tag: tax planning

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.

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.

Back in the day, buyers and sellers were better off selling shares in a company with possession of the property, rather than the property itself; but over the years, legislators have chipped away steadily at the benefits of acquiring property through a company purchase. Contrary to common belief, however, buying real estate through a company can still bring a number of tax advantages; and the range of these is set to expand from January of next year.

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.

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.

International tax structures fail more and more often due to the lack of real economic presence. These days both foreign and Hungarian tax authorities analyse in detail whether a legal entity has real economic nexus to the country where it was established. While tax investigations in the past primarily focused on corporate income tax reassessments, a recent decision of the Court of Justice of the European Union (“ECJ”) pointed out that the lack of real economic presence may also entail significant VAT consequences.