Hungary FinMin tables new proposals - Pensioners, families to benefit

Hungary's economy is again expected to perform well above the EU average this year, the ministry said in a press release. The government decided on an Economic Protection Action Plan this May to preserve economic progress, which included seven points that would result in tax cuts. Six of these, including cuts to the social contribution tax and the tax on small businesses, were already passed by Parliament this spring, , while the seventh point is part of the bill that has been submitted on Tuesday. 

Under the proposal, four types of contributions would be merged into the social security contribution after 1 July 2020. Also, all pensioners will be given exemption from this contribution, which could result in 14% extra income for most people involved, the ministry said.

Meanwhile, families with children will benefit from changes in the family tax allowance offered after children, and the tax authority NAV could prepare draft VAT returns for businesses starting from the spring of 2021.

The whitening of the economy will shift into an even higher gear next year. Practically every invoice will require online data provision by the issuer. This measure is also to given NAV the tool to prepare draft VAT returns for business as of the spring of 2021. The tax office currently sees the data relating to invoices for over HUF 100,000 online, but from 1 July 2020 it will see the invoices issued to so-called domestic VAT payers, meaning essentially all business invoices, while from 1 January 2021 the tax office will also see all invoices issued to private individuals.

Market analysts praise the online invoice system, estimating that it generated HUF 200-250 billion more for state coffers in a single year.

The online data provision system played a major role in the decline of the VAT gap to under 10% in 2018 from around 14% in 2017 and 21% in 2013.

Two further measures will also be facilitating the whitening of the economy next year. From 1 July 2020, an invoice or receipt will also have to be issued with relation to the majority of VAT-free transactions, for instance with relation to private healthcare, dental or education services, or the sale of property. In addition, the deadline for issuing invoices will be reduced from 15 days to eight days.

In addition to encouraging businesses to abide by the law, the fact that the tax authority will also be informing employees with relation to possible tax evasion on the part of their employers will also serve to protect employees, the ministry argues.

The bill submitted on Tuesday also stipulates that as of 1 July 2020 the pension contribution, the ‘in cash’ and ‘in kind’ healthcare insurance contributions and the job market contribution will all be combined into a single tax.

The new unified contribution, called the social security contribution, will be set at 18.5%. In addition to significantly simplifying the tax system, the introduction of the unified contribution also assures that for instance primary producers and people working based on an engagement agreement will also be eligible for job market services from 1 July.

In addition to realising a significant reduction in bureaucracy, the new, Unified Contribution Act will also result in several tax cuts. Enterprises will be saving a total of 7.5 billion forints (EUR 22.4 million) a year thanks to less strict minimum contribution base regulations. While healthcare insurance and job market contributions must currently be paid with respect to at least 150% of the minimum wage, the limit will be reduced to the minimum wage from 1 July 2020.

From 1 July 2020, all working pensioners will be exempt from contributions. Currently, the favourable regulation according to which pensioners must only pay personal income tax with respect to 15% of their salary is only valid for people in proper employment. According to the government’s calculations, the expansion of the regulation will leave a total of some 20 billion forints (EUR 59.8 million) a year in the pockets of those affected.

The family tax benefit relating to the number of children will also become more favourable from 2020 in view of the fact that the benefit can currently not be deducted from the 1.5%job market contribution, but from 1 July the family benefit can be enforced with relation to the full, 18.5% social security contribution.

In 2020, the government will be leaving the highest amount ever recorded in the pockets of families with children, some 380 billion forints (EUR 1.14 billion), as a result of tax benefits. This sum will be increasing by a further one billion forints-a-year from next year thanks to the favourable regulation, which is made possible by the Unified Contribution Act.

In the spring, within the framework of the Family Protection Action Plan, the National Assembly also already adopted the new regulation according to which mothers with four or more children will be exempt from paying personal income tax from 1 January 2020.

On the cover photo: Finance Minister Mihály Varga at a hearing before Parliament’s Business Development Committee on 12 November 2019. Photo by MTI/ Tibor Illyés