Hungary Tax Treaty

United States-Hungary Tax Treaty

Hungary International Tax Compliance Rules

Quick Summary.  Hungary is a parliamentary republic.  It is comprised of 19 counties.

In 2019, Hungary introduced a group taxation regime.  With certain restrictions, the regime promotes cross offsetting of operating losses.  As of 2020, Hungary implemented EU’s Anti-Tax Avoidance Directive (ATAD II), providing for hybrid anti-abuse rules.  In addition, Hungary imposed an exit tax and anti-avoidance rules.

Other recent developments for individuals subject to Hungarian taxation include the removal of cash benefits as fringe benefits and developments with respect to the economic employer rules.

U.S-Hungary Tax Treaty

Treaty.

• Convention Between the Government of the United States of America and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington, February 12, 1979.
• TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE HUNGARIAN PEOPLE’S REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

Currency.

• Hungarian Forint (HUF)

Common Legal Entities.

• Limited Liability Company (Kft)
• Public Company Limited by Shares (Nyrt)
• Private Company Limited by Shares (Zrt)
• Branch of Foreign Company

Tax Authorities. 

• National Tax and Customs Office

Tax Treaties.

• Hungary signed the OECD multilateral instrument (MLI) on 7 June 2017 but has not ratified it yet.
• Hungary has 80 tax treaties in effect.

Corporate Income Tax Rate.  

• 9% rate
• Same 9% rate also applies to branches.

Individual Tax Rate. 

• General 15% rate
• 15% rate also applies to dividend income and bank interest.

Corporate Capital Gains Tax Rate. 

• 9% rate, capital gains are taxed as a part of the accounting profit.
• No tax due if the participation exemption applies.
• Capital gains realized by a nonresident shareholder from the sale of its shares in a Hungarian company generally are not taxable, but Hungarian taxation may apply if the shares are held in a Hungarian real estate company by a shareholder resident in a non-treaty country or by a shareholder resident in a tax treaty country if the relevant treaty so provides.

Individual Capital Gains Tax Rate. 

• 15% rate.

Residence.  

• Residence for Individuals
  • Individual is a Hungarian citizen
  • Individual has a permanent home exclusively in Hungary
  • Center of individual’s vital interests is in Hungary
  • When residence cannot be determined from home or center of vital interests, the individual is a citizen when the individual’s habitual abode is in Hungary.
  • EEA citizen considered a resident if the individual is present for a total of 183 days or more in Hungary.

Withholding Tax.

            Dividends.

• 0% withholding tax rate for resident and nonresident companies.
• 15% withholding tax rate for all individuals (personal income tax rate)

            Interest.

• 0% withholding tax rate for resident and nonresident companies.
• 15% withholding tax rate for all individuals (personal income tax rate)

            Royalties.

• 0% withholding tax rate for resident and nonresident companies.
• 15% withholding tax rate for all individuals (personal income tax rate)

Transfer Pricing.

• When consideration applied is not at arm’s length, the transfer pricing rules require that the tax base be adjusted.
• Acceptable transfer pricing methods
  • Comparable uncontrolled price
  • Resale minus
  • Cost-plus
  • Transactional net margin
  • Profit-split
• If none of the above methods provide a proper result, taxpayer may apply any other defensible method.

CFC Rules.

• Controlled Foreign Company Definition – a foreign entity in which a Hungarian company holds a direct or indirect participation exceeding 50%, or a foreign permanent establishment, if the tax paid by the subsidiary/permanent establishment is less than the difference between the tax that would have been payable in Hungary on the same revenue and the tax actually paid.
• A foreign entity does not constitute a CFC when the entity realizes income from “genuine arrangements.”
  • Arrangements are not genuine when they are carried out primarily to gain a tax benefit and the significant people functions in terms of the assets owned and risks borne by the foreign entity are performed by a Hungarian parent company.
  • The proportionate part of the undistributed income from non-genuine arrangements of a CFC are taxable in Hungary as part of the taxpayer’s tax base.

Hybrid Treatment.

• Costs are not deductible when a Hungarian taxpayer enters into an arrangement with related parties or is a party to a structured arrangement that results in a hybrid mismatch.

Inheritance/estate tax. 

• 18% general rate
• 9% reduced rate applied to residential buildings.
• Inheritance fully exempt in the case of direct descendants and the surviving spouse.

Overview

Hungary imposes a national income tax on individuals and corporations. In addition, Hungarian municipalities may impose a tax on sole proprietors and corporate taxpayers that have their legal seat or permanent establishment located in the municipality. The Hungarian tax year is the calendar year, although corporate taxpayers may elect a fiscal year under the accounting law in certain circumstances.

Hungarian tax law includes anti-avoidance provisions that allows tax authorities to disregard the form of a transaction in favor of its actual substance. An abuse of law doctrine also permits tax authorities to look at all relevant facts and circumstances to assess tax liabilities resulting from transactions determined to have the sole purpose of avoiding the tax law.

Individuals

Individuals resident in Hungary are generally subject to tax on their worldwide income. An individual is generally considered a resident if he or she is (1) a Hungarian citizen, (2) a foreign citizen with a Hungarian residence permit, (3) a citizen of a country in the European Economic Area other than Hungary that spends more than 183 days in Hungary in a calendar year, (4) a foreign citizen with a permanent home exclusively in Hungary, or (5) a foreign citizen with no permanent home in Hungary, or with a permanent home in another country in addition to a permanent home in Hungary, if (a) the person’s center of vital interests is in Hungary, or (b) if the person’s center of vital interests cannot be determined, his or her habitual abode is in Hungary (for example, he or she spends more than 183 days in Hungary in a calendar year).

Business income is generally treated as income from independent personal services and included in the consolidated tax base. Unlike with employment income, deductions are generally allowed for expenses associated with the business income. Certain business income of sole proprietors is treated as entrepreneurial income and taxed under a separate regime. Amounts withdrawn from a business qualifying for this separate regime and used to compensate the entrepreneur for his or her personal services are taxed as part of the consolidated tax base and not under the separate regime. An entrepreneurial dividend tax is also payable. As an alternative to the entrepreneurial income tax regime, entrepreneurs may elect the application of a simplified tax regime available for small businesses, which is described in more detail below.

Capital gains from the disposition of property are generally taxable. A reduced rate applies to capital gains realized on the disposition of certain investments. Exemptions exist for capital gains realized on the disposition of certain investments as well as real property the proceeds of which are used to purchase retirement property for the seller or his or her relatives.

Corporations

Corporations resident in Hungary are generally subject to a corporate tax on their worldwide income. An entity is considered a resident of Hungary for corporate income tax purposes if it is incorporated under Hungarian law or has its place of management in Hungary. Partnerships are treated as corporations for tax purposes.

In general, taxable income is determined by making certain adjustments to the pretax profits shown on a corporation’s financial statements prepared in accordance with the accounting rules. Under those rules, all expenses directly related to the operation of the business, including compensation, interest, depreciation, amortization, and royalties, are generally deductible.

However, certain expenses such as dividends, interest in excess of thin-capitalization limits, and certain fines and penalties are not deductible. If a corporation does not make a profit, it must pay a minimum corporate tax unless it files a form showing its cost structure. The minimum corporate tax equals two percent of the corporation’s gross revenue. Losses may not be carried back, but a taxpayer may elect to carry forward losses indefinitely and use them to offset future income. Capital gains are generally included in income, but gains from the disposal of stock in certain subsidiaries in which the corporation has owned at least a 30-percent interest for one year are exempt. Capital losses may be deducted in the same manner as ordinary losses. Dividends, as well as 50 percent of royalties, received by corporations are exempt from tax.

An elective simplified tax regime is available for small businesses. This simplified regime is available to limited liability companies, general and limited partnerships, sole proprietors, and certain other business forms. The business must be owned exclusively by individuals and may not own .an interest in any corporation (except publicly traded shares). Under the regime, the business is taxed at a flat 30-percent rate on its annual revenue in lieu of having to pay the corporate income tax, the personal income tax, and the value added tax (“VAT”). Thus, individual owners of businesses that elect this regime are exempt from tax on any dividends received from the business.

International Aspects

Individuals who are residents of Hungary are generally taxed on their worldwide income. Nonresidents are subject to tax only on certain Hungarian-source income, including business profits derived from a permanent establishment in Hungary, income derived from employment and independent personal services performed in Hungary, and income from the use of real and intangible property in Hungary.

Corporations resident in Hungary are generally taxed on their worldwide income. Nonresident corporations are generally subject to tax only upon income derived through a branch or permanent establishment in Hungary. The taxable income of a branch or permanent establishment is calculated in the same manner as a resident corporation.

In addition, nonresident corporations without branches or permanent establishments in Hungary may be subject to tax on certain Hungarian-source income if they own Hungarian real estate holding companies. A Hungarian real estate holding company is any nonpublicly traded resident corporation or nonresident corporation with a branch or permanent establishment in= Hungary if more than 75 percent of its assets consist of Hungarian real estate. Hungarian-source dividends paid to nonresident corporations are not subject to withholding tax. Similarly, there is no withholding tax on Hungarian-source interest and royalties paid to nonresident corporations.

In general, dividends received by a Hungarian corporation from a foreign subsidiary are not taxable. However, dividends received from controlled foreign corporations are taxable. In addition, payments to controlled foreign corporations are generally not deductible. A foreign corporation is a controlled foreign corporation if (1) a 10-percent or greater interest in the corporation is held, directly or indirectly, by at least one Hungarian resident individual for more than half the days of the taxable year, (2) the corporation’s effective corporate tax rate in its jurisdiction of residence is less than 10 percent, and (3) the corporation (a) is resident in a country that is not a member of the European Union or the OECD and that has not entered into a tax treaty with Hungary, or (b) does not have a real economic presence in its country of residence.

Transfer pricing

The transfer pricing rules generally follow OECD guidelines and require that transactions between related parties must occur at arm’s-length prices.

Other Taxes

Inheritance and gift taxes

Hungary imposes a tax on the transfer of property located in Hungary pursuant to an estate, a legacy or will, an acquisition of a legal share of an estate, and donation in the event of death. The tax also applies to moveable property (and rights with respect to moveable property) located outside Hungary that is inherited by a Hungarian resident, but only when no inheritance tax is imposed abroad. The rate of tax varies depending on whether the recipient is a spouse, sibling, or other individual. The rate also varies depending on the value of the property received and whether that property is residential property (or rights with respect to residential property) or other property. Exemptions are available for persons who are descendants or ascendants of the deceased. A tax is imposed on gifts of real property (and rights with respect to real property) located in Hungary. The tax also applies to gifts of moveable property (and rights with respect to moveable property) over certain value thresholds if the physical transfer occurs in Hungary.  Exemptions, again, are available for persons who are descendants or ascendants of the donor.

Social security taxes

Employers are required to pay a social security tax on employees’ gross wages (including benefits in kind), which is used to fund pension and health insurance programs. In addition, employers must pay a tax on employees’ gross wages. A health care tax is imposed on payers of income that is not subject to the social security tax, with the rate of tax depending on the type of income.

Employees must also pay social security taxes. In general, employees must pay a health insurance tax and a pension insurance tax.

Indirect taxes

Hungary imposes a VAT on the supply (including importation) of goods and services on a regular basis for profit. Small businesses may elect to be exempt from accounting for VAT. The VAT is levied at each stage of the economic chain on the total consideration received (excluding the VAT) by the supplier, with either a deduction by the supplier or a refund by the tax authorities for the VAT paid by the supplier on purchases of goods and services.  In addition, exported goods and services are exempt from the VAT.

Tax Treaty Network – International Tax Attorneys

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