This article is the fifth one in a seven-part series of articles covering the important rules of corporate taxation in Hungary. After covering the Basic Framework and Special Regimes of Corporate Tax in Hungary we provide you a summary regarding Cross-border Treatment. The series will cover later on issues such anti-avoidance and penalties for non-compliance.
The corporate tax liability of a foreign resident taxpayer is a limited tax liability, i.e. it covers the income from Hungary only if:
- the foreign entrepreneur carries out business activities at a domestic location,
- a foreign shareholder of a Hungarian company owning real estate is trading with his existing share and thereby earns income,
- participating in a reverse hybrid business organization. In this case the non-resident entity becomes a resident taxpayer. A reverse hybrid business organization is an organization The income of the reverse hybrid organization is taxed in Hungary to the extent that this income is not taxed under the tax laws of the Hungarian or other tax legal system.
Double tax treaties signed by the Hungarian government generally follow the Organisation for Economic Co-operation and Development Model Convention. Generally, treaty provisions override domestic provisions (regardless of whether they were enforced before or after the domestic provisions). In the absence of treaties there is no relief from the Hungarian corporate tax after corporate tax liabilities paid by Hungarian taxpayers abroad.
Hungary does not levy withholding taxes on payments made to non-resident enterprises; i.e., no Hungarian withholding tax applies to interest, royalty, service fee and dividend (etc.) payments.
Under Hungarian tax law, foreign companies which transfer their tax residence to Hungary are entailed to step up for tax purposes assets and liabilities at fair market value.
When acquiring shares in a Hungarian entity, the acquirer must capitalise the shares at their acquisition cost. In the case of a future disposal of the shares, a capital gain is subject to corporate income tax at a rate of 9 %. A capital gain is computed by deducting the book value of the shares at the time of disposal from the proceeds from sale less the costs of disposal.
However, companies may apply for a tax ruling from the Hungarian tax authorities on the relevant tax values to be attributed to their assets and liabilities.
A Hungarian company which transfers its tax residence outside Hungary triggers a taxable event in Hungary.
In such case any unrealised capital gains, calculated on the basis of the fair market value of its assets, is subject to Corporate tax in the financial year of the exit.
However, Hungarian companies are entitled to request for payment of the exit tax in five annual instalments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.