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HUNGARY
Taxation of Nonresident Entities
Corporate Assessments and Payments
Personal Assessments and Payments
Hungary was the first eastern European country to make the transition to democracy, and
the transition was gradual, stable, and free from unrest. The tax and legal systems have
been radically revised to remove restrictions on business operations in Hungary yet
provide a secure legal framework in which to conduct business. Entities with foreign
investment have benefited from special protections and privileges. With favorable
company and tax laws, a skilled but low-cost labor force, and a central location, the
country makes an ideal base for trading and financial operations throughout central and
eastern Europe.
Deloitte & Touche Kft., the Deloitte Touche Tohmatsu International member firm in
Hungary, opened its office in Budapest in 1990. The firm now boasts a professional staff of
more than 120. The firm's areas of expertise include banking and financial services,
privatization, and restructuring.
Auditing Services: Didier Taupin
International Services: Didier Taupin
Management Consulting Services: Peter Lörinczé
Tax Services: Paul Lacy
Telephone: +36 (1) 267 2062
Telecopier: +36 (1) 267 4182
Forms of Business Organization. Forms of business organization include the business
association, joint enterprise, limited liability company, public limited company, general
partnership, and limited partnership. The main forms of interest to foreign investors are the
limited liability company and the public limited company. The term economic association
is applied to business forms other than the sole proprietorship. Entities with foreign
participation are referred to as joint ventures.
Representative offices may be registered. Foreign companies sometimes open commercial
representative offices to start limited activities in Hungary.
Resident and foreign enterprises are subject to corporate income tax. The following are
subject to corporate income tax: cooperatives, trusts, various types of associations,
foundations, and some self-employed individuals who opt to be subject to corporate
income tax to take advantage of the different accounting regime. General and limited
partnerships are not separate legal entities but are liable for the tax.
Exchange Controls. The Hungarian forint (HUF) is still not completely convertible, but
companies carrying on economic activities may freely exchange forints for hard currency to
the extent necessary to purchase components, materials, and goods. Repatriation of profits
can be accomplished, as well as one-half of a foreign employee's after-tax salary.
Local Participation or Management Requirements. Local participation or management
requirements do not exist. Business entities may be wholly owned by foreigners.
Foreigners may form or acquire a Hungarian subsidiary or acquire an interest in another
Hungarian business or company.
Investment Incentives. Effective 1 January 1995, no further tax concessions or incentives
are available to new companies. The various forms of tax incentives that were granted in
the past remain effective. However, because of a change in the structure of the corporate
income tax law, the amount of tax saved from previously granted tax incentives may be
limited.
Prior to 1995, the tax law in force during different years permitted tax incentives at
differing rates. Corporate tax exemptions of 100%, 60%, or 40% of taxable income were
possible. Corporations that hold any of these exemptions in 1995 may later use them in the
following ways:
Certain other incentives are available to all taxpayers. A provision exists that permits a
portion of the interest on loans that were made to purchase productive assets to directly
offset income tax of the borrowing corporation. Several different categories of loans have
been established, and the amount of interest (ranging from 6% to 30%) that may be used to
offset tax varies according to the category in which the loan falls.
Foreigners employed to work in Hungary are allowed to deduct 30% from their taxable
employment income before tax is computed. Such individuals can also opt for exemption
from making contributions to the national social security plan. If they so elect, their
employer will also be exempt.
As of 1 January 1994, companies with 100% foreign ownership that do not forward goods
across the border may be set up as offshore companies. Such companies are entitled to an
85% tax allowance if they are exclusively engaged in trading or service activities with
third countries or foreign countries and employ Hungarian staff and use Hungarian services.
In addition to the tax benefits mentioned, certain tax credits are also available to corporate
income taxpayers that bear certain interest charges in relation to loans taken to develop
exports and to finance certain investment projects.
In principle, all resident entities are subject to corporate income tax on worldwide income.
Companies established under Hungarian law, as well as other Hungarian economic
associations, are regarded as resident.
Corporate Income Tax Rate. A substantial change in the computation and timing of
corporate income tax has been adopted into law. For corporate income earned on or after 1
January 1995, the corporate income tax rate has been reduced from 36% to 18% on
undistributed profits before tax. This 18% income tax is referred to as the calculated tax.
When the income that has been taxed at 18% is distributed to shareholders, an additional
tax of 23% is due. The additional tax is computed by dividing the dividend amount by 1.23.
Hungary has income tax treaties with other countries. Those treaties generally provide for a
lower dividend withholding tax rate. As of 22 February 1995, unofficial reports indicated
that the lower rate will take precedence over the Hungarian domestic rate.
A minimum tax of 2% of net sales revenue applies in the 1994 tax year if the taxpayer's
corporate income tax would otherwise be lower than 36%. Net sales revenue is defined as
net accounting sales income less the value of the goods sold, payments to subcontractors,
and commission payments. The minimum tax is abolished for tax years starting on or after 1
January 1995.
Taxable Income. Taxable income is generally computed by deducting from total receipts
the costs of obtaining those receipts, as well as other expenditure, and by making the tax
adjustments prescribed by corporate income tax law. Accounting law rules are initially
applied in arriving at income. Tax adjustments are applied to the result.
Inventory valuation. Inventories are usually valued on the basis of cost or net realizable
value, whichever is lower.
Businesses use the first-in, first-out method. The possibility of deducting certain
provisions on inventories for tax purposes was introduced in 1994.
Dividend income. Distributions are made from after-tax profits; a company receiving a
dividend from a resident company will not have to pay further corporate income tax on the
dividend.
Foreign-source income. When income has been doubly taxed, relief for foreign tax may be
available under a treaty or by way of a business deduction.
Capital gains. Capital gains are included in taxable income and charged at the normal rate.
Deductions. Hungarian tax law permits a number of deductions from the tax base.
Depreciation. Depreciation on fixed assets must be deducted under the rules laid down in
the tax law, which can differ from those used for accounting purposes. The law prescribes
the straight-line method. A list of depreciation allowances has been published with a
maximum rate of 33%. The rates of depreciation allowances include 2% to 7% for
buildings, 14.5% to 33% for machinery and equipment, and 20% for vehicles (or for a
proportion of the vehicle, depending on its use). Accelerated depreciation rates were
introduced in 1994 for certain types of assets. Effective 1 January 1995, tax depreciation
may neither be greater nor less than that specified by the tax law.
Interest. Interest paid by a company is treated as an ordinary business expense and is not
subject to any special limitations except with respect to shareholders' loans. Click for
information on Tax Considerations for Groups.
Directors' remuneration. Remuneration paid to a director acting as an employee is
regarded as an ordinary expense. In some circumstances, fees and remuneration paid to a
director who is a member of the company may be regarded as paid out of after-tax profit.
Taxes. Most taxes are deductible as business expenses. Corporate income tax is not
deductible.
Bad and doubtful debts. Companies may create reserves for bad and doubtful debts. The
tax law prescribes the following percentages: 2% of debts in default for 90 to 180 days,
5% of debts in default for 181 to 360 days, and 25% of debts in default for more than 360
days. Financial institutions and insurance and brokerage companies are not allowed to
deduct reserves for bad debts.
Other deductions. Companies employing previously unemployed people may reduce their
tax base by 100% of the social security contributions made on behalf of those employees
for the first twelve months of employment. Some conditions must be met.
Approved charitable donations may be deducted up to 20% of the taxpayer's corporate
taxable income for the year.
The deductibility of rental fees paid for shares in limited liability companies or securities
is limited if the rental is for less than one year.
Entertainment expenses are deductible up to 0.5% of the taxpayer's net sales.
Tax Treatment of Losses. Losses may be carried forward for five years. Formation and
start-up costs may be capitalized and written off a maximum of five years. The rules are
different for financial institutions.
Tax Treatment of Fringe Benefits. From 1994, companies providing benefits in kind and
rights of a material value to individuals are considered to do so net of tax. As a result, the
company must pay personal income tax at the maximum rate of 44% on behalf of the
individual. The company is allowed to deduct both the benefit and the tax on it from its
corporate income tax base as a business expense.
In general, a benefit in kind is that part of the value of a product or service that is not
reimbursed by the recipient to the provider. Salaries and compensation for independent
activities are not considered benefits in kind.
Taxation of Nonresident Entities
Foreign entities are subject to corporate income tax if they carry on a business activity in
Hungary through a permanent establishment or if they receive Hungarian-source income.
Such entities are divided into two groups: foreign entrepreneurs and foreign organizations.
Foreign Entrepreneurs. A foreign entrepreneur is a legal entity or any type of
incorporated body without a legal personality that has its headquarters abroad, is owned by
foreigners, and carries on a profit-making activity in Hungary through a permanent
establishment there. Broadly, the term permanent establishment is defined as a fixed
settlement used for entrepreneurial activity. The tax base includes all income derived from
the permanent establishment in Hungary, less any costs related to such income. However, if
this tax base is less than 10% of the gross income of the permanent establishment, 10% of
gross income is deemed taxable for the calculated tax. Sixty-five percent of the actual tax
base is used for computing the additional tax.
Foreign entrepreneurs must comply with the rules regarding advance payments of tax
Income obtained and costs incurred in foreign currency must be converted into forints
using the purchase rate of the National Bank of Hungary on the day that the income was
credited or cost incurred.
Foreign Organizations. Foreign entities and other foreign enterprises having no permanent
establishment in Hungary but deriving income from entrepreneurial activity there are
subject to corporate income tax on their Hungarian-source income. Generally, all
Hungarian-source income is treated as taxable and subject to a withholding tax at the rate
of 18%. Tax treaties may, however, modify the rules. Interest paid by the Hungarian
government, the National Bank of Hungary, or other banks is not subject to withholding tax.
Since each legal entity is currently regarded as an independent person, both in general
company law and in tax law, separate returns must be filed. Group dividends are dealt with
in the normal way. Losses may not be transferred, and assets may not be transferred free of
tax.
Arm's-Length Principles. For various purposes, Hungary's tax law uses the concept of the
associated enterprise . When a taxpayer or individual not classified as a taxpayer directly
or indirectly takes part in the control of another taxpayer's enterprise or holds more than
25% of the voting rights in another taxpayer's company, the other enterprise or company is
an associated enterprise of the taxpayer or individual concerned. If transactions between
associated enterprises are not carried out at arm's-length prices, the tax authorities have the
right to adjust the base for corporate income tax purposes.
Thin Capitalization Rules. Interest paid on shareholders' loans can be treated as a
business expense, subject to limitations. If the amount of a loan from a significant
shareholder exceeds four times the equity of the company, interest relating to the excess
cannot be deducted. The amount involved is thus added to the tax base. A shareholder is
considered significant if that person's holding exceeds 25%. This rule was adopted to
prevent hidden distributions of profit.
Corporate Assessments and Payments
The tax year is the year to 31 December. A return for a tax year must be filed by 31 May in
the following year. Fines are levied for failure to file a return.
Tax is paid under a system of self-assessment. Advance payments are required, based on
the previous year's liability.
A complete audit is made about every five years to verify the accuracy of a taxpayer's
returns and overall tax liability.
In Hungary, individuals who receive income are subject to personal income tax.
Individuals resident in Hungary are subject to tax on their worldwide income, and
nonresidents are subject to Hungarian-source income only. An individual is regarded as
resident if his or her home is in Hungary or if he or she habitually resides there. An
individual who stays in Hungary for at least 183 days in a calendar year is regarded as
habitually resident there.
Treatment of Families. All individuals are taxed separately in Hungary; a provision for
joint taxation of families does not exist.
Tax Rates. Beginning January 1, 1994, personal income tax is calculated using
progressive income tax rates.
Taxable Income. Income includes all receipts, whatever their nature or source, derived by
an individual; any profit remaining after the deduction of costs allowed by law; or any
proportion of a profit stipulated by law. Income may be cash, a credit, or the pecuniary
value of compensation derived by an individual from an activity or for some other reason.
Income is divided into various classes:
Income from dependent services. Receipts derived from dependent services are
generally taxed in full; reimbursement of business expenditure does not, however, usually
constitute a taxable receipt. This class covers
Special benefits are available to foreigners. Only 70% of remuneration is regarded as
taxable if the employee is not registered as a permanent resident in Hungary and is
employed by an economic association with foreign participation, a legal entity based
abroad but carrying on a business activity in Hungary, an unincorporated foreign concern,
or an association owned entirely by foreigners.
Income from independent activities. Receipts from an individual's business activities,
less deductible costs, are regarded as taxable income. If the individual does not wish to
itemize costs, 90% of the year's receipts may be regarded as the taxable amount. Some
individuals may opt to be subject to corporate income tax. Click for information about
investing in Hungary.
Loss relief is limited to relief against income from independent activities in the next five
years, the proportion deducted in each year being chosen by the taxpayer.
Income from the transfer of movable or immovable property or from rights with a monetary value. Gains from transfers of property and rights must be calculated by taking the market value on the date of transfer as the sales proceeds. Taxpayers may deduct the acquisition cost, transfer costs, and expenditure on improvements. Special rules apply to transfers of houses and apartments.
Income from savings deposits and securities. Loan interest paid to individuals is tax free
if the interest rate is lower than that of the National Bank of Hungary. In January 1995, the
National Bank of Hungary rate was 25%. Since all bank deposits pay interest lower than
25%, interest on savings deposits is free of tax.
Minor and miscellaneous receipts. Income is regarded as a minor receipt if it is based on
a contract, does not exceed HUF 3,000, and relates to an independent activity. Most minor
and miscellaneous receipts are taxed separately from other income at a flat rate.
Exempt income. Items exempt from tax include the following:
Deductions and Reliefs. Effective 1 January 1995, seven deductions from an individual's
taxable income were eliminated. The former deductions were replaced with credits against
the tax owed by an individual. The following items directly reduce the tax:
Credits are available to taxpayers with children based on the number of children that they
are supporting. In addition, a credit of 20% of savings to acquire an apartment is available,
up to HUF 60,000. Allowances of HUF 200 per month are given to employees.
Personal Assessments and Payments
The tax year is the calendar year to 31 December. Returns must be filed and outstanding tax
paid by 20 March in the year following the year of assessment. In general, total income,
including income originating abroad, must be included on the return, but some investment
income may be excluded because it is taxed by way of a final withholding tax. Individuals
with income from a private business activity must file their returns by 28 February.
Some individuals do not have to submit returns, such as taxpayers whose income derives
exclusively from a single employment and those whose total income does not exceed HUF
110,000.
Employers are responsible for deducting tax at source from the employment income of their
employees and accounting for the tax monthly.
Basic Rates. Hungary's domestic law requires the payment of an additional tax when a company pays out a dividend from income earned on or after 1 January 1995. The tax of 23% is computed by dividing the entire amount of the distribution by 1.23 to determine the distributable amount and the 23% thereof . Dividends paid to resident individuals are subject to a 20% withholding tax if the paying company has not paid corporate income tax at the standard rate and to a 10% withholding tax if it has.
Resident entities are not subject to withholding tax on payments of interest. In the case of
nonresident entities, interest paid by the government and banks is not subject to withholding
tax, but other interest is charged as business income and therefore is subject to withholding
tax at an effective rate of 18%.
A final withholding tax at a rate of 18% is levied on royalties paid abroad to companies.
Individuals are subject to tax on royalties under the normal personal income tax rules.
Relief Under Double Tax Treaties. Hungary's agreements are mainly based on the
Organization for Economic Co-operation and Development (OECD) model. In some cases,
interest may be tax free under domestic law; thus, the treaty rate would not apply. The
applicability of the treaty with Yugoslavia is uncertain.
Value Added Tax. Effective 1 January 1993, Hungary introduced a new system of value
added tax (VAT), which is similar to the systems operated in European Union member
states. All persons conducting business activities are subject to the tax in relation to sales
of products and services in Hungary and imports of goods. As a general rule, the tax base is
the invoiced value of the goods or services, excluding VAT. In the case of imports, the tax
base is the invoiced value plus customs duties, customs clearance fees, other taxes, and
costs of transporting the goods to their first destination in Hungary.
The standard rate is 25%. A number of products and services are charged at 12%,
including basic food products; medical instruments; and the provision of electricity, gas,
heating, and water. Exports are zero-rated.
Various supplies qualify for exemption, including education, cultural services, sports
events, social services, health services, services contributing to scientific research and
development, and services related to the protection of copyrights.
Businesses may opt to be exempt from tax when turnover does not exceed HUF 1 million in
the retail trade or HUF 2 million when providing commercial accommodations of room and
board. A business that opts to be exempt or renders only exempt services may not recover
input tax, other than that related to imports.
Social Security Contributions. Employers must make social security contributions at a
rate of 44% on the gross salaries and other remuneration paid. Employees make
contributions at a rate of 10% on total remuneration received. Contributions are deductible
for corporate and personal income tax purposes.
A foreign national employed by a foreign employer may elect not to participate in
Hungary's social security system.
Social security provides sickness, maternity, and pension benefits, as well as compensation
for industrial accidents. Medical care is free of charge to all insured individuals.
Unemployment Fund Contributions. Employers must pay 4.2% of gross salaries and
wages to the unemployment fund. Employees pay 1.5% of their gross wages. Employees'
contributions are tax deductible.
Training Fund Contributions. Entities subject to corporate income tax must contribute to a
fund that finances the costs of training employees. Training fund contributions are levied at
the rate of 1.5% on the total payroll of the employer. They are deductible for corporate
income tax purposes.
Municipal Taxes. The municipalities levy a number of taxes.
Buildings tax. Tax is charged to the owners of buildings of all kinds. The tax base is either
the useful floor area or the market value of the building, whichever the municipality in
question decides.
Tax on undeveloped property. The owner of an undeveloped plot of land suitable for
building purposes may be taxed by the municipality in which it is situated. The maximum
rate is normally HUF 100 per square meter.
Communal charge. Communal charges may be levied on rental contracts concluded by
private lessors and on business entities in relation to the number of staff employed. The
maximum charge is HUF 3,000 in the case of a private lessor and HUF 2,000 per employee
in the case of business entities.
Tourism tax. A municipality may impose a tourism tax on a nonresident individual who
spends more than twenty-four hours in a municipality or who owns a vacation home there
that does not qualify as a permanent home. The charge is usually HUF 100 per night and
4% of the hotel lodging fee.
Local business taxes. Most municipalities levy local business profit taxes on business
activities conducted in their area. For manufacturers, the tax base is the value of the goods
sold or services rendered, excluding value added tax.
Inheritance Tax. Inheritance tax is charged on the total value of property passing on death,
including real estate, movable property, and rights that have a value. The tax is levied
principally on Hungarians and foreigners inheriting property located in Hungary. The rates
vary between 2.5% and 20%, depending on the degree of relationship between the
deceased and the beneficiary. Exemptions include the first HUF 300,000 of an inherited
estate, the marital home, and real estate on which the beneficiary builds a dwelling within
four years.
Gift Tax. Gift tax is charged on gifts made in Hungary of Hungarian property, including
real estate and movable property whose value exceeds HUF 150,000. The rates are the
same as for inheritance tax.
Tax on the Transfer of Ownership. A tax is payable on the transfer of property in
Hungary, including real estate, rights connected with real estate, movable property sold at
auctions, and vehicles. The standard rate is 8%, but the rates on the transfer of a private
residence are 2% and 6%, and the rate for automobiles depends on engine size.
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