HUNGARY | Holding Company Regime
Hungary is relatively new entrant to the tax planning market thereafter the tax advantages for non-resident companies ended in y2005. The holding company regime is not the most flexible, the company management is not the cheapest and not the less bureaucratic in Europe but with proper plannig and advice the HU Holding Company can function tax and cost efficiently.
Introduction and Specific Advantages
The HU Holding Company tax regime was introduced in y2006. Currently the HU Holding Companies dividend income distributed by daughter companies is tax free, the capital gain of so called reported shares and reported intellectual properties is also tax free if the company meets the criteria. The dividend, interest and capital gain are not subject to local business tax neither. Hungary has extensive tax treaty network and offer the main tax characteristic what the most important when we want to find the best location for our holding company.
The specific advantages of Hungary as a holding location is the non-offshore status, the country were always on the OECD White List and the company structures are transparent.
Corporate and Local Business Tax
The dividend income of the holding company is exempt on corporate tax in case the daughter company is not foreign controlled company of the HU Holding. The capital gain of sold shares is also exempt if the holding held the 30% of the shares of the sold company for 12 month at least. The capital gain of reported intellectual property also tax free. The company have to send the application for the registration of the reported shares and intellectual property within 60 days after the purchase or procreation, otherwise the tax benefit is not applicable.
The companies and branches registered in Hungary have to pay 2% local business tax calculated on the net trading margin of the company, but the dividend, royalty and other financial income included the capital gain and intercompany interest as well are not subject to local business tax according to the rules.
The general rate of the corporate tax is 19%, but lower, 10% rate is applicable up to the first HUF 500 million pre-tax profit.
The HU Holding Companies can be VAT registered and may apply for VAT refund. In accordance with the general rules if the VAT reclaimable amount is exceed the HUF 250 000 for the VAT period, what is the calendar quater in the first business year of the company.
Foreign Controlled Company Rules
The CFC rules of Hungary became very strict since y2009, very unreasoning since y2010 and would like to protect the corporate tax income of the Budget of Hungary. HU Holding Company controlled by non-residents are not targeted by CFC regime. The CFC rules are very complex, but they are not relevant for companies controlled non-Hungarian tax resident ultimate benefical owners.
HU Holding or Trading companies are allowed to forward royalty, commissions, management or consulting fees and dividends free of withholding tax to companies with tax residence in treaty-country or third country. Dividend to individuals subject to 16% personal income tax and the double tax treaties may reduce the rate. An exception to the above provisions occurred in the year 2010, in which royalty, management fees and commission 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.
Tax Treaty Network
Hungary has very extensive double tax treaty network, currently over 75 treaties, which generlally follows the OECD model treaty standards. Tax withheld by treaty and non-country is also creditable. Withholding tax credits are always capped at the effective corporate income tax rate of the company. Hungary also implemented exchange of information provisions according to the OECD standards.
Thin Capitalization Rules
The debt-to-equity ratio is 3:1 in Hungary, what means that the interest paid or calculated for on debt to non-financial institutions exceeding three time the equity of the company is not deductable for corporate tax purpose, even is the parties are non-related companies.
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. Since 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.
The taxpayer have to appoint an accountant 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 authority as well.
The choice of the registered office is also important, the tax authority always controlls the registered office and place of document storage of foreign-owned companies within 90 days after the registration of the company.
The non-VAT registered HU Holding Company have to file registration forms 15 days after the formation and then the annual report, corporate tax, local tax and social tax returns have to be filed once in a year. The VAT registered company have to file the VAT and VIES quaterly, monthly or annually depend on its payable VAT.
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.
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.