While efforts to hunt down offshore companies may appear to be yielding results, there’s been no slackening of demand for setting up companies abroad. However, tax avoidance and tax evasion, as the primary motives for doing so, are giving way to other objectives.

ESOP (Employee Share Ownership Programme) entities have been springing up like mushrooms in Hungary since last year, and the acronym itself has become something of a buzzword. And this is hardly surprising, as ESOP entities can be a tax efficient vehicle for paying out work incomes. Caution is advised, however: alongside the many advantages, the regulations also conceal a number of pitfalls.

In order to bring Hungarian tax law in line with OECD’s recommendations delivered in “Action 5” of the “BEPS-package”, Hungary’s special tax regime on intellectual properties has been amended as of 1 July.

The recent amendment of the Luxembourg - Hungary double tax treaty will result in a sharp decrease of Luxembourg-based schemes for Hungarian real estate transactions. Those groups which currently use such schemes for holding their Hungarian real estates will need to react fast.

The “anti-offshore” law relating to the use of public funds, introduced in 2011, aimed to prevent off-shore companies with unidentifiable ownership structure from acquiring grants out of domestic and EU public funds. The original intention of the legislation seriously distorted, however. Numerous innocent foreign-owned firms, including Hungarian subsidiaries of US-based multinational firms got trapped by the rules.

Software developer companies fall under a very favourable corporate income taxation in Hungary. Moreover, their income is local business tax exempt. Surprisingly, however, most of such companies are not aware of their beneficial status, losing billions of forints as a consequence.

The recently adopted tax law changes significantly expand the definition of related parties. As of 2015 not only those companies will qualify as related parties which are connected in their ownership chain, but also those with an overlap in their management. As a result, the number of transactions where parties have to apply arm’s length pricing will increase. The new definition may, however, cause uncertainties as well.

The purpose of the personal income tax is to make Hungarian tax residents liable to tax on all their personal income irrespective of where the income is sourced and in which form it is realized. The personal income tax laws, therefore, create a net around the individuals and any item of income can only get through the net if it has been taxed. On this net a rather big hole was cut by the introduction of the so called long-term investment account (“TBSz”) in 2010.