How Does the New EU Anti-Money Laundering Regulation Affect Company Formation in Hungary?

Hungary has implemented the Anti-Tax Avoidance Directive (ATAD) of the EU through several legislative amendments, integrating the key components of the directive into its domestic tax system. Below is a detailed overview of how Hungary has transposed and currently applies the General Anti-Avoidance Rule (GAAR), Controlled Foreign Company (CFC) rules, and Thin Capitalization Rules, along with their current impact:

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1. General Anti-Avoidance Rule (GAAR)

Implementation:

Hungary already had a GAAR prior to ATAD, but it was reinforced to comply with Article 6 of ATAD.

The rule is embedded in Act CL of 2017 on the Rules of Taxation (Art. 1 §7).

It allows the tax authority to disregard artificial arrangements or series of arrangements that are put in place with the main purpose (or one of the main purposes) of obtaining a tax advantage, which defeats the object or purpose of the applicable tax law.

Current Impact:

The rule is increasingly relied upon by NAV (Hungarian Tax Authority) in audits, especially in aggressive cross-border structures.

However, its application is still case-by-case and relatively conservative compared to some other Member States.

Used especially in corporate restructurings, hybrid arrangements, and real estate planning.

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2. Controlled Foreign Company (CFC) Rules

Implementation:

Implemented in line with ATAD Article 7-8 through amendments to Act LXXXI of 1996 on Corporate Tax and Dividend Tax (Tao. tv.).

CFC definition was broadened in 2019:

A foreign entity is a CFC if a Hungarian taxpayer by itself or together with related parties holds >50% voting rights, capital, or entitlement to profits, and the foreign tax paid is less than half of what would have been paid in Hungary.

Passive income types (e.g., interest, royalties, dividends, financial leasing) earned by the CFC can be included in the Hungarian taxpayer’s tax base.

Current Impact:

Tightened reporting obligations on foreign subsidiaries.

Commonly affects trust and IP structures based in low-tax jurisdictions.

Often relevant in private wealth planning and holding structures involving Malta, Cyprus, UAE, or certain Caribbean jurisdictions.

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3. Thin Capitalization Rules

Implementation:

ATAD-compliant thin cap rule introduced in 2019, replacing Hungary’s former debt-to-equity ratio system.

Based on ATAD Article 4 (Interest Limitation Rule).

Net interest expense is deductible only up to 30% of EBITDA or EUR 3 million, whichever is higher.

Certain exemptions apply (e.g., standalone entities, public infrastructure projects).

The rules are codified in Act LXXXI of 1996 (Tao. tv.), Section 8(1)(d).

Current Impact:

Affects group financing and intra-group loans, especially from foreign parent companies.

Companies with high leverage, including real estate SPVs, are increasingly being scrutinized for excessive interest deductions.

Requires careful structuring of financing, with preference for equity over debt where limits are exceeded.

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Overall Observations on the Impact of ATAD Implementation in Hungary:

Compliance Burden Increased: Especially for multinational groups and high-net-worth individuals with international structures.

Audit Risk Heightened: NAV uses these tools to challenge aggressive tax planning schemes, particularly in cross-border contexts.

Planning Needs Adaptation: Taxpayers need to review financing structures, IP arrangements, and holding company locations.

No Exit Tax or Hybrid Mismatch Rules Yet: Hungary opted out of exit taxation rules and has not yet transposed hybrid mismatch rules under ATAD 2, but pressure for full implementation remains.

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Dr. Katona Géza, LL.M. ügyvéd (Rechtsanwalt / attorney at law)

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