Mária Lakatos

Taxation in General: Hungarian Tax System

Terms used in the Model Convention

When elaborating the Model Convention the experts of OECD tried to uniformly determine certain basic terms of taxation, therefore, in its first chapter the Model Convention clarifies who can be subjects of the convention for the avoidance of double taxation and what taxes are covered by the convention.

After defining the geographical scope of the convention an important new issue is to determine who is meant under the term “person”, which was not always and not unambiguously used for natural persons or private individuals.

As a rule the term “person” includes natural persons, but in certain cases also companies, but there are treaties that specifically discuss partnerships. Partnerships are a form unknown in Hungary, but consulting firms, for example, where the partners are equal and have interests in the firm, work under the same principle.

Various countries handle “partnerships”, as an association of individuals, differently. There are countries, where the partnerships are taxed, while in others only the individuals taking part in it, for the revenues they have realized through the partnership. Accordingly, for the revenues of the partnerships various rules of the conventions can be used. If the partnership is deemed to be as equivalent for a company, then the profits paid out to the members can be taxed as dividends from the company’s profits. If, on the other hand the partnership is not deemed a company, then, irrespective of whether distributions are made or not, the entire amount of the profits can be taxed as income from an entreprise or self-employment. One thing is, however, sure: under whatever title the tax is imposed it cannot result in double taxation or tax evasion.

“Company” means legal persons or subjects of law who, from the point of view of taxation, are not necessarily considered as legal persons, which means that companies without legal personality belong here too. As from the aspect of taxation companies either with or without legal entity are subjects to taxation.

“Enterprise” means the venture, i.e., business activity for profits pursued by a resident person in any of the states concerned.

Some conventions contain the definition of the term “international traffic”. According to this, “international traffic” covers any transport activity carried out using a vessel or airplane operated by an enterprise having an actual place of management. An exception is when the ship or airplane carries out such transport tasks only where the points of departure and destination are in the same country.

To facilitate enforcement, the conventions enlists the persons qualifying as “competent authorities” in the given state. In Hungary, this is the minister of finance, or the minister discharging the former’s tasks and duties, or duly authorized representative.

When applied in the conventions, the term “citizen” shall mean all private persons who have the citizenship of one of the contracting states and also all legal entities, associations, societies or other entities that derive their legal standing from statutory provisions in force in one of the contracting states.

One of the main goals of treaties aiming the avoidance of double taxation is to help to decide under the tax laws which country and, most importantly, where should the income acquired during a concrete period be taxed?

Three fundamental factors play part in this: in case of natural persons: where are they residents, and in case of ventures the whereabouts of their business premises and management.

To determine tax residence is not so easy, though, because in case of natural persons four distinct criteria must be considered in order to be able to decide: what state the person in question is a resident of, and what is at last equally important: the tax authorities of which country may claim the taxes paid by this person?

A (tax) resident in a state concerned is a person who is subject to taxation for his/her income in that state from resources located there or for his/her property in there and his/her income from abroad. Residence is determined according to the law of the state concerned by the residential address, temporary residential address or the place of management of the business. If tax residence cannot be determined according to the general rule, then there are additional rules to help.

If a natural person is tax resident in both countries, then the country where such natural person has his/her permanent residence shall be deemed as his tax residence. If the natural person has permanent residence in both or none of the two states, then he or she shall be considered to be the tax resident of the state where the centre of his/her vital interests is. If it cannot be determined in which state the centre of the vital interests of the natural person in question is, then he/she shall be deemed to be resident of that state where he/she usually stays (where his/her usual place of stay is). If the natural person in question has such a usual place of stay in both states or has not got in any of them, then the natural person shall be deemed to be the tax resident of the state of which he/she is a citizen.

If a legal person has tax residence in both states, then it is deemed to be a tax resident of that state in which the place of management of its business is.

The terms necessary for determining tax residence must be assessed according to the national laws of the contracting states. In Hungary, these terms are defined in the Act on the Rules of Taxation (Art.). According to it:

Definition

Permanent residential address: the dwelling place where the private person established the conditions for durable living and where he/she actually lives.

Usual place of stay (temporary residence): a natural person has a usual place of stay (temporary residence) in the Republic of Hungary, if during a calendar year he/she spends 183 days at the minimum, in the country, including also the days of entry and departure.

Seat: the place designated as such in the by-laws or the registration of the legal person in the Company Register, or in lack of that or if there are more than one such places then the central place of management.

Business premises: the place where the activity subject to tax is pursued including, especially the permanent business, production (factory), servicing establishment of the entrepreneur irrespective of whether the business premises and the seat are or not in the same administrative area.

In the event that tax residence cannot be determined on the basis of these rules, the competent authorities of the contracting states use their best efforts to jointly solve the issue and determine in what way the convention could be applied to such person?

Residence shall be determined based on the above rules, if there has been a convention for the avoidance of double taxation concluded between the two countries concerned and the convention in question is in force. In this case the international conventions and treaties take precedence over domestic regulations.

If no convention for the avoidance of double taxation has been concluded, then the tax residence of the person concerned shall be judged and determined according to the domestic regulations, which in Hungary means, that in case of natural persons the tax payment obligations shall be determined according to the Personal Income Tax Act (Szja), and in case of legal persons according to the Corporate Tax Act (Tao.).

(As it can be seen, the Hungarian Personal Income Tax Act and the Corporate Tax Act follow the same principles for establishing one’s tax residence.)

According to the Personal Income Tax Act (Szja), from the point of view of tax law, a natural person who has Hungarian nationality is deemed to have Hungarian tax residence. If, however there has a convention been concluded for the avoidance of double taxation with the country where he or she lives or works, then the regulations of that country shall apply. In the majority of the cases a rule included in the OECD Model Convention steps in here. According to it, a natural person shall be deemed to have Hungarian tax residence if his/her permanent residence is in Hungary. Permanent residence is such a dwelling place where the natural person settled for permanent living. If none of this is in Hungary, then his/her tax residence shall be determined in view of such person’s permanent residence in that other state. In the event that the natural person has permanent living (dwelling) arrangements in several states, than his/her tax residence shall be established based on the centre of vital interests of this person. If the private person has no permanent living (dwelling) arrangement on the territory of another state or no centre of vital interests can be established, then tax residence shall be established based on the usual place of stay (temporary residence) in the other state. The centre of vital interests means that state whereto the natural person has the closest family and economic links. If tax residence cannot be established based on any of the above criteria, then nationality shall be decisive.

As we have already mentioned, from the point of view of the payment of personal income tax it is fundamental where the tax residence of the specific person is. Hungarian citizens have unlimited tax liability under the Personal Income Tax Act (Szja), which means that all income they have, be it from abroad or from Hungary, shall be taxable in Hungary. (The greatest obstacle to establishing companies abroad is that the tax benefits there can be made use of only as long as one does not wish to bring the income legally home, as then returns shall be filled respectively and, although reduced, a tax payment obligation shall be incurred.)

The terms to be used for determining tax residence shall be interpreted according to the national laws of the contracting states. In Hungary, the interpretation of these terms is given by the Act on the Rules of Taxation (Art., by the Hungarian abbreviation). Accordingly, domicile (permanent residence) is the dwelling where the natural person wishes to durably live as his/her dwelling and where he actually lives. The Act on the Personal Income Tax (Szja) establishes the following order for determining tax residence:

„Natural person of Hungarian Tax Residence: a Hungarian citizen (unless simultaneously the person in question has other citizenships and has no permanent place of dwelling or customary place of stay (temporary residence) in Hungary), and also foreigners having residence permits, the stateless, and also those natural persons,

who have domiciles (dwellings) in Hungary only;
whose centres of vital interests are in Hungary, who do not have any or if they have any at all, then their permanent domiciles are not only in Hungary; whose centres of vital interests are in the states to which the natural persons are attached by the strongest personal, family and economic contacts (closest link);
whose usual places of stay (temporary residences) are situated in Hungary; who have no domicile at all or if they have such, then their domiciles are not only in Hungary, and whose centres of vital interests cannot be established.

Natural persons of foreign tax residence are natural persons who do not classify as tax residents in Hungary.”

Accordingly, Hungarian tax residence can be determined in the same way as in the Model Convention, using the same terms and order. If tax residence cannot be determined on the basis of these rules, then the competent authorities of the contracting states shall try to settle the issue and determine, in what manner can the convention be applied to the person concerned? As a rule the conventions and treaties aiming the avoidance of double taxation include the rules of determining tax residence. If they contain regulations setting different order from that set down in the principles of the OECD Convention, then the international regulations shall take precedence over the provisions of domestic – in our case: the Hungarian regulations laws. If no convention has been concluded between the states concerned then the Hungarian statutory provisions shall be applicable for assessing the given person’s tax residence. In case of natural persons these provisions shall be those of the Personal Income Tax Act (Szja) and in case of others, the Corporate Tax Act (Tao.).

According to the Corporate Tax Act (Tao.) that legal person, partnership, or other organization established under foreign law shall classify as a person having Hungarian tax residence and being Hungarian taxpayer:

whose place of business management is in Hungary,
who pursues entrepreneurial activities at its business premises (foreign entrepreneur),
acquires income by the selling or withdrawal of its participation in a company owning real estates (hereinafter called: member of a company owning real estates). In the Hungarian taxation environment the term “taxpayer” is defined by the Act on the Rules of Taxation (Art) proclaimed in 1995. To sum it up: entrepreneur:
- is the natural person, who pursues in his/her own name and for his/her own risk regular business activity with the goal to realize profits, has an entrepreneur’s card or whose activities the Act classifies as entrepreneurial activities,
- the legal entity, other organization that regularly pursues business activities.

The Model Convention elaborated two methods for the avoidance of double taxation, and within each of them, two types of procedures. The conventions also define the method they use and prescribe the procedure that has to be followed in the two countries with a view to avoid double taxation. The methods can vary even within the legal practice of that and the same country, which means that in case of certain types of income they allow full exemption, while in case of another only limited credit. The basis of taxability in case of a foreign natural person is tax residence, in case of a legal entity established under the laws of another state the existence of business premises or the place of management.

According to the OECD recommendations the bilateral treaties follow two main principles: one is exemption, the other is granting credit. Sometimes there is hardly any difference between the two and in certain cases the amounts of the tax/payable and waived are equal. There is a fundamental difference in between the two, however, namely that in the one case

Taxation in General: Hungarian Tax System

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2022

ISBN: 978 963 664 137 5

Taxation is a scheme for the state to provide revenue. The so collected money could then cover the public spending of the government. These are the so-called allocative and redistributive functions of the state budget. Although, taxation theory discusses the various tax types and analyses the various taxation tools very extensively, there is no absolute answer to the question, when and what type of taxation system would be optimal. Thus this introductory book on taxation deals with the three basic types of taxes - the income tax, the VAT and the corporation tax - in a very pragmatic way. There are legal texts and cases from both the international and also from the relevant Hungarian practice.

This book is recommended not only for students of economics but also for law students and practitioners beside anyone who is interested in the basic regulations of taxation.

Hivatkozás: https://mersz.hu/lakatos-taxation-in-general-hungarian-tax-system//

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