Under the new rule, the 13% social contribution tax will be payable by individuals who earn interest income. This means that instead of 15%, they will have to pay 28% tax on certain income. The types of income affected include:

• interest credited to demand deposit accounts or payment accounts,

• interest on term deposits,

• interest on publicly traded corporate bonds, foreign government securities and discount treasury bills, and profits realised on the sale or redemption of these (except for Hungarian government securities issued after June 2019),

• returns on units of public investment funds (except real estate funds) and the profits realised on the sale or redemption of units of such funds, and

• returns on investment-type insurance, if subject to personal income tax.

First, it should be noted that the new tax does not apply to the returns paid on shares or closed-end investment funds, or to the profits made on the sale of these securities, as this income does not qualify as interest income. Proceeds from the sale of bonds, units or shares onthe Hungarian or international stock exchanges are also not treated as interest income. Thus, the trading of certain investment fund units – primarily ETFs – will be exempt from the 13% social contribution tax.

However, even for the types of income mentioned in the list above, the new tax will not always apply. So the question is, what options are left for investors?

A key opportunity is provided by the transitional rules. This means that the new tax will only apply to interest and returns on securities acquired from 1 July 2023.  For example, investors wishing to buy German government securities or units of Dutch investment funds should do so in the next three weeks, as the income from this investment will only be subject to 15% tax, and no social contribution tax will be charged, this year or in the coming years. Moreover, this also implies that an existing portfolio would not have to be sold immediately for tax reasons, as the interest earned on the securities already held will be exempt from the 13% social contribution tax indefinitely.

The 30 June deadline is also important for investment-type life insurance and term deposits. If the life insurance policy is taken out or the deposit is made by that date, the interest income paid on the investment will be exempt from social contribution tax at any later date.

In addition, long-term investment accounts (TBSZ accounts) can also protect against the new tax burden. In the case of a TBSZ account, all gains, including interest, from investing the funds in the account are tax-exempt. The tax liability arises when investors terminate the account, i.e. withdraw funds before the term ends. In this case, all previous gains will be taxable – but the tax rate will only be 15% even if the long-term investment contract is terminated in a short while. The reason for this is that in such a case, returns on fixed deposit, and not interest income, will be assessed. Another advantage is that the personal income tax payable is reduced to 10% after three years and to 0% after five years. In this way, TBSZ accounts can not only provide personal income tax savings, but also protect against the new 13% tax burden. Interestingly, the returns on Hungarian government securities held in a TBSZ account may become taxable if the investor terminates the TBSZ account before the end of the five-year term.

Investors should therefore familiarise themselves with the details of the new tax burden, for which they have three weeks left.

This article was first published in the Budapest Business Journal print issue of June 16, 2023.