Mária Lakatos

Taxation in General: Hungarian Tax System

Principle of granting tax credit (set-off)

In case of tax credit (set-off), the state where the taxpayer has its tax residence does not waive its right to include in the taxable amount the income the taxpayer realized in another state, but renders possible deduction of the amount paid as tax in the other state in part or full.

Tax credits can be of two types:

Full credit: Full credit is when the tax paid on the taxable income in the other state can be deducted in full.
In the country of the tax residence of the person concerned the income tax payable thereby is calculated on the basis of such person’s total income but deduction of the tax paid by this taxpayer on his taxable income in the other state is possible.

In these treaties Hungary has, as a rule, chosen in case of income falling under the effect of the Personal Income Tax Act (Szja) and realized from both self-employed activities and employment the method of full exemption with the proviso that it shall take into account also the income taxable in the other state in establishing the rate of tax payable. As a rule, in case of income to be consolidated the Hungarian Personal Income Tax Act allows exemption of the income included in consolidation in such a way that it classifies it a type of income not subject to taxation or, based on the principle of reciprocity, the income in question is exempted from taxation in the Republic of Hungary but it can be taken into account when calculating the tax, which, practically speaking, is not identical to full exemption but is the type of “exemption with the maintenance of progression”, the solution recommended by the OECD Model Convention. This means that the income is part of the consolidated basis of assessment, i.e., it is included in the returns, but the tax that would otherwise be imposed on it must not be paid.

The Hungarian Personal Income Tax Act (Szja) shall allow partial credit for the tax paid elsewhere even if there is no treaty concluded with the other state. This means that the calculated tax shall be reduced by 90 per cent of the tax paid abroad, but in no case by more than the tax calculated for the income in question using the average tax rate in the table of taxes. The average tax rate is the quotient of the calculated tax and the consolidated basis of assessment.

Contrary to what have been described here, tax credit is possible in case of income realized from dividends, interest and royalties. The amount of the tax credit (i.e., counted towards the amount of tax) must not be higher than the tax that would be payable calculated according to the domestic regulations, which means that no credit is possible toward taxes for other income and that the minimum amount of tax payable even in such cases cannot be less than 5 % of the basis of assessment.

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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