Taxing

Dear Clients!

Recently passed tax laws both include changes in taxation for individuals and companies. Here we shall attempt to sum up the changes we deem most important and give you a transparent picture.

1. Capital Gains

From 2008 the taxing of income from swap deals is regulated by law. According to the law concerning accounting: income from swaps (to inlude currency and interest rate swaps) is the amount proceeding directly from swap deals by which the total annual revenue exceeds the total annual expenses. A swaps loss is defined as the amount by which total annual expenses exceed revenue. The law allows for tax compensation in case of loss. The rate of the tax is 25%.

The definition of income from Exchanges has also changed. It is now the amount by which total annual revenue exceeds the total annual expenses proceeding from trades at any domestic Exchange included in the law concerning capital markets, or any EEC or OECD Exchange.

According to the law the tax levied on dividend is determined at the time of payment. It is declared and paid according to the accounting laws. The issuing corporation settles the advance dividend payments and the deducted tax against the dividends determined in the next report and its tax. If there is no issuer, the individual determines the tax for the advance dividend payment and he is legally obliged to pay it until the twelfth day of the first month in the next financial quarter and declare it concerning the given tax year on the Tax Form.  After all listed stocks income (defined by regulating state authority) in the EU and in the states of the EEC a tax of 10% is payable.

2. Tax on currency and derivative products in OTC markets (according to legislation valid till 31 Dec 2009

Corporations under the legal effect of corporate tax

The Corporate Tax Act recognizes the figures in the settled financial statements; revenue is presented under the heading revenue from financial operations and expenses are presented under the heading expenses of financal operations. The rateable value is not modified by changes under those headings. According to the law the tax is 16% of the rateable value.
The investment service provider compiles a statement for transactions turnover for the principle (at least annually, at least as detailed as an accounting statement. This is the basis of the principle’s ledger.

Solidarity Tax

In the case of partnerships according to legislations in effect, solidarity tax is 4% of the before tax figure. With respect to transactions no change needs to be made to the rateable value.
In the case of individuals and sole proprietorships the the 4% is only payable for gross revenue over the HUF 7,446,000 threshold.

EVA Tax subjects

The simplified legislation for taxes for entrepreneurial activity sets out that tax is payable with respect to their total revenue. Thus profit proceeding from currency trading is fully taxable, and it cannot be reduced by expenses or a loss. The rate of EVA is 25%

Individuals and sole proprietors under the effect of personal income tax

The law does not make a distinction between individuals and sole proprietors in taxation.OTC currency and derivative products are classified as „Other Income” within Hungarian personal income tax. (SZJA). In the case of the establisment, conveyance or termination of a right, taxable income is the proceedings from surrendering that right, reducing the costs of acquisition with justified expenses. Justified expenses can be: expenses to acquire a right, transaction costs, BUT a loss generated is not considered a justified expense. Revenue realized in foreign currency has to be calculated based on exchange rates on the 15th day of the following month. Fulfillment is the day of realizing revenue.

„Other Income” is part of the composite rateable value. For this, tax is progressive. Up to HUF 1,700,000 the rate of tax is 18% and above HUF 1,700,000 the rate of tax is HUF 306,000 plus 36% of the amount above the threshold.

If the income is paid out by an issuer, it is the issuer’s responsibility to deduct and make advance tax payments. If the income is not from an issuer the individual or sole proprietor has to determine the amount of advance tax payments due and pay them till the 12th day of the first month of the next quarter. In the 4th quarter of the financial year there is no obligation to make advance tax payments, rather at the end of the last month, on the Tax Form, the annual tax figure has to be revised and settled.
Investment service providers have to produce such detailed statements at least quarterly from which the principle can reliably forcast the prospective rateable value.

Determining a forint value to a foreign currency rateable value
Revenues in foreign currency must be converted on the 15th day of the following month at a rate provided by a certified credit institution. Using rates of the Hungarian National Bank (MNB) is only open to tax payers who declare their such intentions in advance to the tax authorities.

3. Tax settlement for income from currency and derivative dealings (valid from 1 Jan 2010)

• Trades made on the OTC Interbank currency market are classified as controlled capital market dealings.
• Controlled capital market dealings are taxable at 20%.
• Income from controlled capital market dealings is the net profit (total annual revenue take total annual expenses), which can be reduced by adding commission
• Controlled capital market dealings are to include trades made for a financial instrument through an investment service provider in a regulated fashion and currency spot deals with immediate settlement (via a provider)
• Annual obligation to declare and pay tax: the individual gaining an income determines the tax payable based on the statement from the investment service provider, the individual execution-verifications from the controlled capital market dealings and his own records. He declares it on his annual Tax Form and pays it untill the prescribed deadline for the preceding financial year (20 May).

If the individual in the financial year or/and in the previous financial year or/and in the year before sustains a loss in controlled capital market dealings and declares this/these on the appropriate Tax Forms, he is entitled to tax compensation, that is: from 2010 profits from controlled capital market dealings can
be matched against losses and vice versa for over as long as two years.