Social contribution tax, or “szocho” as it is commonly known in Hungary, is a type of public charge levied not only on wages but also on other types of income. This obligation generally applies to companies, sole proprietors, and in some cases to individuals. However, foreign individuals are often treated differently under Hungarian tax rules, and in certain cases, they are exempt from paying this tax. In this article, we offer a detailed overview of the main cases when foreign persons are exempt from paying social contribution tax in Hungary.
Understanding Who Qualifies as a “Foreign Individual”
In order to determine whether a person is subject to social contribution tax, the first step is to establish their residency status. Hungarian legislation differentiates between domestic and foreign individuals. Importantly, the term “foreign” in this context does not necessarily mean someone with foreign citizenship. It refers instead to someone who does not have their permanent residence or habitual abode in Hungary and is not considered a Hungarian resident under the social security system.
Thus, a person can be a Hungarian citizen and still be treated as a “foreign individual” for tax purposes if they reside abroad. This classification significantly influences whether or not a particular type of income is subject to social contribution tax.
Taxable Income and Exemptions for Foreign Individuals
Let us now go through the different categories of income and examine how the rules apply to foreign individuals in Hungary.
1. Employment and Personal Service Income
Generally, income derived from employment, personal services, and similar activities is subject to social contribution tax in Hungary. This includes both independent and non-independent work, such as freelance or contract-based engagements. However, for foreign individuals, the situation may be different.
If a foreign person earns income that would normally form the basis for contribution but is not otherwise subject to mandatory social security contributions in Hungary, then social contribution tax does not apply either. The exemption, however, does not apply if the income relates to a period during which the individual was considered insured in Hungary.
For example, if a foreign national serves as an executive in a Hungarian limited liability company (Kft.) but earns below a certain threshold and does not establish an insurance relationship, then no social contribution tax is due. However, if the executive was insured at the time the income was earned—even if the payment is made later—the contribution tax may still apply.
2. Business and Investment Income
Certain types of business and investment income are usually subject to social contribution tax. These include income from:
- Dividends or similar profit-sharing payments
- Withdrawal of funds from a business
- Capital gains on securities
- Other financial income
However, foreign individuals who receive such income are generally exempt from paying social contribution tax in Hungary. This exemption reflects the principle that Hungary does not aim to impose public charges on income generated abroad or by non-residents, unless a strong domestic link exists.
It is important to note that when these types of income are taxable, they are only taxed to the extent that they are considered taxable in Hungary. Moreover, a yearly income threshold also applies—above this limit, social contribution tax obligations may cease for domestic individuals, but this is not usually relevant for foreigners due to their exemption.
3. Interest Income and Long-Term Investments
Interest income earned by individuals is typically subject to social contribution tax in Hungary. This includes interest from bank deposits and investment instruments, as well as returns from long-term investment contracts that are terminated before maturity.
Nevertheless, foreign individuals are not subject to social contribution tax on such income, even if it is otherwise taxable in Hungary. This is a significant relief, especially for those who have investment portfolios that generate passive income.
4. Benefits and Perks
Certain benefits—such as fringe benefits provided through employer programs or other defined non-cash compensations—are subject to social contribution tax when granted to domestic individuals. These may include, for example:
- Non-wage employee benefits (e.g., food vouchers, recreation cards)
- Certain defined personal use perks
- Discounted interest rates on loans from the employer
When such benefits are granted to foreign individuals, they are typically exempt from social contribution tax—exceptin the case of benefits derived from interest rate discounts. In that scenario, contribution tax may still apply even for foreign individuals, depending on the exact circumstances and source of the benefit.
5. Other Income Categories
In Hungarian tax practice, there is a residual category for “other income,” which can include various payments not explicitly categorized elsewhere. For domestic individuals, such income may be subject to contribution tax. However, if the recipient is a foreign individual, such income is usually exempt from social contribution tax.
This is another clear illustration of how foreign tax residency status can significantly reduce public charge obligations in Hungary.
Tax Refund Possibilities for Overpaid Contributions
In certain cases, social contribution tax may be withheld and paid even though the individual is exempt. This can happen due to an incorrect assessment by the payer or lack of proper residency documentation.
When this occurs, a refund application can be submitted to the Hungarian tax authority. The overpaid amount can be reclaimed by presenting the necessary certificates, including a statement issued by the payer indicating the amount of tax withheld. If approved, the refunded amount will be transferred to the individual’s designated bank account.
Year-End Obligations – Personal Tax Filing
Individuals who are not required to pay personal income tax advances during the year must assess and settle their contribution tax liabilities in their annual personal income tax return. This return must be filed by May 20 of the following year.
Whether using the pre-filled draft return provided by the tax authority or preparing a manual return, individuals must:
- Declare the amount of contribution tax already paid,
- Settle any remaining liabilities, or
- Request a refund for any overpayment.
This step is especially important for foreign individuals who may have been incorrectly charged contribution tax during the year and want to reclaim it.
Summary
In Hungary, social contribution tax is a significant public charge affecting many income types. However, foreign individuals—as defined under Hungarian social security law—are often exempt from paying this tax, especially in the case of investment income, business withdrawals, and various passive income categories.
Given the potential financial implications, it is essential for businesses and individuals alike to assess the residency status of income recipients and apply the correct tax treatment accordingly. With proper planning and documentation, foreign persons can often avoid unnecessary tax burdens—and even reclaim overpaid contributions through the proper channels.
Need assistance with social contribution tax matters in Hungary?
Our team at CFH provides expert advice on tax obligations for foreign individuals and businesses. Get in touch with us to ensure compliance—and save on unnecessary tax payments.