Following the launch of a flat corporate tax rate of 9% from the start of 2017, it is clear that international companies can be well served by using Hungarian companies for a variety of business activities. The use of Hungarian companies as international holding companies and for the ownership and exploitation of intellectual property is well known. However, the new corporate tax rate of 9% means that Hungarian companies will provide tax-efficient commercial vehicles for international trade and for trade within Hungary itself.
Hungary is not an offshore financial centre, but its corporate tax rate is the lowest in the EU.
Not only is the Hungarian tax rate now the lowest in Europe, but losses can be carried forward for 5 years with a limit of 50% of the current year’s taxable income. Losses cannot be carried forward.
There are also generous rules regarding tax deductions. All expenses incurred in the course of generating taxable income can be deducted (in addition to losses carried forward). In addition, Hungarian companies can deduct 50% of their royalties provided that this deduction does not exceed 50% of the company’s total pre-tax profits. Hungary restricts the scope of intellectual property rights subject to this deduction by limiting the deduction to intellectual property rights developed in Hungary.
Dividends received by a Hungarian holding company are exempt from Hungarian tax. In addition, capital gains realized on the disposal of subsidiaries are also exempt, provided that the holding company holds at least 10% of the shares of the subsidiary for at least 1 year and that the company declares its ownership within the 75 days following the date of acquisition of the shares.
Hungarian companies are subject to local business tax. The local business tax base is the turnover corrected for certain costs, for example the cost of goods sold. Dividends, royalties and capital gains are not subject to local business tax. The tax rate is determined by the local municipalities and cannot exceed 2%. The tax rate is 2% in Budapest. Some local municipalities do not levy this local business tax.
In addition to Hungary’s low corporate tax regime, potential non-EU investors such as corporate groups and international entrepreneurs will benefit from the fact that Hungary is an EU member state and therefore a Hungarian company benefits from all the freedoms enshrined in the European Treaty, for example the freedom of establishment and the free movement of capital and services within the EU, provided that the Hungarian company carries out a genuine economic activity. These important EU treaty freedoms can therefore benefit non-EU investors who wish to set up Hungarian companies in order to take advantage of the low corporate tax rates in Hungary.
Double taxation agreements
Hungary has a good network of double tax treaties to mitigate international double taxation, including treaties with EU member states and countries such as Belarus, Brazil, Canada, China, Hong Kong, India, Kazakhstan, Russia, Singapore, Switzerland and the United States. In addition, Hungary benefits from all EU directives, such as European directives on parent/subsidiary companies, mergers and interest and royalties.
It is important to note that Hungarian companies do not pay any withholding tax on dividends, interest and royalties paid to non-Hungarian companies (including offshore companies), although there is a withholding tax of 15% on these distributions paid to individuals. This suggests that Hungarian non-residents should invest through holding companies.
The net trading profit is subject to the Hungarian corporation tax rate of 9% and possibly to an adjusted local corporation tax on income at a rate of up to 2%.
Dividends can be paid to the UK holding company without Hungarian withholding tax (and this should continue to be the case regardless of “Brexit”).
The UK holding company will be exempt from UK corporation tax on dividends from Hungary (and this dividend exemption will continue to apply regardless of “Brexit”).
The UK holding company can pay dividends (from its own Hungarian dividend income) to its non-UK resident shareholders, free of UK withholding tax. The UK company can also obtain the “Substantial Shareholders’ Exemption” to exempt the capital gains on disposal of the Hungarian company from UK corporation tax, subject to meeting certain conditions, the most important of which is that the Hungarian company is a trading company and that the UK company is a member of a trading group¹. Any such structure will of course have to take into account the OECD Multilateral Instrument to implement BEPS measures related to tax treaties.
The Hungarian Kft, or Limited Liability Company, is the preferred business vehicle for foreign investment in Hungary and for international investors to do business internationally.
A Kft may have a single shareholder and a single director who may be the same person or different persons. Corporate directors are permitted. The directors and shareholders of a Hungarian Kft do not need to be Hungarian residents or nationals, but the location of the directors and shareholders does affect the tax results.
Share capital requirements
A Kft must have a minimum paid-up share capital of HUF 3 million (approximately £8,660). Assuming evidence is provided of a bank deposit of at least this sum by the promoters of the company, this will be sufficient evidence of capitalization for incorporation purposes.
Incorporation normally takes 2-3 weeks. It is important to note that Jordans can quickly and efficiently organize director and banking services in Hungary for appropriate cases. Local professional administrators can open corporate bank accounts in Hungary and administer the accounts, subject to obtaining satisfactory KYC.
Jordans can also organize local accounting and auditing services (the appointment of an auditor is compulsory if the average annual net turnover of a Hungarian company for two consecutive financial years exceeds 300 million HUF (approximately £866,330 )). In addition, any Hungarian company, whether small, medium or large, which is subject to consolidation outside Hungary, also requires that its accounts be audited.
The Hungarian company is an attractive international business vehicle, which can be used by international groups and entrepreneurs (i.e. non-Hungarian residents) planning to set up businesses in Hungary as well as for trade and international investment.
Hungarian corporate tax rates are the lowest in the EU, and these low rates apply to both business income and investment income (unlike some other low tax regimes which may offer lower rates). low tax rates for trading income but higher tax rates for certain categories of non-trading income, eg Ireland). In addition, relations with administrators and banks can be organized quickly and efficiently in Hungary for appropriate cases, which is a very important consideration.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.