While Hungary has long been a preferred place in international tax planning, with a flat 9% corporate tax rate recently introduced, the country has arrived to the forefront of the competition. Adding also the absence of withholding taxes, the participation exemption both on portfolio holdings and intellectual properties, coupled with all benefits of an EU–compliant tax legislation, Hungary is destined to become a popular place for tax experts.
One-digit corporate tax
12 years after the abolishment of its off-shore regime, offering a 4% corporate income tax rate, the corporate tax rate of Hungary is becoming one-digit again. As opposed to the pre EU-regime, however, this 9% tax will apply to all Hungarian companies, regardless of their activities or shareholders. As a result, from 2017, Hungary will provide by far the lowest tax rate within the EU and obtaining such tax rate will not require shady tax agreements with the tax authority.
In the assessment of the corporate taxation it also needs to be taken into account that local municipalities may levy local business tax on enterprises, up to the level of 2% of their adjusted turnover. With the careful choice of the location of the entity, however, this tax can be mitigated or even avoided.
Holdings and IP regime – Hungary still ahead of its peers
As a result of the recent changes to the corporate tax legislation, Hungary has become an efficient holding company location, competing with traditional holding jurisdictions like Luxembourg and The Netherlands. As part of the rules, dividends received by a Hungarian entity are exempt from corporate tax. Capital gains realised on the sales of holdings can also enjoy the exemption, subject to certain criteria.
Apart from the holding company rules, the Hungarian IP legislation also offers various opportunities for tax planning. While Hungary needed to align the IP tax incentives to the BEPS requirements, royalties received by a Hungarian company can still enjoy a 50% tax deductibility (leading to a 4.5% effective tax rate). Also taking into account that the sale of intellectual properties created at the level of a Hungarian entity can enjoy exemption from capital gain taxation, multinationals can continue to exploit Hungary as a centre for IP developments.
Absence of withholding taxes
Based on its domestic legislation, Hungary levies no withholding tax on dividends, interests or royalties received by foreign enterprises from Hungary. What makes the Hungarian legislation particular in this respect is that this withholding tax exemption applies irrespective of whether the recipient foreign company is subject to tax in its jurisdiction, whether it is a tax transparent, a look-through, or any other special type of entity which is not taxable in the country of residence for any specific reason.
As a result, Hungarian holding companies can be easily used as a stepping stone to distribute the income of European corporate groups to non-EU (including low-tax) countries, either in the form of dividend, interest or royalties.
Where will all this lead to?
Hungary has long been exploited by multinational enterprises due to its favourable tax environment. The creation of a one-digit corporate tax rate will, most likely, expedite this procedure, and will also push genuine businesses to locate their new development into Hungary.
The position of Hungary is also reinforced by its membership in the European Union: after Brexit, it is already considered as an advantage that Hungary provides all the benefits and legal tax guarantees accorded to an EU Member State.
And, finally, the well-functioning advisory, banking and corporate law infrastructure of the country should not be underestimated, either. Coupled with relatively low cost of company establishment and maintenance, Hungary appears to maintain a competitive edge against its peers in the long run.