Foreigners often have a misconception of their tax situation if moving to Germany and working there.

Here are typical issues often misunderstood:

1. Very often foreign employees coming to Germany think that their foreign source income is not subject to German income taxation. This is a misjudgement. Foreign source income is either taxable in Germany or it effects the progressive German income tax rate. In both cases the income has to be declared in the German income tax return.
2. The calculation of foreign source income has to follow German legal requirements. This may require a recalculation of foreign source income. This is especially the case for business and rental income (for example recalculations of depreciations or capital allowances).
3. Foreign income taxes including withholding taxes can be deducted against German income tax if foreign source income is taxed in Germany.
4. It is also not correct to believe that being tax resident in Germany is unfavourable compared to a situation where somebody receives German based salaries as non-resident. This is due to the fact that non-residents cannot claim various allowances and personal expenses. A careful tax planning is advisable.
5. Germany has the reputation of being a high tax jurisdiction. This may be the case for individuals with high income. The tax burden on lower or average income is endurable. And German tax law is less strict concerning the deduction of income related expenses than most neighbouring countries. Additionally it provides a wide range of personal allowances and a liberal acceptance of private expenses. Foreign individuals are often surprised by the relatively low tax burden on average income. The real problem is social security liability if applicable. The social security contributions are one of the highest in Europe. Individuals coming to Germany should always seek advice on whether or not they can avoid German social security contributions.
6. Foreigners often think that personal payments to foreign organisations or insurance companies cannot be deducted. That again is a wrong impression. Payments to foreign pension schemes, private health insurance, private accident insurance, personal liability insurance etc. may very well be deductible in Germany.
7. A special problem arises from employment income related to stock options. Respective benefits will be taxed in Germany under certain conditions. Taxed will be the difference between the value at the time of purchasing the stocks and the value at the time when the options have been granted. For the allocation of taxation rights the time between granting the options and the vesting time (vesting period) is applicable. This means that if somebody worked for an employer in the vesting period in different countries he may have to pay taxes in these countries. Example: The vesting period was 2 years. For one year employee worked in the USA and for the other year he worked in Germany. Than half of the benefit will be taxed in the USA and the other half in Germany.

We have developed a checklist “Foreign citizens working in Germany – Required documents and information” to file a German income tax return. The checklist can be ordered free of charge at our German office (www.iapa-online.com/hamburg-germany).

Corporate Taxation

Introduction

From 1 May 2004, Hungary is a Member State of the European Union. Important features of the Hungarian tax system have been harmonized with EU tax law, including direct taxes, VAT, excise duties, mutual assistance and administrative cooperation.

Companies are subject to corporate income tax, social security contributions, VAT, property tax and excise taxes. Municipal authorities are authorized to levy local taxes, including local business tax and real estate taxes.

Corporate Income Tax

Corporate profits are subject to corporate income tax. The general rate of corporate income tax is 19%. If certain conditions are fulfilled, a rate of 10% is applicable to the part of the taxable base which does not exceed HUF 50 million, while any excess is taxable at the general rate.

Value Added Tax

The standard rate is 25%. A reduced rate of 5% applies to text books and specified medicines, medical materials and supplies. An additional reduced rate of 18% applies to certain basic foodstuff, hotel services and district heating.

Non-residents are taxable in the same manner as residents if they carry out any taxable transactions in Hungary.

EU resident registered taxpayers who are not established in Hungary are entitled to reclaim VAT according to provisions implementing the relevant EU directives.

Non-EU resident registered taxpayers who are not established in Hungary may be entitled, on the basis of reciprocal arrangements, to reclaim the VAT paid on domestic supplies of goods (including the importation of goods) and paid on services used in Hungary for their business activities. Hungary currently has reciprocity agreements with Liechtenstein and Switzerland.

Local taxes

The municipalities are authorized to levy a local business tax at rate of maximum 2% on corporate taxpayers that have their legal seat or permanent establishment within their jurisdiction. This tax is generally levied on the turnover, decreased by the acquisition costs of goods sold, costs of mediated services and material.

Immovable property situated in Hungary may be subject to municipal real estate taxes, including building tax and land tax. The owner is the taxable person. The building tax is HUF 900/m2, while the land tax is HUF 200/m2. These taxes are deductible for corporate income tax purposes.

Payroll tax

Employers’ social security contributions on top of the gross salary are:

• pension and health insurance contributions at 27%; and
• vocational training contribution at 1,5%.

The above contributions are deductible for corporate income tax purposes.

Withholding taxes

Dividends paid to (resident and non-resident) corporate shareholders are not subject to withholding tax. Only dividends paid to (resident and non-resident) individual shareholders are subject to withholding tax.

A 30% withholding tax is levied on interest, royalties and certain service fees (including fees for business consulting and advisory, advertising, marketing, etc.) paid to non-resident companies if Hungary does not have an income tax treaty with the country of residence of the recipient.

Transfer tax

Transfer tax is levied on the transfer of ownership (for consideration) of immovable property and rights. The tax is payable by the transferee. The taxable base is the fair market value (generally the sales price), not reduced by debts. The regular rate of the transfer tax is 4%.

Transfer tax is also due on the acquisition of vehicles. The acquisition of shares and other securities for consideration is not subject to transfer tax.

Property tax

A property tax applies to owners of water vehicles, aircrafts and heavy duty passenger cars.

Author: Tamás Bajor, Vienna Consult Kft., www.viennaconsult.hu