Hungarian government introduces new tax on savings

Here comes the 13% social contribution tax on savings

Pursuant to last night's government decree, natural persons are liable to pay social contribution tax on interest income (including exchange gains) under the Income Tax Act, with the exception of interest income from mutual fund shares of real estate funds.

• In the case of interest income on credit institution deposits, payment accounts receivable balances, the social contribution tax applies to the interest accruing for the period after the entry into force of the Regulation, and in the case of fixed-term deposits, to the interest accruing on deposits placed after 30 June 2023.
• In the case of yields on publicly traded bonds and mutual fund shares, it applies to the interest or yield on the security acquired from the date of entry into force of the Regulation;
• In the case of the prize or securities won in special prize lotteries, the tax is payable on the full value of the individual's assets as interest income for the period following the entry into force of the Regulation;
• For life insurance for savings purposes, it applies to the insurance performance of an insurance contract concluded from the entry into force of the Regulation.

The 15% interest tax remains

Interest and exchange gains on the savings concerned will continue to be subject to the 15% personal income tax. The charge, colloquially known as interest tax, is deducted by the service provider and the saver is credited with the net amount of interest or exchange gains.

The interest tax has already been in place on bank deposits, publicly issued mutual fund shares and bonds (except government securities issued after 1 June 2019), life insurance policies for savings purposes and voluntary pension funds. The latter two are exempt after a certain period of time, similar to investments placed in a long-term investment account (TBSZ) and a pension savings account (NYESZ), which are fully exempt after 5 and 10 years, respectively (partially exempt after 3 and 5 years, respectively).

What is the government trying to do?

By introducing the 13% social contribution tax, the government may have two objectives: 1. to further shift the structure of savings in favour of tax-free retail government bonds, and 2. to improve the fiscal balance. The first objective may be much more pronounced, as it also serves the second: making retail government bonds more attractive and thereby increasing their demand not only improves the structure of government debt, but also increases the fiscal room for manoeuvre in interest expenditure later: government security rates can be cut earlier and at a higher pace. However, the second aspect, i.e. the increase of fiscal revenues directly through tax revenues, is rather uncertain, as the extent to which the revenues from the social contribution tax will be raised also depends to a large extent on the future evolution of the volatile financial market environment, given that the government is relying on future yields.

The government's tax measure is understandable from the point of view of its particular objectives, but it certainly does not serve the interests of retail savers and the wider savings market. In financial terms, the near doubling of the interest tax will be painful for many providers, especially for yield-oriented investments (e.g. funds), as the same net return will require a gross return of around 18% more than before (since the saver will be left with HUF 72 instead of HUF 85 for every HUF 100 of return), and in many cases, in the context of high inflation, taxing nominal interest rates could result in negative real interest rates.

Hungarian savings penetration is low in many segments, savings capacity is deteriorating in an inflationary environment, and in some segments (e.g. long-term savings products) the right savings mindset has been missing for a long time. A positive turnaround would be better served by easing the tax burden rather than increasing it.

After the underperformance in the second half of last year, government securities started this year well among household savings: their stock rose by 8.3% in three months to almost HUF 11 trillion, taking over the first place from current account deposits again.

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