Tax residency in Hungary for digital nomads is definitely worth looking into. Most people underestimate what this Central European country has to offer. A low cost of living and crazy speed internet are just some of these things.
Living in Hungary
Hungary is part of the European Union and the Schengen Area. This means that if you are a citizen of another country of the Schengen Area, you are able to move to Hungary without the need for a visa. However, if you spend more than three months in the country, you will need to register yourself with the local authorities.
If you don’t hold a passport of a Schengen country, you will need a visa to stay in the country long-term.
Hungarian tax rules
Tax residency in Hungary
First and foremost, Hungary considers you a tax resident if you are a citizen of the Schengen Area, apply for the residence card and stay for more than 183 days in the country. The same applies to third country citizens who permanently move to the country.
However, this does not mean that if you don’t qualify under the aforementioned conditions you can be sure not to be a tax resident of Hungary.
Subsidiary, Hungary also considers you a tax resident if your only permanent home is there or if you have your centre of vital interest in the country.
Tax residency in Hungary for digital nomads: tax rates
If you are a tax resident of Hungary you will pay personal income tax at a flat tax rate of 15%. However, there are some regimes that deviate from this principle which allow you to lower this rate.
As a freelancer, for example, you could take into account a lump sum deduction for business expenses without the need to prove them. For most freelancers, the percentage of the deduction is set at 40%. In this way, you are practically able to limit your tax rate to 9% without the need proof any expenses.
You do need to take into account the addtional local business tax. The rate is 0-2% depending on where you register yourself.
Tax residency in Hungary for digital nomads: social contributions
Apart from income taxes, you should also account for social contributions in order to get a full picture of your tax burden. There are basically two social contributions charges you will be paying. The first one are the social security contributions at a rate of 18,50%. Apart from that, also a social contributions tax is levied at a rate of 13%.
This brings your total social taxes to a rate of 31,50%.
In some cases, you will also have to pay social contributions on non-professional income like dividends.
KATA tax scheme
Apart from the aforementioned regimes, you also have the KATA tax scheme. Under this scheme you pay a fixed amount of taxes and social contributions of around €130 per month.
However, if you make more than €45.000 per year, the excedent is taxed at 40%. So, calculations should be made if it makes sense to opt for this regime.
Also, this tax scheme is only open to freelancers providing services to private individuals. If you provide services to businesses, you will be excluded from the scheme. Unfortunately, based on this requirement a lot of digital nomads will not qualify for this regime.
Setting up a company in Hungary
If you work with a company you will pay corporate income tax on the profit of your company. The corporate tax rate in Hungary is a flat 9%. Again, the business tax kicks in here just like with the personal income tax rates.
After paying corporate tax the money is still in the bank account of the company though. In order to get the money to your private account you will need to distribute a dividend. The dividend is subject to a withholding tax of 15% which is also your final tax rate as a Hungarian tax resident.
Overall, you will thus be paying around 24% in taxes if you use a Hungarian company while being a tax resident there.
Tax residency in Hungary for digital nomads: conclusion
Tax residency in Hungary for digital nomads has some things to it. The personal income tax rate can be rather low. However, you also need to take into account social taxes. Combining all of these, you will end up paying around 40% in taxes.
By setting up a company you could lower your tax burden but you will still end up paying more than 20% in taxes.