HU - The good news is that you won the lottery – the bad news is that you have to pay taxes on it?

Over the weekend, a single winning lottery ticket won the top prize of the five-figure lottery, meaning a lucky person won exactly 6,613,905,020 forints. Interestingly, the last time a similarly high prize was won was in February this year, but before that, the approximately 6.5 billion forints found its owner only in 2020. However, it is a question of millions, even billions, whether these winnings from gambling are the net amounts, or could they be subject to tax?

It's worth looking out

TAXATION OF LOTTERY WINNINGS

The state-owned Hungarian Szerencsejáték Zrt. maintains a separate hotline for winners of prizes exceeding 300 million, where the winner is identified and the validity of the original ticket is also checked. The player always receives his/her so-called exceptionally large prize by transfer to his/her ordinary bank account. It should be noted that in the case of a jointly purchased ticket or in the case of player companies, there can only be one winner, in practice this is the one who has the ticket (so in the absence of a relevant contractual agreement, the other player partners cannot make any claims regarding the prize). In accordance with the previous tax rules, in Hungary, after lottery winnings, Szerencsejáték Zrt., as the payer, deducted and paid the personal income tax from the prize amount in one item, so the winner no longer had any obligation to declare and pay tax. This changed on January 1, 2024, when, according to a legislative amendment, winnings from so-called number games , including lottery winnings, became tax-free. The indirect effect of this is that the amount of winnings that can actually be distributed increases in the absence of public charges.

TAXATION OF FOREIGN LOTTERY WINNINGS

The situation may be different with lottery winnings from gambling games organized abroad. We can read about the fate of many fabulous sums won, especially in the USA (for example, the legendary Powerball prize of 818 billion forints converted), that up to half of the prize can be taken away by taxes, but here a lot depends on the method of payment. For some lottery winnings, you can request a lump sum payment or a payment in installments, and the difference is typically that while the amount to be paid out annually, e.g. in installments over 30 years, is exempt from public charges, the amount after a single payment is usually smaller due to taxes and other deductions. This is a kind of incentive to allocate the prize more responsibly, to reduce the psychological burden, and of course it also means a significant relief for the payer, but at the same time, payment in installments also carries a risk due to inflation and the limitations of investment options.

In the case of the Eurojackpot, which is also popular in Hungary and is organized with the participation of many European countries, we can easily obtain the prize tax-free in accordance with domestic regulations, but in the case of other types of foreign games, it is necessary to examine the relevant national taxation rules and compare the with the laws of the country of our residence, such as with the Hungarian Personal Income Tax Act or tax treaties for the avoidance of double taxation regarding tax obligations on winnings.

REVENUE FROM OTHER GAMES OF GAMBLING

If we consider not only lottery games, but also gambling in general – i.e. any game in which the player may become entitled to a prize in exchange for paying money, and all of this depends exclusively or predominantly on chance – the tax exemption under the Personal Income Tax Act may also apply here, as in some cases the prize does not qualify as income if it comes from a legally organized legal gambling game, e.g. from online sports betting. In contrast, income from illegally organized, i.e. prohibited gambling is always taxable, so in addition to the Personal Income Tax, the winner is also liable to social contribution tax.

ORGANIZATION OF GAMES OF GAMBLING AND PRIZE GAMES

But what about the other side, i.e. what obligations does the organizer of the game of chance have? Depending on the type of game of chance – e.g. card game or casino game – it is possible that the organizer pays the personal income tax as the payer of the prize, so the winner only receives the pure prize, but other tax obligations may also arise, so in addition to personal income tax, the organizer of the game is also charged with various amounts of gaming tax. Gaming tax is a tax paid for the right to organize the game of chance, typically paid on gaming income, while personal income tax is generally a public charge on the winner's income. As a general rule, in both cases, the organizer of the game of chance is solely responsible for the obligations related to the assessment, deduction, payment and declaration of tax on this type of income to the National Tax and Customs Administration , and moreover, the organizer's payment obligation arises sooner than the winnings are claimed.

The majority of gambling can only be organized with prior official permission, which was previously the competence of the Tax and Customs Administration, and today the Supervisory Authority for Regulated Activities performs the tasks related to the licensing, official control, supervision and regulation of the organization of gambling. There are also administrative service fees and gambling supervision fees associated with the organization of gambling. For example, an exception to the licensing requirement may be a tombola that is not organized continuously or a gift draw that is tied to a purchase. In addition, of course, Szerencsejáték Zrt. has exclusive authority over certain games, and, for example, the organization of casino games is subject to a concession.

If, as a company, we are thinking about organizing a prize game for business purposes, it is definitely worth looking into the possible tax obligations. Purchase incentives, typically in kind, gift raffle prizes are taxed under the Personal Income Tax Act, i.e. the payer (the company organizing the game) must pay personal income tax on 1.18 times the value of the gift - if there is no stake payment in this type of game, they are not considered gambling, so they are not subject to gambling tax, and accordingly this type has been removed from the Act on the Organization of Gambling. However, discounts, purchase discounts and product samples are specifically considered tax-free from the Personal Income Tax (and even VAT) point of view. It is also worth noting that in the case of competitions and contests where the luck factor is smaller or does not apply (e.g. a car prize for the first place winner of a beauty contest), there is also no gambling tax, the payer is only subject to Personal Income Tax. In addition to the types of taxes listed above, it is always essential to evaluate our other tax and accounting obligations, such as the effects of winnings on VAT refunds or corporate tax bases.

Dr. Robin Bordas

BRDS Tax & Legal