Foreign Tax Credit - for Hungarian-resident natural persons
If a Hungarian tax resident individual earns income not only from domestic sources, international tax issues arise. In such cases, another foreign state may also impose tax obligations on the income, raising the question of whether the tax withheld or otherwise paid abroad can be taken into account when determining Hungarian tax liabilities, and if so, in what manner.
What is the article about:
Role of Double Tax Treaties in Foreign Taxation
Procedures in the absence of an international treaty
Possibility of tax credit for employment income, independent activity or other income
Tax credit for capital income
Tightening of the rules effective from 2024
For the purposes of the analysis, it is assumed that the individual is a Hungarian tax resident, meaning that they are subject to tax in Hungary on their worldwide income. Otherwise—if the individual were not a Hungarian tax resident—only income from Hungarian sources would be taxable, and no foreign tax credit could arise.
Foreign tax credit where a double tax treaty exists
The simpler situation is where a valid double tax treaty exists between Hungary and the source country. Double tax treaties are bilateral agreements aimed at avoiding double taxation. Hungary has concluded such treaties with more than 80 countries.
Most Hungarian tax treaties follow the wording of the OECD Model Convention. According to OECD recommendations, treaties contain provisions for each type of income, determining which country has the right to levy tax. They also specify how the tax paid in the other state should be taken into account in the state of residence. Essentially, two methods exist:
Credit method For certain types of income, the foreign tax paid may be credited against the Hungarian tax levied on the same income. However, the credit may not exceed the amount of Hungarian tax calculated on that income. Therefore, Hungarian tax liability cannot become negative.
Exemption method For other types of income, the treaty recommends applying the exemption method. This means that income taxed in the source country is simply exempted from Hungarian taxation, as if the income had not existed. Thus, no Hungarian tax liability arises on income covered by the exemption.
Foreign tax credit where no double tax treaty exists
If no double tax treaty exists with the source country, both Hungary and the other state may tax the income under their domestic laws. This can easily lead to double taxation. Fortunately, the Hungarian Personal Income Tax Act (Szja tv.) contains special rules allowing limited credit for foreign taxes paid. These rules do not apply in all cases or to all types of income, so double taxation is not fully eliminated.
The applicable rules differ depending on whether the income is:
aggregated income (e.g., independent activity, employment income, other income), or
separately taxed income (e.g., capital income).
Aggregated income – Section 32 of the Personal Income Tax Act
If the tax base includes income on which the individual paid tax abroad equivalent to personal income tax, the calculated Hungarian tax is reduced by 90% of the foreign tax paid, but not more than the Hungarian tax calculated on that income.
Thus, foreign tax may be credited, but only up to 90% of the foreign tax, and only up to the amount of Hungarian tax. Hungarian tax liability may be reduced to zero, but cannot become negative or refundable.
Section 32 also states that foreign tax cannot be credited if the amount is refundable to the individual under foreign law, a treaty, or domestic rules. This means that only the final foreign tax burden may be considered. In many countries, individuals pay advance tax at a standard rate during the year, then receive refunds based on allowances at year‑end. Some foreign annual income statements (similar to the Hungarian M30 form) do not show these refunds, so the amounts on the certificate should not be accepted without review.
Separately taxed income – Section 8 of the Personal Income Tax Act
For capital income, the rules differ. Hungarian tax is reduced by the foreign tax paid; however, the Hungarian tax may not be reduced below 5% of the tax base as a result of the credit.
This is a key difference from aggregated income: Hungarian tax on capital income can never be reduced to zero. At least 5% Hungarian personal income tax must be paid, regardless of the foreign tax rate. Thus, for example, if the foreign withholding tax is 20%, aggregated income would result in zero Hungarian tax, but capital income (e.g., foreign dividends) would still trigger a 5% Hungarian tax liability.
The law also reiterates that refundable foreign tax cannot be credited.
Changes effective from 2024
We would like to draw attention to the fact that the established practice of previous years must be reviewed, as both of the above crediting rules have significantly changed and tightened with effect from 2024.
According to the explanatory notes of the law, the reason for the changes is the termination of the Hungarian‑US double tax treaty. Under the rules in force before 2024, the procedure would have caused a disadvantage for the Hungarian budget due to the termination of the treaty, therefore the rules on foreign tax credit had to be tightened. Under the amendment, from 2024 onwards, no foreign tax may be credited if it was levied and paid on income for which the place of income acquisition is Hungary. Furthermore, only tax levied in the state of income acquisition may be credited; other foreign taxes paid may not.
The 90% and 5% credit rules described above remain unchanged, but the scope of income and the scope of foreign taxes eligible for credit have been tightened. The amendment allows the credit of foreign tax (but only tax paid in the state of income acquisition) for income acquired abroad by a Hungarian tax resident (e.g., capital income, especially dividends). However, no credit is allowed for foreign tax paid on separately taxed income acquired in Hungary (e.g., Hungarian dividends taxed abroad).
We note that although the changes were triggered by the termination of the Hungarian‑US treaty, it would have been justified—also from the perspective of the Hungarian budget—to apply similar tightening earlier in relation to income from any non‑treaty country with a similarly strict tax system.
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