In Hungary the overall tax burden on employment income represents 44% of the total wage cost. Here are the most efficient ways to cut this tax bill.
Employee shares
Employee share can be granted to employees free from taxes and any dividend distributed on such shares enjoys a low taxation of 15% in the employees’ hands. This means a tax saving associated by a higher motivation of the employees arising from their owners’ status in the employing company. There exists various legal techniques to avoid, at the same time, the interference of the employees in the strategic decisions of the company.
ESOP
ESOP can be best described as a “holding foundation”, owning shares in the employer in favour of the participating employees. Similar to employee shares, share grants through an ESOP enjoy tax exemption and employees may realise income at an overall 15% taxation. One of the advantages of ESOP, compared to employee shares, is that it may also be used to distribute proceeds of an exit in a tax efficient manner.
KIVA
KIVA (which stands for “small company tax”) is a popular alternative taxation for small and medium-size companies. KIVA payers are liable to a flat 12% tax based on the wage costs and on the amount of dividends distributed to shareholders. KIVA replaces various taxes (such as corporate tax, social security tax and training fund contribution). KIVA can result in significant tax saving for companies with high wage costs relative to their distributed profits.
Benefits granted by shareholders
If either cash or in-kind benefit is granted to the employee by the employer’s shareholder, instead of the employer itself, such income will be free from the 18.5% social security tax. Examples can be a cash bonus system introduced by the shareholder or a global parent company stock option program – if not introduced through an employee share or an ESOP scheme.
Cafeteria
In the cafeteria system, certain fringe benefits related to recreation can be offered up to specific value limits to employees at their own selection and at a reduced tax burden of 24.5% for the employer, with no liabilities for the employee at all.
By István Csővári, Partner, Jalsovszky
