Corporate tax and dividend tax

Corporate profit is subject to corporate tax.

 

1. Persons subject to corporate tax

Pursuant to the Corporate Tax Act, the following are deemed resident taxpayers:

• companies established under Hungarian law (thus, firms established under the Act on Business Associations (Gt.): joint stock company, limited liability company (Kft.), joint company (Kv.), general partnership (Kkt.), limited partnership (Bt.) and other organisations (e.g. foundations, associations)
• non-resident taxpayers performing entrepreneurial activities at business premises in Hungary.

No group taxation is permitted under Hungarian law.

In general the tax year corresponds to the calendar year. Pursuant to the Accounting Act, taxpayers, however, may, under certain conditions, exercise discretion in deciding on a financial year that differs from the calendar year.

 

2. Taxable income 

The tax liability of resident taxpayers applies both to their income from Hungary and from abroad. Pre-tax profit, adjusted in accordance with the law, represents the corporate tax base.

Based on a general anti-avoidance rule, the Tax Authority is obliged to qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to attain a tax allowance (tax relief, tax incentive). A regulation on the prescribed minimum income (profit) has been in force since 1 July 2007.

Pursuant to this, if the higher of either the pre-tax profit or the tax base is below 2 per cent of the adjusted total income, the taxpayer is obliged to

• pay tax on 2 per cent of the adjusted total income, or
• make a declaration on a form supplementing the tax return, which will qualify as a tax declaration.

Items adjusting the tax base

 

2.1. The tax base must be increased with the following items: fines, penalties, late payment penalty interest due to delay in payment of taxes, etc.

 

2.2. Depreciation

As a general taxation rule, the entire cost of purchase or cost of production can be written off.

 

2.3. Development reserves

The portion of the retained earnings earmarked for future capital investments (development reserves) is subject to accelerated depreciation and can be recognised as lump sum deduction from the pre-tax profit. The taxpayer may release the earmarked reserves exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserves (in case of committed reserves as in the 2008 annual report, 6 tax years following the year the reserves were committed). However, deduction due to accelerated depreciation cannot exceed 50 per cent of the pre-tax profit or HUF 500 million in any tax year.

 

2.4. Provisions

The tax base must be increased with the amount of the provision for contingent and future liabilities accounted for as expenses; the amount recognised as income due to the utilisation of such provision qualifies as a tax-base decreasing item. 

 

 

2.5. Losses

As per the currently effective regulations, deferred losses of previous tax years (negative tax base), in an amount of the taxpayer’s choice, can be deducted from the tax base or rolled on without limitations.

 

2.6. Dividends

Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, dividend received from a controlled foreign company cannot be deducted from the tax base (except for years 2008 and 2009 with certain conditions), with regard to the following. As per the provisional rule, 75% of the dividend received from the controlled foreign company can be deducted in the tax years 2008 and 2009.

No withholding tax is levied on dividends paid by a company registered in Hungary to another company (whether registered in Hungary or abroad).

 

2.7. Profits from off shore companies

The unpaid dividend share of Hungarian companies in a controlled foreign company increases the tax base. If the dividend is paid at a later date, the tax base can be reduced by this amount, to the extent of the amount taken into account as an increasing factor earlier, at the most. 

 

2.8. Transfer price

Transfer price regulations have been established in accordance with OECD guidelines. Under the transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company must take the difference between the two and

• deduct it from the company’s pre-tax profit, if
  • its taxable profit were higher than if the arm’s length principle were applied;
  • the related company is also a resident company in Hungary, or, if it is a non-resident company, it must be a corporate taxpayer in the country of its primary place of business (this does not apply to controlled foreign companies) and
  • it holds a document signed by both parties establishing the difference, or
• add it to its pre-tax profit if the taxable income were lower than if the arm’s length principle were applied.

The above transfer price regulations need not be applied to long-term agreements concluded by SME’s if the related company in question has been established for the purpose of sale and purchase, and if the voting rights of the small and medium-size enterprises concerned in the related company exceed 50 per cent on the aggregate.

 

2.9. Controlled foreign company

Payments to controlled foreign companies do not, as a rule, qualify as eligible costs incurred in the interest of the company except when the taxpayer can prove that the payment has been made in connection with its business operation.

 

3. Tax rates

The corporate income tax rate is 19 per cent from January 1^st 2010. If certain conditions are met, a 10-per cent rate can be applied to the portion of the tax base below HUF 50 million, and a 19 per cent rate to the portion in excess of HUF 50 million. Progressive taxation may be applied by taxpayers who do not claim tax allowance, employ at least one employee in the tax year; have declared social security tax liability in an amount that is minimum – from January 1^st 2010 – 27 per cent of twice the annualised amount of the prevailing minimum wage (or the amount of the prevailing minimum wage in the case of taxpayers with a registered seat in any one of the disadvantaged regions) multiplied by average number of employees; the taxpayer’s tax base or earnings before taxes in the current tax year and in the preceding tax year  reaches the income (profit) minimum and the taxpayer has complied with the statutory regulations pertaining to employment. The gains from the 10-per cent tax rate received be spent exclusively to achieve certain objectives (e.g. capital investment and employment).

 

4. Tax allowances

4.1. Investment tax allowance

Taxpayers investing in socially and economically disadvantaged regions are eligible for tax relief. Eligible investments include:

(1) capital investments valued at least at HUF 3 billion at current prices and serving the purpose of manufacturing,

(2) capital investments put into operation in counties with a high unemployment rate.

In order for the criteria of eligibility for tax relief to be met, further conditions must also be satisfied, for instance, the number of staff must be increased.

 

4.2. Development tax allowance

Among others, the following capital investments are eligible for tax allowance:

(1) projects started and operated within the administrative jurisdiction of a preferential local self-government, valued at HUF 1 billion or more at current prices,

(2) projects aimed at the provision of broad band Internet services,

(3) projects valued at HUF 100 million or more at current prices exclusively for motion picture and video production,

(4) projects serving the creation of new jobs.

 

5. Exclusion of double taxation

Double taxation may be excluded unilaterally or on the basis of a treaty. Unilateral tax-withholding applies to 90 per cent of the tax amount paid (payable) abroad and it may not exceed the amount of the tax calculated in accordance with the Hungarian regulations.

If a treaty is to be observed, tax allowance serving the purpose of excluding double taxation can be granted in accordance with the treaty.  

 

6. Non-resident companies

6.1. The tax liability of non-resident enterprises in Hungary that carry on business operations at their permanent branches in Hungary  applies to their income from their business operations carried out at their permanent branches in Hungary.

A separate statutory regulation specifies the cases where foreign enterprises must have some form of business (e.g. a branch) inside the territory of Hungary. A branch, which is not an independent business entity or a separate legal person but has been entered into the company registry, constitutes part of the non-resident company. However, for taxation purposes , business premises - establishment qualify as such in the territory of Hungary only if they comply with the criteria for business premises defined in tax legislation. The definition of ‘establishment’ in the Corporate Tax Act is a close approximation of the one in the OECD Model Convention. A construction site or the site of a capital investment – unless otherwise provided in the Convention – constitutes a permanent establishment only after 3 months.

The taxable income of a permanent establishment must be assessed in accordance with the rules applicable to domestic companies. The tax base of a foreign enterprise in respect of its permanent establishment in Hungary must be adjusted in a manner that the tax base is reduced at most by a commensurate with all its revenues and income portion of its operating costs and expenses falling to the permanent business establishment and is increased by the operating and overhead costs and expenses directly incurred at the business establishment in question. It should be further increased by 5 per cent of the revenues and income that has been earned through, but not directly recorded for the business establishment.

Permanent establishments apply the flat or the two tier rate and are also eligible for tax allowances.

Foreign organisations which do not have a permanent business establishment in Hungary are not subject to corporate tax in respect of their income earned in Hungary.

 

6.2. Starting from 2010, foreign organisations that are legal entities established by Hungarian law, or which have no legal entity status, personal associations, other organisations, and foreign entrepreneurs with establishment in Hungary and who pay (provide) interest, copy right or service fees, and whose country of registration has no valid agreement with Hungary on the avoidance of double taxation (in Hungary identified as “foreign companies”) are liable to corporate tax after such incomes. The tax base is the amount of the interest, royalty or service fee, with certain exceptions. The tax rate is 30% that must be withheld, paid and declared to the tax authorities by the Hungary payer.

 

6.3. Starting from 2010, foreign persons receiving income from the sale or withdrawal of shares in Hungarian companies with real estate property (known in Hungary as “members of companies with real estate property”), are liable to corporate tax after such incomes to the Hungarian tax authorities at the general corporate income tax rate. The tax base is the positive amount of the payment received upon sale or upon the reduction of the registered capital of the company, but reduced by the proven expenses related to maintenance.

 

7. General administration (tax refund and tax declaration, payment of taxes)

Taxpayers whose tax year coincides with the calendar year must file their corporate tax return not later than 31 May of the year immediately following the tax year to which the tax return pertains. Taxpayers whose tax year differs from the calendar year must file their tax return within 150th days following the last day of the tax year to which the tax return pertains.

The taxpayer establishes the amount of the payable corporate tax through self-assessment.

 

OTHER INCOME TAXES

Municipalities may levy a local business tax after business activities carried out on the permanent basis at a maximum rate of 2% which shall be collected and allocated to the self-governments by the national tax administration starting from 2010.

 

TAXES LEVIED ON WEALTH

In Hungary wealth tax must be paid on watercrafts, aircrafts and high performance – with a performance of 125 kW or more – passenger cars listed in the Hungarian official registers.

Municipalities in Hungary also levy local tax, building and building site taxes. Owners are obliged to pay the above taxes. The annual maximum rate of building tax is HUF 1083.2 per square metre or a maximum 3% of the market value of the real property. The annual maximum rate of the building site tax is HUF 240.7 per square metre or 3% of the market value. The above taxes can be deducted from the corporate tax base.