the ordinary sense, but to the interest earned by a member of a cooperative on the loan granted to his/her cooperative under certain conditions. This interest will be subject to the social contribution tax if the loan is granted after 30 June 2023.
- In the case of the return on payments into an employer’s pension scheme which constitutes interest income, the social contribution tax is payable on the income accruing for the part of the conditional vesting period completed in proportion to the period after 30 June 2023.
Your bank will send you a letter
Also, as published in the Official Journal of Hungary on 31 May, the Government Decree requires Hungarian credit institutions to send a notice to natural persons holding a bank account on one occasion between 1 October and 31 December 2023 showing the yield that could have been obtained by a person who purchased and held continuously a government bond issued by the Hungarian State for HUF 100,000, HUF 500,000 and HUF 1,000,000 during the specified period.
Shall we all buy government securities?
One clear purpose of the above measures is to encourage individuals to buy government securities. Given that interest income from debt securities issued by the Hungarian State and placed with the general public as the target market for investment is still not considered as income, it is not subject to either personal income tax or social contribution tax.
Are long-term investment accounts (TBSZ) subject to the social contribution tax?
The above measures could also have the effect of increasing the number of people concluding long-term investment contracts. There is also a form of long-term investment contract where the amount paid into the long-term investment account in the year of conclusion may be used to acquire securities, with the securities bought and sold any time, and the income from the long-term investment is not subject to social contribution tax, even if the long-term investment contract is terminated in a short while.
The social contribution tax liability introduced by Government Decree No. 05/2023 (31.V.) applies only to interest income under Section 65 of the PIT Act, with the exception of interest income from investment units of real estate funds, and therefore does not affect income from long-term investments regulated by Section 67/B of the PIT Act. Income from long-term investments continues to be subject to personal income tax at a maximum rate of 15%.
This is payable on the positive tax base if the private individual investor terminates the contract before the end of the three-year term. The personal income tax rate is 10% at the end of the three-year period and if the individual breaks the term after the three-year period but before the end of the five-year term. If, however, the individual does not withdraw the investment during the five tax years following the year of the tie-up, no tax liability arises and the income does not have to be declared in the personal income tax return.