HUNGARY | IP Holding Structures
Tamas Danku, GrandConsulting | TheCompanyHouse, Budapest, Hungary
In the middle of Europe, today Hungary is one of the IP Holding premises with the lowest tax rates. In Hungary royalty – income deriving from the exploitation of intellectual products – has been subject to a low effective tax rate for several years, and even the stormy tax changes of recent years have not terminated or tightened this tax benefit.
The corporation tax law does not impose a strict framework in the definition of the concept of royalty. Under the law, consideration received in exchange for the transfer of the following items shall qualify as royalty:
- a) patents, other intellectual property subject to protection under industrial property rights and utilization license of know-how,
- b) usage license of trademark, commercial name and business secret,
- c) usage license of works of art protected under copyright and performance protected under law related to copyright, furthermore
- d) consideration of the transfer of the property rights related to the subject of industrial legal protection and copyright, received by the beneficiary, as defined in sections (a) and (c).
Taxation of royalty income in Hungary
The Hungarian corporation tax enables the deduction of the tax base by 50 per cent of revenues deriving from the exploitation and sale of intellectual property, thus the actual corporation tax rate is only 5 per cent – if the earnings are under HUF 500 million -, since the general corporation tax rate is only 10 per cent. If the earnings are higher, above a tax base of HUF 500 million the tax rate is 19%, in that case the actual tax rate of royalty and similar revenues can reach 9.5 per cent. The rate of 19 per cent only applies to the portion of the tax base above HUF 500 million, and the tax base has to be adjusted by the deduction of the revenue from royalty, the corporation tax rate of 10 per cent is applicable even in the case of pre-tax earnings of HUF 1 billion, if the enterprise only generated revenues from royalty and its costs are minimal. Royalties are also exempt from local business tax (generally 2%) and from special industrial branch tax.
Hungarian companies are allowed to forward royalty and dividends free of withholding tax to companies with tax residence in a third country and to private individuals. An exception to the above provisions occurred in the year 2010, in which royalty forwarded to non-treaty was subject to capital gains tax of 30 per cent, but dividends were not subject to withholding tax in that year, either.
Naturally, in the case of a tax audit it has to be presented to the tax authority in detail what was the intellectual property on which the revenue from royalty was recognized and what are the documentations, registrations, etc. concerning the intellectual property. If the received royalty was not paid exclusively for the use of intellectual property, rather it also contains, for example, other services – e.g. development, maintenance, customer service – then revenues not belonging to the scope of royalty must be kept on record separately and the tax base cannot be adjusted by their value.
In the array of corporation tax benefits the concept of reported intellectual property, similar to reported participation and the related tax benefit, is a new element. Intellectual properties held for at least 12 months and reported to the tax authority can be sold free of tax. The acquisition or production of the intellectual property must be reported to the tax authority within 60 days, otherwise the capital gain tax benefit is not applicable. The deadline is strict, missed reports cannot be made later and no excuses are accepted for the delay.
Another new benefit is placement of the gains on intellectual property into reserve. If we sell an unregistered intellectual product and purchase a new intellectual product within three years on the gains placed into reserve, the corporation tax on the gains placed into reserve previously is also waived.
Hungary has a significant double tax treaty network. At present there are more than 70 valid DTTs, and most of them are based on the OECD Model Treaty. In most treaties royalty income paid to Hungarian companies is subject to 0 or 5% capital gains tax, e.g.: Austria, Belgium, Croatia, Cyprus, Denmark, France, Germany, Israel, Ireland, Italy, Japan (for cultural intellectual products), Luxembourg, Moldova, Norway, Netherlands, Russia, South Africa, Spain, Sweden, Switzerland, South Korea, UK, USA, 5% – Ukraine, Singapore, Mongolia, Finland, Albania.
Company formation and operation
The formation of a company in Hungary is relatively simple: the processing time is short, VAT registration and certificate of tax residence are issued almost immediately. From March 2012 the tax authority will assess in advance whether or not it consents to the issue of the tax number of the company and VAT registration. If they find any natural person or legal entity among the owners or managers of the company who/which have a high amount of overdue tax liabilities, or their liquidated companies had such debts, then the authority may reject tax registration, and in this case the company court will also reject the registration of the company.
The most often used company form is KFT (Limited Liability Company) , less often ZRT (private company limited by shares), NYRT (public company limited by shares), BT (limited partnership) and KKT (general partnership) . BT/KKT is a special form, in that, as opposed to the rest of the company form, another company may be the active partner in it, in charge of managing the company. A BT/KKT has to have at least two members, and the active partner must not be an active partner of another BT/KKT. A member of a BT/KKT may be also be a foreign company, from any country of the world. Although the structure of the BT is similar to LLP used in the UK, it is not subject to flow-through taxation, rather the BT/KKT is mandated to pay tax.
If a Hungarian company is managed by non-residents, opening a bank account is not a simple affair, generally every bank requires the managing director to make a personal visit for account opening, but any Hungarian company may open a bank account abroad, without reporting obligation.
The taxpayer have to appoint an accountnat to file the tax returns within 15 days after the registration of the company or the directors need to register themselfs at the tax office and the at the competent government authiroty as well.
The choice of the registered office is important, the tax authority always controls the registered office and place of document storage of foreign-owned companies. If we plan royalty turnover from a high-tax country, it is not mandatory, but recommended to employ a domestic citizen director. If the place of company management is not Hungary, then the actual place must be reported to the tax authority, which may cause taxation problems in almost every country. In addition to the place of company management, the place of document storage may also be abroad, but at the request of the tax authority the documents of the company must be presented to the tax auditors.
Today both Europe and Hungary may seem as risky investment destinations in the eyes of overseas investors, judging from the news of the press, statements of local politicians and analyses of credit rating companies. However, the tax planning structure that we recommend, which also uses Hungarian companies, is usually unaffected by the temporary local economic problems, or this impact is minimal and can be avoided with some circumspection.