Why
Hungary?
The general corporate tax
attributes in Hungary are quite favourable, as follows:
-
Hungary is a member of the European Union and thus has
adopted the respective tax directives;
-
Compared with other EU member states, the corporate tax
rate is low: it is now levied at a rate of 10% up to HUF
500 million ($1.8 million) of the tax base, while a 19%
rate is applicable to profits above that threshold;
-
Hungary has an extensive network of double tax treaties,
with more than 70 treaties now in place;
-
By domestic law, there is no withholding tax on royalty,
dividend or interest paid by a Hungarian company to a
non-resident foreign company;
-
Dividend income received by a Hungarian company shall be
exempt from corporate tax if the payer is not qualifying
as a controlled foreign company (CFC). The main element
for qualifying a company as a CFC is that the ultimate
major owner must be a Hungarian individual or that the
source of the revenue of the respective company is
Hungary; and
-
Foreign currency ,for example EUR or USD, bookkeeping is
possible.
Exemption for registered shareholdings
Since 2007,
a special holding regime has been available for companies which
provides exemption on any capital gain realised on the sale of
the shares held. The conditions for this beneficial taxation
(known as 'registered shareholding’) are as
follows:
-
The holding company needs to acquire at least 10%
shareholding in the respective Hungarian/foreign company;
and
-
The acquisition of the original and any additional shares
has be reported to the Hungarian tax authority within 75
days; and
-
The shares have to be kept and recorded in the Hungarian
company’s books for at least one year before
the sale.
The most
typical revenues of a holding company are dividend income and
capital gain upon a later sale. Dividend income is exempt in
any case from corporate tax and if the holding applies the
registered shareholding regime, any capital gain on the sale
will also be exempt from corporate tax in Hungary. Impairment
losses or capital losses cannot be deducted, either. Thus, a
holding company can operate in Hungary with an effective
corporate tax rate of 0%.
This regime
provides good planning opportunities both for multinational
groups searching for tax effective holding locations and
Hungarian domestic groups wishing to avail of capital gains tax
exemption on a sale of a Hungarian or non-Hungarian company.
Moreover, the scheme of registered shareholding is also
available for companies registered outside Hungary with an
effective place of management (tax residency) in Hungary (for
example, with regular board of directors meetings in Hungary,
and decision-making in Hungary).
Beneficial taxation of revenues from IP
There are several incentives for developing IP, including,
among others, double deductibility of qualifying R&D costs
and tax credits for companies carrying out investments which
serve R&D purposes.
Irrespective of whether the IP concerned is self-developed or
purchased, beneficial rules also apply for revenues from
holding intellectual properties (royalties). Definition of
royalty is very wide and includes revenues from the
exploitation of patents, from the industrial design of assets
under industrial law and know-how, from permission to use
trademarks, business names, business secrets, and from
permission to use copyrights. Based on the effective Hungarian
rules, 50% of the royalty income (capped at 50% of the pre-tax
profit) decreases the corporate income tax base. As a
consequence, the effective tax rate of a royalty collecting
company can be reduced down to 5% if the tax base remains under
HUF 500 million and 9.5% above.
Similarly
to the concept of the registered shareholdings outlined above,
the Hungarian corporate tax law also provides exemption on
capital gain on a sale of registered IPs. For the preferential
treatment, the acquisition or production of the respective IP
should be reported to the Hungarian tax authority within 60
days and the asset should be held and recorded in the
company’s books for at least one year. If these
conditions are fulfilled, any gain realised from the sale of
the intangible asset will be exempt from corporate tax. In
parallel, any losses (impairment loss or capital loss on a
sale) will not be deductible, either.
As a
result, not only developing but purchasing and holding IP in
Hungary may be carried out with a favourable effective tax
rate, meaning taxpayers should consider the country when taking
decisions on the location of IP.
Tamás Gyányi (tamas.gyanyi@klient.hu
/ +36 1 887 3736) is a partner and Andrea Linczer (andrea.linczer@klient.hu
/ +36 1 881 0629) is a tax manager, at WTS Klient Tax
Advisory.