Anti-deferral rules in Hungary - DLA Piper Guide to Going Global

Residence and basis for taxation

A corporate entity is treated as a domestic entity for corporate income tax purposes if it is incorporated under Hungarian law or the place of effective management is in Hungary.

Domestic

A resident company is subject to Hungarian corporate income tax on all its worldwide income and capital gain unless specifically exempted by the corporate income tax legislation.

Foreign

A nonresident company with a permanent establishment in Hungary is subject to corporate income tax on (i) the income derived through the permanent establishment, defined in Hungarian tax law and the applicable double taxation treaties, and (ii) on the income realized through alienation of participations in a Hungarian entity qualifying as a real estate holding company.

The applicable double tax treaties may reduce or eliminate these taxes. Hungary has an extensive network of treaties.

Taxable income

Domestic

A resident company is subject to corporate income tax on all its income from sources anywhere in the world, including patent royalties, dividends, interest and capital gains. Taxable base is equal to the pre-tax profit as shown in the financial statements by effecting certain adjustments. Taxable profits comprise operational business profits, profits from financial transactions and other profits.

In general, all expenses related to the operation of a business are deductible with certain exemptions (eg, fines and penalties).

Certain tax incentives are granted in the form of taxable base reductions in addition to the already-recognized cost deduction for accounting purposes.

A minimum alternative tax applies if a company cannot present a cost structure attached to the tax return.

Foreign

Nonresident taxpayers are taxed on the income attributed to their Hungarian permanent establishments or on the income realized through alienation of participation in a Hungarian entity that qualifies as a real estate holding company.

Tax rates

The corporate income tax is levied at a flat rate of 9 percent.

Local business tax is payable at a maximum of 2 percent on adjusted total trading turnover; it is deductible for corporate income tax purposes.

Tax compliance

Corporate income tax returns must be filed within 5 months from the last day of the tax year. Corporate income tax must be self-assessed by taxpayers and declared annually.

Under the self-assessment system, taxpayers are expected to voluntarily comply with the rules of the tax legislation. In order to encourage voluntary compliance, a self-correction procedure is available to taxpayers.

Alternative minimum tax

Companies are required to pay corporate income tax (based on a so-called minimum taxable base) even if they do not make a profit, unless they present their cost structure on an additional form attached to their tax returns.

Tax holidays, rulings and incentives

Tax holidays

Not applicable for this jurisdiction.

Tax rulings

Advance rulings may be requested by both resident and non-resident companies on any type of tax, provided that the request concerns the tax consequences of a future contract or transaction. In addition, binding rulings may be requested in relation to past transactions regarding corporate income tax, personal income tax, small business tax and local business tax consequences.

The application for a ruling is subject to a fee. The fee of the ruling request is between HUF5 million and HUF8 million (approximately between USD14,500 and USD23,500), depending on whether the taxpayer applies for an urgent ruling.

Tax incentives

There are tax incentives for specific activities. The tax credit for the promotion of development, being the general incentive regime, may not exceed 80 percent of the tax due. Any other tax credits (eg, the small business investment credit, the film production credit and the credit for sport subsidies) may not exceed 70 percent of the tax due that remains after the deduction of the tax credit for the promotion of development.

Hungary has an attractive IP regime that provides several benefits for IP-related activities. Pursuant to Hungarian legislation, companies may deduct 50 percent of the profit derived from royalty payments received. There are further advantages, including the CIT and local business tax exemption for income arising from the royalty payments received and the sale of a qualifying IP; preliminary requirements are registration of the IP with the tax authority and a 1-year holding period.

Consolidation

Since 2019, taxpayers may opt for group taxation for corporate income tax purposes subject to certain conditions. Members of the tax group may offset losses against the profits of other members of the tax group concerned. The general corporate income tax rate is applicable to corporate income tax groups.

Participation exemption

Capital gains realized through the disposal of stock in qualifying subsidiaries are exempted from corporate income tax. Participation exemption additionally applies to dividends received.

Capital gain

Capital gains are generally included in the company’s total ordinary income and are subject to tax at the general rates.

However, capital gains on the disposal of a “reported participation” are exempt, provided that the taxpayer has held the participation for at least 1 year before the disposal. In this context, “disposal,” aside from sale and purchase, refers to contribution in kind as well. A reported participation is a participation in the capital of a company (domestic or foreign, except CFCs), the acquisition of which was appropriately reported to the tax authority, within 75 days from the acquisition date.

Capital gains on the disposal of “reported intangible assets” (ie, acquired or self-developed assets that entitle the taxpayer to royalty income) are exempt, provided that the seller has held the asset for at least 1 year and the acquisition is reported to the tax authority within 60 days from the acquisition date.

Distributions

There are no withholding taxes on patent royalties, dividends and interest paid to resident or nonresident companies.

Loss utilization

Tax losses may be carried forward for 5 years from the year in which they incurred. Losses carried forward from previous tax years may only be used to offset 50 percent of the current year’s profit. Losses must be deducted in the order they were sustained. Losses generated by the last day of the 2014 tax year which have not yet been used can be utilized in line with the provisions effective on December 31, 2014 and are available to be utilized by December 31, 2030.

Tax-free reorganizations

The provisions that implemented the EU Merger Directive apply to domestic situations and provide for a tax deferral (ie, a temporary tax exemption) on capital gains realized on qualifying transactions. Qualifying transactions are identified in the Hungarian legislation by the terms “preferential transformation,” “preferential transfer of assets” and “preferential exchange of shares.” The tax deferral is not automatically available, but only at the election of the taxpayer.

Anti-deferral rules

CFC

A CFC is defined as a non-resident company that meets 1 of the following conditions:

A foreign entity is regarded as a CFC if a Hungarian taxpayer, either on its own or together with related entities/persons:

Holds a direct or indirect participation of more than 50 percent of the voting rights of that entity
Owns, directly or indirectly, more than 50 percent of the registered capital of that entity or
Is entitled to receive more than 50 percent of the profits of the foreign entity and
If the participation or entitlement specified above persists during the majority of the underlying tax year.

The above definition is also applicable in relation to a Hungarian resident taxpayer and its foreign permanent establishment.

The CFC rules apply if the actual corporate tax paid by the foreign entity or permanent establishment (PE) on its profits is less than the difference between the equivalent corporate tax that would have been due in Hungary if the foreign entity or PE had been subject to Hungarian corporate income tax and the corporate income tax actually paid by the foreign entity, if all other tests are also met.

A foreign entity or PE does not qualify as CFC if the income of the foreign entity or PE is derived solely from a transaction - or series of transactions - regarded as genuine.

If the entity attains CFC status, the profit generated by that entity from a transaction, or series of transactions, that is regarded as non-genuine and reduced by the dividends declared will be included in the taxable base of the Hungarian taxpayer to the extent of amounts generated through assets and risks, which are linked to significant people functions carried out by the controlling Hungarian tax resident entity.

Dividends received from a CFC are included in the taxable base of a resident corporate taxpayer.

General anti-avoidance rules

There are several anti-avoidance rules that allow tax authorities to ignore the legal form of an arrangement between entities and examine the actual substance or genuine purpose of a contract or transaction.

The following general anti-avoidance rules are set out in the Hungarian Act on Rules of Taxation:

A genuine economic activity clause, which is a requirement to carry out transactions of a real economic substance, and
The prohibition of abuse of law, which is a requirement of proper exercise of the law.

Under the substance-over-clause rule, the tax consequences of transactions or the chain of transactions may be assessed according to their real substance. The general abuse-of-law doctrine examines the goal of a transaction or a chain of transactions. Should the primary goal be the avoidance of taxation or gaining tax advantages, the deductions may be denied.

General anti-avoidance rules under the Hungarian Corporate Tax Act include the following:

Prohibition of the multiple reduction of the taxable base under the same legal title
Transactions should make business sense; otherwise, deduction may be denied, and
Taxpayers should act with due diligence.

Based on the general anti-avoidance rules as set out in the corporate income tax legislation costs, expenditures and losses related to a contract or a transaction are deductible for corporate income tax purposes to the extent that the underlying transaction, or series of transactions, is in line with the purpose of the applicable tax rule and is substantiated by real economic, commercial reasons. If the main purpose or one of the main purposes of the transaction, or series of transactions, is largely to achieve tax advantages contrary to the objective of the applicable tax rules, the costs and losses related to the transaction are not deductible.

Foreign tax credits

Double tax treaties

Hungary has signed more than 70 double taxation treaties with other countries to avoid double taxation of income or gains. According to these, foreign taxes paid on foreign-source income may be credited against Hungarian tax, or the foreign source income may be exempted.

Special rules applicable to real property

The acquisition of real estate in Hungary as part of a purchase, exchange or similar transaction is normally subject to real estate transfer tax, payable at 4 percent of the market value. A reduced rate of 2 percent applies to the value above HUF1 billion (approximately USD2,900,000). Besides real estate transfer tax, there may be other different tax liabilities, including building tax and land tax, which are imposed at the level of municipalities.

Transfer pricing

The arm's-length principle is applied under Hungarian law to transactions between related entities. Hungarian rules are in accordance with the OECD guidelines.

Withholding tax

Dividends, royalties, interest, rents, etc.

There is no withholding tax on dividends, interests and royalties paid to resident and nonresident companies.

Dividends, including advance dividends, paid to individuals are taxed at the rate of 15 percent. Double taxation treaties operate to modify these rules, including reducing the rate of withholding taxes.

Service fees

Not applicable for this jurisdiction.

Capital duty, stamp duty and transfer tax

There is no capital duty in Hungary. There is no standard rate for stamp duties – they are imposed in administrative and court procedures.

Generally, transfer tax is payable by the purchaser at a rate of 4 percent of the value of the property up to HUF1 billion, and 2 percent on the value exceeding HUF1 billion (approximately USD2,900,000) (capped at HUF200 million per property, approximately USD580,000).

Employment taxes

Social security tax is paid by paying agents (eg, employers) based on a legal relationship with an individual (eg, employment). The rate of social security tax is 13 percent.

Generally, social security contribution is payable by the employees at the rate of 18.5 percent. However, employers (ie, paying agents) are obliged to withhold and pay the social security contributions for their employees.

Other tax considerations

Not applicable for this jurisdiction.

Key contacts

Levente Torma

Counsel DLA Piper Hungary [email protected] T +36 1 510 1100 View bio