On 27 June 2013 the Hungarian Parliament changed tax regulations in relation to the investments and interest income of private individuals. Please find below a summary of major changes that may be important for the clients of UniCredit Bank Hungary’s Global Securities Services (GSS) and as they relate to investments in securities in Hungary.
As a general rule effective 1 August 2013, the interest income of domestic private individuals shall be subject to a 6% healthcare contribution in addition to the already applicable 16% personal income tax. The interest income for this purpose shall be determined according to the personal income tax rules while the domestic status of the investor for this purpose shall be based on social security rules, which may be different from tax residency. The paying agent will be responsible for the calculation, deduction and payment of the healthcare contribution to the Hungarian tax authority.
The regulations set certain exceptions from the above rules, for example
- In case the interest income is taxable at 0% by law (e.g. investment fund notes purchased prior to 1 September 2006 and redeemed after 1 August 2013 will not be subject to the 6% healthcare contribution)
- Income deriving from the investment in government bonds, treasury bills and central bank bonds issued by an EEA member state in HUF (currently only Hungary). Bonds issued by municipalities are not considered as exceptions.
- Income deriving from investment funds investing at least 80% of their portfolio in the above mentioned bonds and bills. The issuer of the security can publish a declaration whether this condition is met and the paying agent responsible for the deduction of the healthcare contribution will be in the position to use this information in the calculation of the payment obligation.
According to the official opinion issued by the responsible ministry, the interest income paid under the European Savings Directive is not subject to the 6% healthcare contribution. The Interest income paid outside the scope of the European Savings Directive will be taxed as follows:
- If a Double Tax Treaty Agreement (DTT) is in place between Hungary and the country of the private investor and it sets the DTT rate at 0%, the 6% healthcare contribution will not apply either
- If a Double Tax Treaty Agreement is in place between Hungary and the country of the private investor and it sets the DTT rate at any rate greater than 0%, the 6% healthcare contribution will apply in addition to the DTT rate. We note that the DTT rate can be applied anyway only if the foreign private investor submits a valid Certificate of Residence, otherwise the standard 16% rate will apply.
Paying agents shall calculate the 6% healthcare contribution on a gross basis, meaning that except for the above cases, they do not examine the domestic status of the investor at the time of calculation and deduction, but investors not qualifying as domestic shall turn to the Hungarian tax authority and reclaim the entire 6% afterwards.
Previous tax regulations allowed the netting of capital gains and losses in case of controlled capital market transactions provided that the private investor declared in advance that he would like to apply this procedure for bonds and investment funds. In such case the private investor had to calculate the net tax effect in its annual tax declaration and investment service providers did not deduct any capital gains tax during the year. The new regulations allow this declaration only by the end of 2013 and only relating to income received before 1 August 2013, so netting will not be possible and the private investors shall pay the 16% capital gains tax and the 6% healthcare contribution in relation to their capital gains, taking into account all details in the regulations as they relate to their specific case.
Paying agents shall issue a certificate, at least once a year, to each private individual client in which the basis for the healthcare contribution as well as the deduction is precisely stated.
Related Newsflash: Newsflash Hungary - Cash FTT update and interest income tax changes
Impact on investors:
Effective from 1 August 2013, private investors will be generally liable for 6% healthcare contribution in addition to the standard 16% personal income tax. The 6% healthcare contribution will apply in all cases as detailed in the regulations while the personal income tax rate can be reduced in accordance with the applicable DTT. UniCredit Bank Hungary is still in the process of interpreting the regulations and will provide further updates in due course. Clients of GSS Hungary are recommended to examine their client base and investigate if the above changes are applicable. It is also recommended that a tax advisor is consulted to find answers to investor specific questions.