Hungary is an ideal location for international tax planning. Below we summarize the 5 most important features of the Hungarian tax system that can make the country attractive for international investors and public and private multinational groups.
1. 9% CORPORATE INCOME TAX RATE
The corporate income tax rate in Hungary is only flat 9%.
In addition to corporate income tax, Hungarian companies are also subject to local business tax at a maximum rate of 2 %. This tax is imposed on the adjusted gross turnover. Interest, royalties, dividends and capital gain are fully exempt from this tax. Furthermore, this levy may be lowered or completely avoided by the appropriate selection of the place of operation of the company.
2. NO WITHHOLDING TAX ON PAYMENTS TO FOREIGN CORPORATIONS
Based on its domestic tax laws Hungary does not levy withholding tax on outbound dividends, interests, royalties and service fees paid to foreign entities. The sole exemption is the source taxation of the capital gain realized on the sale of a domestic real property (either in the form of an asset deal or a share deal). The general exemption from withholding taxation allows flexible forms of tax-free profit repatriation.
3.IDEAL HOLDING LOCATION
Hungary is an ideal location for establishing a holding company. Based on the participation exemption rules, dividends and liquidation proceeds are tax exempt without holding period or minimum shareholding requirements. Furthermore, the capital gain realized on the disposition of shares is also exempt, regardless of the size of the shareholding, subject to a minimum one-year holding period.
4. 4.5% EFFECTIVE TAX ON INTELLECTUAL PROPERTY INCOME
Hungary has a favourable IP box regime. This allows companies to deduct 50% of the profit derived from qualifying IPs (software, patent and certain other types of IP) from the CIT base. Taking into account that IP income is not subject to local business tax, this results in an effective tax rate of 4.5%. Further, the income arising from the sale of a qualifying IP is fully exempt from CIT and local business tax, subject to a one-year holding period and the registration of the IP with tax authority. This can result in tax free exit through asset deals, tax-free step-up and various other tax planning opportunities.
5. NO TRANSFER PRICING WORRIES THROUGH GROUP TAXATION
Upon their choice, members of a company group (or some of them) may opt for group taxation. This election entitles the following benefits: (i) transfer pricing rules are, basically, not applicable on the transactions between group members; and (ii) both current losses and losses carried forward can be consolidated on a group level.
By István Csővári, Partner, Jalsovszky
