Although many different types of taxes are known worldwide – one might even say the range of taxes is inexhaustible, with 54 types of taxes currently in force in Hungary alone – individual taxes can be classified into three clearly distinguishable categories based on how they function. Some tax income (e.g., personal income tax or corporate tax), others tax transactions (e.g., VAT), and there are also wealth-type taxes (e.g., building tax).

According to a program recently published by the TISZA Party, a tax belonging to the latter category could be introduced. However, the proposal currently contains an unusual taxation solution: it would introduce a general wealth tax on billionaires, which would be a new annual tax of 1% on wealth exceeding 1 billion HUF.

Although no detailed proposal is yet known, Dr. Balázs Békés and Dr. Balázs Horváth, board members of SQN Trust Bizalmi Vagyonkezelő Zrt. and international tax experts, have compiled key information about wealth taxation. Drawing on their decades of professional tax experience advising wealthy individuals both domestically and internationally, as well as international examples, they summarize what is worth knowing about wealth taxation, what challenges lawmakers would face when introducing a general wealth tax, and how international practice addresses these issues.

Existing wealth-type taxes in the Hungarian legal system

It is worth briefly noting that wealth-type taxes have existed in the Hungarian legal system for a long time. These taxes typically apply either to real estate or to certain valuable assets.

Under the current tax system, local governments may tax real estate by imposing building tax or land tax. In addition, municipalities may introduce local taxes on tax objects that are not already subject to another public charge defined by law. Car owners are also familiar with the motor vehicle tax, which by its nature is likewise considered a wealth-type public levy.

However, the amounts of these taxes cannot be compared with a general wealth tax imposed on private individuals with wealth exceeding 1 billion HUF. For example, under the proposal, a private fortune of 2 billion HUF would incur an annual direct tax liability of 10 million HUF. By comparison, in Budapest’s 1st district, a similar amount of building tax would apply to approximately 4,500 square meters of property (or 45 apartments of 100 square meters each).

Regulatory attempts to introduce wealth taxation in Hungary

In Hungary’s tax system, special types of taxes targeting wealthy private individuals have been introduced on several occasions. These taxes aimed to tax “luxury properties” and other valuable assets such as aircraft, boats, and high-value cars. Although these tax laws were adopted by the legislature and applied for a short period, the Constitutional Court later decided in its rulings to annul them.

Nevertheless, the principles developed by the Constitutional Court in relation to wealth taxation are worth considering, as the constitutional limits formulated in these decisions bind the legislature in general.

With regard to the determination of the tax base, the Court found it problematic that the municipality competent according to the location of the real estate could determine the market value serving as the tax base within a minimum and maximum range, detached from actual market prices, while taxpayers were not provided with any legal remedy. It is therefore important to avoid a situation where the tax base could be determined arbitrarily, and taxpayers must have the possibility to present counter-evidence.

Another problem in determining the tax base was that taxpayers did not possess the necessary expertise to determine the market value of their property. Under the earlier law, however, the difference between the value determined by the taxpayer and that determined by the tax authority could have served as the basis for imposing a tax penalty. The Constitutional Court considered this circumstance to be contrary to the principle of the rule of law.

The Constitutional Court also established, in relation to building tax, that it is not lawful to introduce a tax that is confiscatory in nature, meaning one that effectively absorbs the value of the property within a foreseeable period of time. In other words, the tax introduced cannot be grossly disproportionate relative to the value of the assets subject to it.

Although what constitutes gross disproportionality cannot be determined in general terms, it is likely that a tax obligation reaching the value of the asset within the statute of limitations period, that is, within a five-year cycle, would be considered severely disproportionate.

Determining market value – the Achilles’ heel of wealth tax

If the basis of a wealth tax is linked to the actual market value of the asset subject to taxation, the precise determination of this market value raises several issues. As can also be seen from the decisions of the Constitutional Court, such an additional obligation cannot be imposed on taxpayers, since it cannot reasonably be expected that a broad range of private individuals possess specialized valuation expertise (whether regarding company valuation or real estate appraisal).

However, if some additional procedures were introduced to determine market value, tax collection would necessarily involve significant costs. The Hungarian Tax Authority (NAV) would either have to establish internal asset valuation units or determine market values by appointing external experts.

For this reason, it may be more practical to determine market value through some form of automatic mechanism. In this way, the tax base would not depend on individual discretionary assessments but rather on predefined criteria. Such a solution could also be more favourable from the perspective of the efficient functioning of the tax system, since as a matter of principle it is important that taxpayers are faced with a clear payment obligation, the collection of which can be carried out with significantly fewer administrative resources relative to the expected tax revenue.

Known international practices in wealth-type taxes

A general wealth tax is currently in force in several Western countries, so it may be useful to review these functioning regulatory models.

Within the European Union, a tax on the total wealth of private individuals exists only in Spain. On the European continent, the Swiss and Norwegian tax systems also operate general wealth taxes.

The Spanish wealth tax seeks to tax the entire global wealth of private individuals, meaning that the tax base includes real estate, financial assets, company shares, and luxury assets. Assets are valued annually according to criteria defined by law. In the case of real estate, the tax base is the highest of the following: the purchase price, a predetermined price per square meter, or the value individually determined by the authorities. For shares in companies, the book value of the company’s assets must be taken into account, while for bank accounts, the higher of the year-end balance or the annual average balance is considered decisive.

In Switzerland, wealth taxes are levied at the cantonal level. In general, however, the entire wealth of the taxpayer is taxed at actual market value based on the taxpayer’s declaration. The determination of the tax base varies by canton. As a general rule, business shares are valued starting from their book value, while other assets are assessed at market value. In the case of real estate, different cantons apply different approaches: in Geneva, a committee of experts determines the value, which is periodically indexed, while in Zurich, a predetermined formula is used for residential properties, and the tax base for investment properties is calculated based on rental income.

Although the Norwegian wealth tax is also a general tax covering the entire wealth of private individuals, different types of assets are taxed with different weightings. As a result, the tax base determined at market value can be significantly reduced in the case of real estate. For example, for a property serving as the taxpayer’s primary residence, the wealth tax base is only one quarter of the market value. The market value itself is determined using a model based on statistical real estate market data.

Interestingly, France previously operated a high wealth tax, but its economic effects were questionable, as many French ultra-wealthy individuals reportedly chose to change their residence. As a result, during the first term of President Emmanuel Macron, the tax was reformed so that today it applies only to high-value real estate. Under the current rules, a special wealth tax applies to real estate portfolios exceeding €1.3 million (meaning that the values of multiple properties must be aggregated). The maximum progressive tax rate is 1.5%. The taxpayer must calculate the tax base based on the actual market value, although the tax authority has the right to adjust the tax base if it considers the declared value to be excessively low.

What role can double taxation treaties play?

Hungary has concluded double taxation avoidance agreements with numerous countries. Among their purposes is the prevention of double taxation in the area of wealth taxes. Although Hungary’s previous treaty with the United States has been terminated, the agreements concluded with EU member states and neighbouring developed countries provide protection against the multiple burdens of wealth taxation.

For example, the treaty concluded with Austria states that real estate may only be taxed in the country where the property is located, and its provisions also determine which country (Hungary or Austria) has the right to tax movable assets.

Thus, even if Hungary were to plan to tax the global wealth of its citizens, double taxation treaties would exclude a significant portion of assets located in other countries from the scope of a potential wealth tax. In addition, they provide effective protection in situations where the wealth of a private individual might otherwise fall within the scope of wealth taxes in multiple jurisdictions.

How could a wealth tax work in Hungary according to experts?

Considering previous “unsuccessful” attempts, the domestic economic environment, and international examples, a wealth tax in Hungary could operate effectively only if the tax base were determined using a predefined, objective method.

This approach would help prevent prolonged legal disputes arising from asset valuation issues related to the tax and would also allow the tax administration to function more efficiently.