INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 9): Hungary
By Dr Anita Ihász Kovácsné, KRS Attorneys at Law
The main international tax compliance act (Act XXXVII) shall be applied to certain matters relating to the assessment of taxes, the collection of taxes and other charges, and the avoidance of double taxation, between EU member states and other international administrative cooperation. Those legal EU acts which affect the taxation procedure and cooperation between the tax authorities of EU member countries are mainly regulated in Act CL of 2017 on the rules of taxation. Moreover, Hungary has concluded international treaties for the avoidance of double taxation with more than 80 foreign countries – including all countries of the EU. The EU directives on taxation are implemented regarding taxation of companies in the Act on Corporate Tax and Dividend, regarding private individuals in the Act on Personal Income Tax, and regarding VAT in the Act on Value Added Tax.
Foreign Tax and Financial Reporting Requirements
1. Main types of business and taxes for each entity. The most common business entities are the following:
a. General partnership joint and several liability for the partnership’s obligations not covered by the assets of the partnership.
b. Limited partnership at least one of the partners undertakes joint and several liability while at least one other partner is not liable.
c. Limited liability company onsisting of capital contributions of a predetermined amount, in the case of which the liability of members extends only to the provision of their initial contributions, and to other contributions set out in the memorandum of association.
d. Limited companies founded with a share capital consisting of shares of a pre-determined number and nominal value, where the obligation of shareholders extends to the provision of funds covering the nominal value or the accounting par value of shares.
In Hungary there are not different taxation types for the different business entities. With regard to the size, the amount of annual revenues, or the number of employees, business entities can choose from different forms of taxation. The most widespread form of taxation among enterprises is the corporate tax. The 10% rate of corporate tax, along with the tax base deduction possibilities, provide a massive competitive advantage for Hungary Europe-wide.
2. Types of trusts, foundations and tax rates for each structure
The new Hungarian Civil Code introduced the fiduciary asset management contracts which are very similar to the trusts of the Anglo- Saxon legal system. With regard to the taxation of a trust fund, the fiduciary shall have competence. It must be highlighted that special tax rates don’t apply to the trusts or foundations, only the calculation of tax base can differ. Besides the fiduciary assetmanagement contracts, from this year a special form of foundation, the so-called trust foundation can be established. A trust foundation may be established for the purpose of managing the assets assigned to it by the founder and for the purpose of carrying out the tasks specified in the articles of association and distributing the assets to the person(s) named as beneficiary(ies). In order to establish an asset-management foundation, assets worth at least HUF 600 million must be assigned to the foundation. With regard to the relevant regulation of personal income tax act, an individual is not liable to tax if he or she disposes of any income for a foundation purpose.
3. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
If someone manages financial investments abroad but has a Hungarian tax identity, they must also declare to the Hungarian tax authorities their income from these investments unless the respective DTA instructs differently. In this case, the investor shall file a Hungarian tax return according to the statement provided by their investment service provider. However, this is not considered to be a solution in accordance with Hungarian tax law and could result in a tax investigation by the tax authorities and the imposition of sanctions.
The amount of dividends received from a controlled foreign partnership recognised as income does not reduce pre-tax profit.
Regarding incomes from interest from foreign bank accounts, it should be noted that interest income from abroad must always be declared in the Hungarian tax return. The actual rate of withholding tax depends not only on international law but also on obtaining the appropriate certificates. Income is always taxable in Hungary, but tax deducted abroad is subject to certain limits. In excess of the Hungarian tax liability, only the EU directive provides for set-off. EU member states automatically provide each other with information on payments, unless they have exercised their right to levy withholding tax permitted by the Directive. Member states divide the proceeds of any withholding tax 25/75 between the source and the country of residence.
4. Tax compliance requirements for estate and wealth planning matters
No tax liability shall arise if the total income of a private individual from the sale of movable property does not exceed HUF 200,000 in the tax year. The portion above HUF 200,000 will be subject to the 15% flat tax.
Regarding wealth planning, the Hungarian regulations providing tax exemption for all those transactions realised among family members and in a marriage provide again real tax haven conditions for Hungarian tax residents.
5. Tax compliance requirements on sale of real estate
The income of a private individual from the sale of real estate shall be based on the proceeds, taking into account the period of costs and ownership. Income arising from the redemption by the spouse of real estate, or movable property or rights or securities, following the termination of community property by marriage, shall be considered as tax exempt revenues. In case of normal real estate transaction, after five years from the date of acquisition the income deriving from the transfer of real estate is tax exempt; until then, considered income is decreasing from 100% to 30% and 15%, personal income tax is payable on the income arising from the transfer of real estate.
The general rate of duty regarding the transfer of ownership of real estate is 4%, which shall be ascertained after sale value of the real property and not after the purchase price which is mutually agreed in the sale and purchase contract.
Family-owned businesses provide a huge part of the Hungarian economy and most of them will face the diffculties of a first-generational transition process in the next five years. In order to enhance the survival of such companies, further favourable changes are predicted in wealth planning and succession. As part of the comprehensive family-support program of the government, further personal income tax reductions are forecast.
Nevertheless, the low 10% rate of corporate income tax, the low 15% flat rate of personal income tax, the tax exemption of inter-familiar transactions, and the fact that no wealth taxes are imposed, make the Hungarian tax system very competitive and attractive still today.
Dr Anita Ihász KovácsnéGGI member firm
KRS Attorneys at Law
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KRS is a local Hungarian firm providing integrated international legal and tax advisory services in all fields of business law. They work as strategic advisory partners of their clients, supporting their daily business and project-based transactions under constantly changing legal and tax conditions. To answer these expectations, their commitment is effective, innovative, solutions-oriented advisory work and proactive, problempreventing workflow. They’re the first Hungarian law firm providing legal services on a digital platform: www.e-krs.hu.
Dr Anita Ihász Kovácsné is an economist, certified tax advisor, and specialist advisor for international taxation and has over 20 years’ experience in business consulting. She joined the firm in 2004 to found the tax advisory department and to support the managing partner in managing and developing the law firm.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: TTstudio - stock.adobe.com