This article is the fifth in a seven-part series introducing the important rules of corporate taxation in Hungary. After presenting the basic framework and special regimes of corporate tax in Hungary, we provide a summary of cross-border treatment. The series will later cover topics such as anti-avoidance and penalties for non-compliance.
The corporate tax liability of a non-resident taxpayer is a limited tax liability, i.e. it only covers income originating in Hungary if:
a) the foreign entrepreneur carries out business activities from a domestic establishment,
b) a foreign shareholder of a company with Hungarian real estate trades with its existing business share and thereby earns income,
c) participation in a reverse hybrid economic entity. In this case, the non-resident legal entity becomes a resident taxpayer. A reverse hybrid economic entity is an entity whose income is taxable in Hungary to the extent that it is not taxable under the tax laws of Hungary or another tax jurisdiction.
Double taxation treaties signed by the Hungarian government generally follow the OECD Model Convention. Generally, the provisions of the treaty override domestic provisions (regardless of whether they entered into force before or after the domestic provisions). In the absence of treaties, there is no relief from Hungarian corporate tax on corporate tax liabilities paid abroad by Hungarian taxpayers.
Hungary does not impose withholding tax on payments made to non-resident enterprises; i.e. payments of interest, royalties, service fees and dividends (etc.) are not subject to Hungarian withholding tax.
Under Hungarian tax law, foreign companies that transfer their tax residence to Hungary must carry their assets and liabilities at fair market value for tax purposes.
When acquiring shares of a Hungarian legal entity, the acquirer must capitalize the shares at their acquisition cost. In the event of a future disposal of the shares, the capital gain is subject to corporate tax at a rate of 9%. The capital gain is calculated by deducting the book value of the shares at the time of disposal from the proceeds from the sale, less the costs of disposal.
However, companies may request a tax assessment from the Hungarian tax authorities regarding the tax values attributable to their assets and liabilities.
A Hungarian company that transfers its tax residence to Hungary triggers a taxable event in Hungary.
In this case, the unrealized capital gain calculated on the basis of the fair market value of its assets is subject to corporate tax in the financial year of exit.
However, Hungarian companies are entitled to request payment of the exit tax in five installments per year.
This article provides a general introduction to Hungarian corporate tax regulations and should not be considered specific legal advice.