Hungary’s Finance Ministry is examining whether changes may be needed to the tax treatment of retail government bonds after the European Commission launched an infringement procedure over their tax advantage compared with securities issued by other EU countries.

The dispute concerns one of the key attractions of Hungarian government bonds for private investors: the interest earned on most Hungarian retail government securities is currently exempt from tax. The European Commission objects to the fact that interest from Hungarian government securities issued specifically for retail investors is tax-free, while similar income from government bonds issued by another EU or European Economic Area country is generally subject to Hungarian tax rules.

Foreign government bond returns can normally be subject to 15 per cent personal income tax, with an additional 13 per cent social contribution tax applying in certain circumstances. Meanwhile, interest on Hungarian retail government securities issued after June 2019 is exempt from these taxes.

According to the argument behind the EU procedure, the difference in taxation can financially encourage Hungarian savers to invest in domestic government securities rather than bonds issued elsewhere in the EU, potentially restricting the free movement of capital within the bloc. The financial impact for individual investors could be significant. On a HUF 10 million (around EUR 27,350) investment, as much as HUF 154,000 (EUR 421) a year could depend on whether the interest remains tax-free.

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The Finance Ministry has now confirmed that it is reviewing possible responses to the European Commission’s action. In a statement to Hungarian financial news outlet Portfolio, the ministry said it was examining “all possible solutions” and that the review extended beyond taxation.

It is also looking at capital-market and government-financing considerations, although the ministry has not explained what specific measures these areas of review could involve. This has raised questions about whether the government could eventually change the pricing or other conditions attached to retail government securities, although no such decision has been announced.

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The Finance Ministry said it would inform the public once a final government decision had been reached. For now, the tax exemption remains in place, and the government has not indicated precisely how it intends to respond to the infringement procedure.

The issue could nevertheless have important implications for Hungary’s retail government bond market. The securities have been an important way for the government to attract household savings and domestic financing, while the tax-free interest has been a significant incentive for individual investors. Any changes could therefore affect both the attractiveness of government securities for Hungarian savers and the government’s approach to financing through the domestic retail market.

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