The Hungarian tax authorities will initiate new support procedures for personal income received from abroad; Hungarian individuals who had an account in a foreign financial institution in 2019 and received income from investments there are expected to be contacted by the tax authorities.
Capital Income from Foreign Countries – Support Procedures from Tax Authorities (NAV)
Hungarian individuals with securities accounts in foreign banks may experience support procedures from the tax authorities in late 2022 and early 2023. At that time, the tax authorities were conducting an investigation for the year 2018. It was expected that subsequent years would be covered sooner or later, and it appears that the time has come: in the first months of 2024, more individuals will receive notices of support procedures from the tax authorities along with contact information.
Who is eligible for the support procedure according to foreign income?
The Hungarian tax authorities are currently initiating assistance procedures for individuals for whom discrepancies have been identified between foreign income data reported in DAC2/CRS and personal declaration data for 2019.
However, as indicated below, the discrepancy is certain in the case of individuals who have securities in foreign bank accounts that have been redeemed or sold, even if the taxpayer has complied with his or her Hungarian tax reporting and data reporting obligations in accordance with the law.
What is DAC2/CRS Data Reporting?
Under the Common Reporting Standard (CRS) introduced by the OECD and the EU’s DAC2 Directive, tax authorities receive detailed information about financial accounts from abroad. We wrote more about DAC2/CRS data reporting in a previous blog post.
Lessons Learned from the 2022 Tax Authority Assistance Procedures
In our experience, at the time of the 2018 assisted procedure, tax authorities were still at a loss as to how to interpret the information received from abroad and how to reconcile the data with the income tax returns and banking documents received from taxpayers.
Several taxpayers were distressed to learn that the huge amounts of income reported to the tax authorities from abroad bore no resemblance to the amounts of income they knew.
The main reason for this discrepancy was that all income from the sale or redemption of securities abroad in a given year was reported without taking into account the purchase price and related ancillary expenses.
It is important for all taxpayers to know that they have 30 days to reveal supporting procedural data. This period cannot be extended. Therefore, it is recommended to prepare for the anticipated procedures as soon as possible, to obtain all documents on time and, if necessary, by the end of the supporting procedures, at the latest in time for the self-correction of the relevant tax returns.
What will the tax authorities examine in the case of income from abroad?
The 2022 assistance procedure initially found that the tax authorities would only examine simple cases, such as interest and dividend payments, and if there were no problems with these, they would not get involved in other transactions. More often, if the individual included data in his/her tax return based on summary data from bank statements, the tax authorities accepted it. Alternatively, if the original tax return did not include income from foreign investments, the administrator assisted the taxpayer in self-correcting the return based on the summary data from the bank statement. An increasing number of tax professionals have become familiar with the income tax law on foreign capital income and have realized that the summary data provided in the foreign bank statement is not sufficient to assess the Hungarian tax liability and can be very misleading.
For ordinary (not long-term investment) securities accounts, foreign banks do not need to take into account the provisions of Hungarian personal income tax law. Foreign banks cannot be expected to issue certificates of compliance with the tax laws of each client’s country of residence.
Already in 2022, it was noticeable how the knowledge base of the tax authorities has increased. They now know which certificates are issued by individual foreign banks and are able to identify exactly which certificates taxpayers need to obtain from a particular bank.
Taxpayers can expect a more serious and comprehensive examination this year, as the tax authorities have become more knowledgeable during the course of the 2022 assistance procedures.
Complex Rules on Foreign Capital Income
The rules regarding capital income are very complex.
First, it must be ascertained what type of income qualifies as capital income under Hungarian personal income tax law. This will determine at which exchange rate the income will be converted into Hungarian francs, whether the loss will be considered a reduction item in the tax base, or whether the equalization rules will apply.
Furthermore, after July 1, 2023, interest income under the Personal Income Tax Law will be subject to a social contribution tax (“Suzocho”) of 13% in some cases.
As noted above, classification under the Personal Income Tax Law is not made by foreign banks. For example, in certificates issued by foreign banks, income from the sale or redemption of securities is usually recorded as capital gains.
How can taxpayers with foreign income prepare for the tax authorities’ assistance procedures?
In order to identify the tax liability and accurately determine the taxable amount, bank documents with all relevant data are essential. This includes information on individual transactions and individual securities. In some cases, the type of income may also be affected, such as whether the sale of securities was an exchange-traded or over-the-counter transaction. If the summary statement does not contain all of the required information, it may be necessary to request individual transaction statements.
Taxpayers should also be aware of deadlines.
Therefore, it is advisable to prepare the documents as soon as possible and, if necessary, to be able to self-correct the relevant tax return by the end of the assistance procedure at the latest.
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