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Hungary: advantages and characteristics of a European tax haven

«Hungary has the traits of a tax haven»: this is what the European Parliament said, and the numbers seem to prove it.

In the past two decades, the corporate income tax rate has literally halved from 18% to 9%. These data would be enough to give evidence of the facilities provided for those who decide to move their business here.

But there is more: in Hungary, there are no withholding taxes on dividend payments, interest and outgoing royalties. This means that a company based in this country can lawfully subtract these payments from taxation, in the event that these are not taxed in the collection jurisdiction.

The opening of a company in this tax haven, therefore, becomes an even more fluid process and, in recent years, the state has also made its contribution by enhancing the infrastructure in the area.

Further advantages can be obtained by investing in research, in this case, the tax rate is further reduced to 4.5%, a clear sign of Hungary’s desire to establish itself as a new pole in fintech know-how.

In essence, the country is confirmed as one of the most attractive destinations within the European Union for small-medium enterprises, but also for multinationals: only the Benelux countries (the Netherlands, Luxembourg, and Belgium) offer facilities of this magnitude but the running costs are 6 times higher. For some, it is unfair competition, but the absence of a common European tax system allows to act in compliance with the rules without falling into Tax Offenses.

02 ———

Favourable tax regime for a company in Hungary

Further benefits can be obtained by investing in research, in this case, the tax rate is further reduced by up to 4.5%, a clear sign of Hungary’s desire to establish itself as a new pole in fin-tech know-how.

In essence, the country confirms itself as one of the most attractive destinations within the European Union for small-medium enterprises, but also for multinationals: only the Benelux countries (the Netherlands, Luxembourg and Belgium) offer facilities of this magnitude but the operating costs are 6 times higher. For some, it is unfair competition, but the absence of a common tax system at European level makes it possible to act in compliance with the rules without falling into evasion offences.

And let’s not forget the benefits for pensioners! Hungarian legislation offers a more favourable tax regime than the Italian one, with a flat tax at 15% and a low cost of living. That is why many people have decided to move to this tax haven after retirement. The only possible obstacle? Cultural and linguistic barriers. But with the support of our EXPERTS who speak perfect English, it becomes really simple. We offer on-site service.

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Hungarian Off-Shore Company

The Hungarian legislation does not provide for a special tax regime for groups of companies.

In order to favor the use of foreign capital, the legislation provides for a special tax regime for Hungarian Off-Shore Companies (Hoc). This regime consists of fixed taxation at a rate of 3% of the company’s income.

A Hungarian Off-Shore Company can hire:

Both the legal form of Kft (LTD);
Both the legal form of Rt (PLC).
In order to benefit from this scheme, a Hoc must necessarily meet certain requirements:

The company must be incorporated and have its registered office in Hungary;
The share capital must be fully owned by non-residents;
The company, in order to operate as an offshore company, must obtain appropriate authorization from the Ministry of Finance;
The company must exclusively carry out trading activities outside the territory of Hungary and/or provide services (excluding financial services if not intercompany) exclusively abroad.
It is also worth noting that the Hoc can benefit from the numerous conventions that Hungary has entered into with other countries in order to reduce the phenomenon of double taxation. In many cases, under these conventions, it is possible not to apply a withholding tax to the payment of interest and royalties.

Finally, it should be noted that services rendered outside the Hungarian territory by a Hoc in favor of non-residents are considered outside the scope of value-added tax.

1 – TAXATION ON LEGAL ENTITIES

This is what the Act LXXXI of 1996 on Corporate Tax and Dividend Tax provides.

Pre-tax profit, adjusted in accordance with the law, represents the tax base for companies. The taxable income is, therefore, determined by making changes to the income shown in the income statement in accordance with the relevant tax regulations.

Resident companies are subject to income tax wherever produced in the application of the world-wide principle. Resident companies are considered to be companies incorporated or actually carrying on business in Hungary. Non-resident companies are subject to tax only on income produced in Hungary.

Legal entities established under the Companies Act, i.e. companies, are subject to corporate income tax under national law:

  • Joint Stock Companies;
  • Limited liability companies;
  • Joint ventures;
  • General partnerships and limited partnerships;
  • Cooperatives and state-owned companies;
  • Venture capital funds and mutual insurance funds;
  • Law firms, executors, and attorneys.

Resident companies are taxed on income wherever produced. No group taxation is allowed under Hungarian law. In general, the tax period coincides with the calendar year. However, taxpayers may, under certain conditions, opt for an exercise other than the calendar year. The main aspects of corporate taxation are the following:

  • Corporate tax rate: 9%;
  • Total exemption from taxation of dividends received (except dividends from CFCs);
  • 50% Royalty exemption from royalties collected;
  • No withholding tax on dividends paid.
  • Double Taxation Convention signed with Italy.

2 – DIVIDENDS AND CAPITAL GAINS

Dividends received by a Hungarian company do not generally contribute to the formation of taxable income. This is except when they come from a person resident in a country with a privileged tax status (Controlled Foreign Company rule).

Dividends distributed by a Hungarian company and received by another resident company are not subject to any withholding tax at the time of payment.

Dividends distributed by a Hungarian company and received by a non-resident company are, however, subject to a withholding tax of 20% at the time of payment under domestic law. However, this is without prejudice to the conventional provisions which in many cases provide for a more favorable withholding tax on outbound dividends (France, United Kingdom, Luxembourg, and the Netherlands 5%, Italy 10%).

Capital gains realized by Hungarian companies are included in the taxable income for income tax purposes. Capital gains realized by non-resident companies, which do not have a permanent establishment in Hungary, are not subject to taxation in Hungary.

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