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Beneficial Hungarian tax rules for group holding and IP holding companies

08 September 2015

ITR Correspondent

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For years, Hungarian tax policy has focused on trying to develop Hungary into an attractive location for foreign investors. While there are many incentives for new investments in the country, the tax regime also provides for favourable regimes for holding shares or intellectual property (IP).

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 ( / +36 1 887 3736) is a partner and Andrea Linczer ( / +36 1 881 0629) is a tax manager, at WTS Klient Tax Advisory.

International Correspondents