High-Tax Country Resident Planning To Stay Put: Hungary

If you are resident and domiciled in Hungary (which will be the normal situation for a native-born Hungarian individual) then you are taxable on your world-wide income and capital gains. There is no wealth tax as such, but inheritance tax applies.

Residence applies to individuals who:

• spend more than 183 days in the country;
• possess a permanent home in the country;
• make Hungary their main base or center of economic activities, directly or indirectly.

Resident individuals are taxed on their worldwide income.

• A rate of 17% applies to all income below HUF5m.
• A rate of 32% applies to anything over HUF5m plus HUF850,000.

There are various personal allowances depending on familial status. Permitted deductions include 20% of mortgage loan repayments; and some types of private pension contribution are deductible.

A social security contribution of 27% is payable by companies for income up to twice the minimum wage, and 29% thereafter.

There is a land tax and a building tax, both of which are levied at the local level. The building tax is capped at a maximum of HUF900 per square meter, or 3% of market value. The land tax is capped at a maximum of HUF200 per square meter, or 3% of adjusted market value.

There is no Alternative Minimum Tax in Hungary.

From January 1, 2010, capital gains from from the trading of securities are taxed at 20% (25% previously). Domestic dividends and are taxed at 25%; and bank interest is charged at 20% (although this can be reduced to 10% on interest earned on deposits of HUF25,000 for between three and five year terms, or 0% on deposits with terms of more than five years, as a result of changes introduced on January 1, 2010).

Inheritance tax applies at rates up to 40%; there are exemptions and lower rates for family members.

NB: The Hungarian tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

Although some revenue protection measures apply to countries having "preferential" tax regimes, general anti-avoidance legislation has not progressed far in Hungary, and offshore trusts are generally speaking quite effective at sheltering many types of asset.

The availability of domestic tax-privileged investment instruments in Hungary, means that for many individuals it will be necessary to balance the advantages of domestic investment against the superior returns that may be achievable offshore.

Pensions investment can also include an offshore element, although the tax advantages of pensions have been steadily eroded vis-à-vis other tax-efficient investments, which are more flexible. In particular, for high earners, the pension provisions over and above that allowed for tax purposes have often been invested in offshore Funded Unrecognised Retirement Benefit Schemes (FURBS). The foreign (offshore) life assurance sector has been particularly innovative in these types of product.

For an individual wishing to explore the investment opportunities further afield, www.lowtax.net contains details of the investment and tax regimes for 50 offshore jurisdictions.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.