Businesses generally adopt one of the following corporate forms in Hungary:

• partnership (közkereseti társaság or Kkt.);
• limited partnership (betéti társaság or Bt.);
• limited liability company (korlátolt felelősségű társaság or Kft.); and
• company limited by shares (részvénytársaság or Rt.), which can be either a private company limited by shares (zártkörűen működő részvénytársaság or Zrt.) or a public company limited by shares (nyilvánosan működő részvénytársaság or Nyrt.).

The key differences between the entities lie in the following:

• the responsibility of the shareholders (only the közkereseti társaság and the betéti társaság have members with unlimited responsibility);
• capital requirements (only the korlátolt felelősségű társaság and the részvénytársaság have statutory minimum capital);
• the simplicity of transferring the ownership of the company (the publicly traded shares of a részvénytársaság face the least restrictions); and
• the possibility of applying one of the beneficial tax regimes available for small and medium-sized companies.

The most commonly used form is the korlátolt felelősségű társaság, while the közkereseti társaság is the least common.

All the above company forms are separate legal entities and are taxed as such; however, a tax grouping can be created with the participation of related parties (see 2.6 Basic Rules on Consolidated Tax Grouping).

The most commonly used tax-transparent entity is the investment fund, which is a sui generis legal entity under Hungarian law – ie, it is a legal entity that is regulated separately and differently from other legal forms of business (corporations, etc). Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds shall be established as investment funds.

Under the Hungarian Corporate Income Tax Act (Act LXXXI of 1996 – the CIT Act), domestic corporate forms are subject to corporate income tax (CIT) and considered to be tax resident in Hungary. The decisive factor is the place of registration when establishing the tax residency of an entity, but this is not explicitly stated by the law.

Foreign entities could be considered as being resident in Hungary if their principal place of business management is in Hungary.

In addition, the following shall be deemed to be Hungarian tax residents for the purposes of CIT:

• a trust fund managed under a fiduciary asset management contract (while it is not explicitly stated by the law, the fiduciary asset management contract is to be concluded under the Hungarian Civil Code);
• a tax grouping formed in accordance with the CIT Act; and
• subject to further conditions, hybrid entities registered or established in Hungary – an investment fund or a collective investment vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor protection regulation in Hungary is not considered to be a resident entity of Hungary based on the provisions regarding hybrid entities.

Resident entities are subject to CIT on the total income regardless of their source (ie, their income arising both in Hungary and abroad is subject to CIT).

Several tax regimes are available to incorporated businesses in Hungary.

The most common tax regime is CIT, under which tax is levied at a flat rate of 9% of the positive tax base (ie, the pre-tax profit of an entity adjusted by various items under the CIT Act). If the higher amount of the company's pre-tax profit or CIT base does not reach the income (profit) minimum (ie, 2% of the total income adjusted by various decreasing and increasing items under the law), the company shall choose between the following options:

• making a statement to the Tax Authority regarding the above fact (increasing the probability of a tax audit); or
• considering the income (profit) minimum as its CIT base and paying CIT accordingly.

Special tax regimes such as KATA (kisadózó vállalkozások tételes adója – lump-sum tax for small enterprises) and KIVA (kisvállalati adó – small enterprise’s tax) are also available for small or medium-sized companies.

KATA

Under the KATA regime, a fixed tax of HUF50,000 (approximately EUR140) is payable by each full-time entrepreneur. A business can opt to pay HUF75,000 (EUR210) tax in order for the entrepreneur to become eligible for social security benefits in cash in a higher amount.

If it pays KATA, an enterprise does not pay CIT, personal income tax (PIT), social security charges, social security tax or entrepreneurs’ PIT. The KATA regime includes rules aimed at discouraging its improper use – ie, instead of an employment agreement.

Subject to further conditions, the following are eligible to apply KATA taxation:

• private entrepreneurs;
• sole proprietorships;
• limited partnerships where all members are natural persons;
• general partnerships where all members are natural persons; and
• law firms.

An entrepreneur who has received any income from renting and operating their own or leased real estate during the year cannot apply the KATA regime.

KIVA

The KIVA regime’s popularity is increasing in Hungary. The tax rate is 10%, and the taxable base consists of payroll increased by the balance of capital and dividend operations, adjusted by a few additional items. If KIVA is paid, the enterprise shall not pay CIT and social security tax.

Subject to further conditions, the following are eligible to apply KIVA taxation, among others:

• general partnerships;
• limited partnerships;
• private limited liability companies;
• private limited companies;
• law firms; and
• notaries’ offices.

These entities can apply KIVA taxation if the following circumstances occur in the tax year:

• the average statistical headcount is not expected to exceed 50 during the previous tax year;
• the revenue estimated for the tax year preceding the tax year is not expected to exceed HUF3 billion, or the proportionate part of HUF3 billion calculated on a time basis if the tax year is shorter than 12 months;
• the Tax Authority did not delete the tax number of the company during the preceding two calendar years;
• the balance sheet date of the company is 31 December;
• the balance sheet total shown in the financial report prepared for the previous tax year is not expected to exceed HUF3 billion;
• the company does not have a controlled foreign company (CFC) in the previous tax year; and
• the amount by which the taxpayer's financing costs, as provided for in the CIT Act, incurred in connection with its business operations exceed the taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives is not expected to exceed HUF939,810,000 for the tax year.

Further Taxes

Businesses are subject to other taxes in Hungary, including transfer tax, local business tax (levied by the municipalities in the territory where the business carries out its activity at a maximum rate of 2% on the net sales revenue of the business), value added tax and social security tax.

For the purposes of CIT, the taxable profit of the company is determined in line with the Hungarian Accounting Standards (HAS) set out by Act C of 2000 on Accounting. The HAS apply an accruals approach to determine the taxable profit.

International Financial Reporting Standards (IFRS)

A company shall make its annual accounting in line with the IFRS principles if its securities are admitted to trading on a regulated market of any member state of the European Economic Area (EEA), or if it is a credit institution (also financial enterprises equivalent to credit institutions under prudential requirements). In addition to those businesses that must apply the IFRS, the following can choose to apply them:

• entrepreneurs owned directly or indirectly by a parent company, if such parent prepares consolidated annual accounts in accordance with the IFRS principles;
• insurance companies;
• financial enterprises, payment institutions, electronic money institutions;
• investment firms;
• central securities depositories, central counterparties and stock exchanges;
• institutions for occupational retirement provision supervised by the Hungarian National Bank acting within its function as supervisory authority of the financial intermediary system, also covering financial intermediaries and insurance intermediaries included – by decision of the parent company – in consolidated financial statements prepared in accordance with the IFRS principles;
• funds and fund managers covered by the Act on Collective Investment Trusts and Their Managers, and on the Amendment of Financial Regulations;

• business associations that are subject to statutory audit under the Hungarian Accounting Act; and
• Hungarian branches of foreign-registered companies.

From the taxable profit, calculated as above, the taxable base of CIT is determined, with various adjustments, which can be classified as relating to the protection of the taxable base, allowances or miscellaneous. The most significant adjustments are as follows:

• limits on depreciation otherwise allowed for accounting purposes;
• restrictions on deductions of costs related to unenforceable claims and costs relating to non-business activities;
• interest deduction limitation (see 2.5 Imposed Limits of Deduction of Interest);
• the transfer pricing regime (see 4.6 Comparing Local Transfer Pricing Rules and/or Enforcement and OECD Standards);
• rules relating to CFCs (see 6.5 Taxation of Income of Non-local Subsidiaries under Controlled Foreign Corporation-Type Rules);
• the carry-forward of tax losses (see 2.4 Basic Rules on Loss Relief);
• receipts of dividends (see 6.4 Use of Intangibles by Non-local Subsidiaries);
• the participation exemption (see 2.7 Capital Gains Taxation);
• the neutralisation of the effect of unrealised capital gains on long-term assets and liabilities denominated in a foreign currency; and
• the deduction of royalty income (see 2.2 Special Incentives for Technology Investments).

Special incentives for technology investments are available in the form of tax allowance – ie, reductions from the taxable base. The following can be deducted from the taxable base:

• the profit from the sale of or contribution in-kind for the royalty-earning intangible asset (excluding the reported intangible asset – see below) recorded in the tied-up reserve of the taxpayer in the tax year and presented in the tied-up reserve at the end of the tax year; the tied-up reserve can only be used to acquire another royalty-earning intangible asset in the following five tax years, otherwise a penalty is payable;
• the profit from the sale of or contribution in-kind for the reported intangible asset, provided that the taxpayer held it continuously among its assets for at least one year; and
• 50% of the profit from a royalty fee.

The deductible cost is also limited in accordance with the nexus approach if the research and development service is ordered from a related party, or if the intangible asset is acquired from one (excluding permanent establishments).

"Reported intangible asset" is defined by the law as a royalty-earning intangible asset whose creation or acquisition was reported to the Tax Authority within 60 days.

In addition, the direct cost of basic research, applied research and experimental development in the taxpayer’s own activity (excluding the direct cost of a research and development service ordered from a third party) in the tax year during which the cost arises or, at the discretion of the taxpayer, when depreciation is calculated on the experimental development or intangible asset if recorded as an asset is deductible from the tax base.

Reported Participation Exemption

See 2.7 Capital Gains Taxation.

Received Dividends

Dividends received from a domestic or foreign subsidiary, regardless of the ratio of ownership, can be deducted from the taxable base unless the subsidiary is a CFC (see 6.4 Use of Intangibles by Non-local Subsidiaries).

Investment in Start-up Companies

A CIT base deduction can be applied by the investor in a start-up company.

In general, the CIT base of the taxpayer can be reduced by three times the cost of a participation acquired in a start-up company (including any cost increase resulting from a capital increase carried out after the time of acquisition) in the tax year when the participation is acquired and in the subsequent three tax years (ie, there are four years to validate the relief), in equal instalments. The tax base deduction may not exceed HUF20 million (EUR56,000) per tax year and start-up company.

If such participation is de-recognised – for any reason other than restructuring, merger, division, preferential transfer of assets or preferential exchange of shares – during the three-year holding period, the tax base shall be increased by twice the formerly applied tax base deduction. Also, the amount of impairment claimed on such participation (with an exception where the participation exemption applies) acquired in a start-up company shall increase the CIT base up to the amount of the formerly applied CIT base deduction.

Preservation of Historical Properties

Special CIT allowances are available with regard to the maintenance and renovation of historical buildings, subject to the following conditions and limits:

• the costs and expenses of maintaining historical buildings in the tax year are deductible from the CIT taxable base (in addition to their counting as expenses or costs), up to 50% of the pre-tax profit of a company; and
• twice the amount of the costs of (i) acquired tangible assets relating to the historical buildings and (ii) investment and renovation is deductible from the CIT taxable base. Such allowance can be applied within five years from the tax year of the acquisition or the starting year of the investment until the fifth tax year following the completion of such investment, regardless of whether or not the investment/renovation was put into use.

Development Tax Allowance

From the calculated payable tax, development tax allowance of up to 80% of the payable tax can be deducted. The development tax allowance can be applied in the tax year in which the investment is put into operation (or the tax year following such year) and in the subsequent 12 tax years, but in the 16th year following the application for the development tax allowance at the latest.

The amount of the development tax allowance is calculated on the basis of the costs of the investment and the state aid intensity applicable to the administrative region in which the investment is made. Above a certain threshold, the application of the development tax allowance is subject to the approval of the government, based on the approval of the European Commission.

Development tax allowance can be claimed for the following, among others:

• investments of at least HUF3 billion;
• investments of at least HUF1 billion in the territory of preferred municipalities; and
• investments of at least HUF100 million for basic research, applied research and experimental development, etc.

Other Tax Allowances

Following the deduction of the development tax allowance (up to 70% of the remaining amount of the payable tax), further tax allowances can be applied with regard to the sponsorship of popular team sports and investments in energy efficiency and the creation of cinematographic works.

Tax Credit

The CIT Act also provides for a tax credit under which developing enterprises can defer part of their CIT liability for a tax year, paying their tax liability in six equal instalments by the end of the second tax year following the tax year in question. The taxpayer can apply the growth tax credit if:

• they became subject to CIT at least three years before the tax year;
• they did not participate in any transformation, merger or division over a period of three years before the tax year;
• the taxpayer’s pre-tax profit for the tax year reaches or exceeds six times the pre-tax profit of the previous tax year (the difference being the growth tax credit) in absolute terms; and
• the taxpayer declares its intention to apply the growth tax credit to the Tax Authority, before the deadline for filing the annual CIT return (generally, 31 May).

A taxpayer can use its tax loss (the negative tax base of the tax year) in the subsequent five tax years to decrease its profit before tax, provided that the tax loss was created in accordance with the principle of proper conduct (the carry-forward of tax losses). The tax loss can be used to decrease the taxable base by a maximum of 50% in any given year.

Special rules apply to tax losses carried forward in the case of a company transformation, a change of control or a transfer of a going concern.

The CIT Act implemented the interest limitation rule under Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.

Accordingly, the net borrowing costs of the taxpayer that are deductible from the tax base are limited to 30% of the EBITDA or HUF939,810,000, whichever is higher.

The CIT Act gives Hungarian companies the option to form a CIT grouping. Such a tax grouping can result in tax savings on a group level through allocating the tax losses within the grouping and through exemption from the transfer pricing regime.

The CIT grouping can be established by closely held companies – ie, if a company has a direct or indirect majority influence in another company or companies, with at least 75% of the voting rights.

As soon as it is formed, the grouping will have CIT liability instead of the members. To determine the taxable base of the grouping, the members shall first determine their own separate taxable base in line with the general rules of the CIT Act (including the application of their tax losses incurred before the formation of the group). Following this, the positive taxable bases of the group members shall be totalled. Such taxable base can be decreased by the total tax losses of the group members incurred in the tax year, up to 50%.

A further advantage of the tax group is that the transactions within the group are not subject to the transfer pricing regime, which otherwise requires related parties to establish their tax base as if an arm’s-length price had been applied in the transactions between them and to prepare a transfer pricing report on each related-party transaction.

The CIT grouping is created by a registration with the tax authorities. The application can only be filed within a designated period during the tax year.

Capital gains or losses (ie, the difference between the income and the book value of the asset or shares sold) are included in the pre-tax profit of the company. CIT is calculated on the positive tax base, being the pre-tax profit of an entity adjusted by various items (please see 1.4 Tax Rates).

Participation exemption is available to corporations on the capital gain of reported participations or intangible assets, so the sale or contribution in kind of these assets can be exempt from CIT.

The following conditions should be fulfilled by the affected entity in order to participate in the above exemptions:

• the participation of a Hungarian or foreign entity (except for CFCs – see 6.5 Taxation of Income of Non-local Subsidiaries under Controlled Foreign Corporation-Type Rules) shall be registered within 75 days from its acquisition; and
• intangible assets should be registered with the Hungarian Tax Authority within 60 days from their acquisition or creation.

Participation and intangible assets shall also be held continuously for at least one year by the corporation before the transaction.

In addition to CIT, local business tax is payable by entrepreneurs, including incorporated businesses. It is levied by the Hungarian municipalities within the framework of the law, at a maximum rate of 2% of the entrepreneurs’ net sales revenue if such entity carries out business activity in the territory of a municipality through a registered seat or a permanent establishment.

The Hungarian tax system also contains the following sectoral taxes for certain industries, which are payable in addition to CIT and local business tax.

• A financial surtax is payable by credit institutions and other financial organisations that have their seat of management or branch office in Hungary. It is also payable by investment funds if they are registered in Hungary or by the fund manager if the fund trades with a foreign collective investment security.
• Energy tax is payable by energy providers (traders and producers of energy products). The taxable base of energy tax is calculated similarly to CIT. The tax rate is 31%.
• Retail tax is payable on the net sales revenue of retail trading (including sales by a foreign tax resident person without a branch office in Hungary). The tax is levied in brackets, at rates ranging from 0% for up to HUF500 million to 2.7% for in excess of HUF100 billion.
• Providers of marketing services are subject to marketing tax, as are their clients if the service providers do not undertake to settle the tax liability. The tax is currently suspended as it is subject to a dispute with the European Commission before the Court of Justice of the European Union (CJEU), but it is expected to be introduced again due to the judgment of the CJEU, which decided in favour of the Hungarian government.

Closely held local businesses generally operate in corporate form.

Compared to earning income as an individual professional, earning income as a shareholder of a company can be advantageous from a tax viewpoint, depending on the various tax regimes available (which depends on the profession itself as well as the level of revenue from the activity). The advantage comes from the fact that, while the rate of PIT is only 15%, the social security charges (the general rate is 18%) generally payable by individuals would make it less competitive.

However, the tax law includes the following special measures to close the gap in taxation.

• If a special tax regime cannot be applied, the professional can apply the regime applicable for private entrepreneurs. Although the rules are set out in Act CXVII of 1995 on Personal Income Tax (PIT Act), private entrepreneurs shall determine their tax base and tax using rules and rates that are very similar to CIT.
• While less effective, the social security laws contain rules for when a shareholder personally takes part in the company’s activity, under which the payable social security charges shall be paid on a deemed basis, and the amount thereof is calculated with reference to the statutory minimum wage.

Private individuals are not prevented from using closely held corporations. However, as a private individual, more favourable taxation – even exemption from tax – is available for investments so, depending on the circumstances, this can be preferable.

In general, there is no significant difference between the taxation of shares in closely held corporations or independent corporations in the case of dividend payments or gains on the sale.

However, dividends are also subject to social security tax (at the rate of 13%), which is payable by the Hungarian tax resident individual. No social security tax is payable if the dividend is paid by a corporation that is publicly traded in an EEA member state or if the recipient is a foreign individual who is not insured by the Hungarian social security system.

The PIT Act applies to the tax liability of Hungarian and foreign private individuals. The tax liability of Hungarian resident private individuals applies to the worldwide income of such persons, while the tax liability of foreign private individuals is limited to their income originating from Hungary.

Hungarian Tax Resident Individuals

Generally, the payments of dividends from or the gain on the sale of publicly offered and traded shares is subject to PIT at the rate of 15%. The private individual shall declare the annual income (profit or loss) from such transactions in their annual tax return, and shall pay the PIT. The private individual shall be entitled to tax compensation based on the realised losses/profits during the two previous tax years, provided that these losses/profits were indicated in the tax return filed for the year when the loss/profit was realised.

Dividends are also subject to social security contribution (at the rate of 13%), which is payable by the individual unless the shares are listed on the stock exchange in an EEA member state.

However, the social security contribution payment obligation is capped in the case of dividends, meaning that the individual does not need to pay a social security contribution on the dividend payment if their PIT base (including various items) reaches 24 times the mandatory minimum wage in the subject year. The minimum wage is HUF200,000 in 2022.

Foreign Tax Resident Individuals

Foreign tax resident individuals are subject to PIT in Hungary if they realise income from Hungarian sources or income that is otherwise taxable in Hungary if the international treaty or reciprocity so requires (limited tax liability).

Dividend income should be treated as having a Hungarian source where:

• the corporation paying dividend is resident in Hungary for tax purposes; or
• the foreign resident individual has a permanent establishment in Hungary to which the dividend income is attributable.

The gain on the sale of publicly offered and traded shares should be taxed in the country of the individual’s tax residence.

Preferential tax rates or tax exemptions are available for long-term investments, subject to specific conditions laid down by the PIT Act.

There is no withholding tax on interest, dividends or royalties paid to foreign businesses.

It should be noted, however, that foreign entities obtaining any income from the transfer or withdrawal of their shares in a real estate holding company can be subject to CIT in Hungary (see 5.3 Capital Gains of Non-residents).

Currently, the primary countries which investors use to invest in local corporate stock and debt are Luxembourg and the Netherlands. There is also increasing interest in investing through Asia (eg, Singapore).

The Tax Authority’s investigations rarely aim to challenge the use of a treaty country since the current Hungarian tax regime is not explicitly unfavourable for non-treaty residents.

The Hungarian Tax Authority adopts a strict, conservative approach to transfer pricing issues, and scrutinises the compliance of the taxpayer with the Hungarian transfer pricing regime from both a formal and a substantial viewpoint. The master file and country-specific documentation prepared abroad in accordance with the Resolution of the Council and of the representatives of the governments of the member states, meeting within the Council, of 27 June 2006 on a code of conduct on transfer pricing documentation for associated enterprises in the European Union (the EU TPD), by the foreign investor in line with the transfer pricing regime of its own jurisdiction, may prove to be insufficient as the practice of the Hungarian Tax Authority maintains a generally high level of expectation regarding proving the value of the benchmark analysis.

Limited risk distribution arrangements are reviewed in the framework of the general transfer pricing practice of the Tax Authority.

The Hungarian transfer pricing standards laid down by the CIT Act and NGM Decree 32/2017 (X.18.) on the Reporting Obligations with regard to Determining the Arm’s Length Price refer specifically to the OECD Standards as well as the standards of the EU (including the EU TPD).

Within this framework, the Hungarian Tax Authority puts emphasis on the benchmark analysis itself and expects the application, based on the law, of statistical methods if the arm’s-length range determined is not specific to the required extent based on the choice of the comparables.

The resolution of international transfer pricing disputes through double tax treaties (DTCs) and mutual agreement procedures (MAP) are increasingly common, but they are far from widely used (at the end of 2020, the OECD statistics show 17 cases in the inventory). The Ministry of Finance has a dedicated division working on such disputes, which sees such procedures as a good opportunity to defend the Hungarian State’s budget interests.

A decision or agreement made during the MAP shall be applied, including adjustments to the tax base, even for tax years where the statute of limitation has passed.

Local subsidiaries of non-local corporations are treated the same as any local corporations, so general rules should be applied on their operation.

Local branches of non-local corporations are treated as permanent establishments of the non-local corporations. Therefore, a non-local corporation has tax liability on the income originating from the business activity carried out in Hungary via its permanent establishment – ie, the non-local corporation has limited tax liability in Hungary.

The non-local corporation shall establish the CIT base of the local branches separately in accordance with the general rules (see 2.1 Calculation for Taxable Profits), and also separate from other permanent establishments of the non-local corporation in Hungary.

The sales revenue, income, costs and expenses of a permanent establishment shall be accounted as if it were a separate entity, independent from the non-local corporation. The pre-tax profit of the non-local corporation determined for its Hungarian permanent establishment shall be adjusted in the following ways:

• it shall be reduced by a portion of the non-local corporation's operating costs and expenses (with the exception of taxes payable abroad) charged to its registered seat and any permanent establishment during the tax year, in proportion to the Hungarian permanent establishments; however, this ratio shall not be more than the ratio between the total of all sales revenues and income reported by the permanent establishment and the total of all sales revenues and income of the non-local corporation;
• it shall be increased by the operating costs and expenses of the permanent establishment calculated to the pre-tax profit; and
• it shall be increased by 5% of the revenue and income that was earned through the permanent establishment but not recorded for it.

Capital gains of non-resident corporations on the sale of shares in a local corporation or on the sale of shares of a non-local holding company owning the shares of a local corporation directly are generally not subject to CIT in Hungary.

However, CIT applies to the yield (ie, the consideration received minus the expenses of the holding and acquisition of the participation) of the sale of the participation and reduction of the registered capital in a real estate holding company by the foreign shareholder, provided that the double tax treaty between Hungary and the foreign shareholder's country of tax residence allows the taxation of such income by Hungary or there is no double tax treaty concluded.

"Real estate holding company" is defined by the law as the Hungarian corporate taxpayer in whose financial statement – together with similar data in the financial statements of its Hungarian related parties (including the Hungarian permanent establishment of a foreign person or an entity which is foreign tax resident due to its seat of management) – the value of the real estate exceeds 75% of the total book value of the assets. Such rule applies not only to the sale but also to the transferring without consideration and contributing-in-kind of the participation in the real estate holding company.

There is no change of control provision currently applicable under the CIT Act.

There are no mandatory formulas to determine the income of foreign-owned local affiliates. However, in accordance with the transfer pricing regulations, the taxpayer shall decide on the appropriate pricing method to ensure that the transfer prices applied between affiliated companies are in line with the arm’s-length principle.

The deduction of management and administrative expenses is restricted within the transfer pricing regime, which follows the OECD standards.

In addition, as a general measure in line with the generally accepted accounting principles (GAAP), expenses that do not serve the business interests of the local entity are generally not deductible from the taxable base. Expenses paid to CFCs are said not to serve the business interests of the company.

Related-party borrowing is not subject to any particular constraints, save for the transfer pricing regime, which follows the OECD standards (ie, arm’s-length prices and terms are expected for the loan). Borrowing also falls under the general interest limitation rules (see 2.5 Imposed Limits on Deduction of Interest).

The taxation of foreign income in Hungary could arise for corporations that are subject to total CIT liability in Hungary – ie, the foreign income of corporations with limited CIT liability is not subject to CIT in Hungary, unless the foreign corporation is a CFC (see 6.5 Taxation of Income of Non-local Subsidiaries under Controlled Foreign Corporation-Type Rules) or the income is related to a Hungarian real estate holding company (see 5.3 Capital Gains of Non-residents).

Local corporations can derive foreign income from their business activity carried out abroad (typically via a permanent establishment), from shares in foreign companies, from financing foreign companies or from providing intangible assets to foreign companies for use.

Tax Exemption under a Double Tax Treaty

According to the CIT Act, when establishing CIT, resident taxpayers and non-resident corporations shall adjust their CIT base so that it contains no income that is subject to taxation abroad, if the exemption is set out by the relevant double tax treaty.

Tax Credit under a Double Tax Treaty

Where exemption does not apply, the tax paid on the foreign income, calculated at the average tax rate, can be included in the Hungarian CIT, thus a reduced amount of tax should be paid. The tax credit is limited to the amount of tax calculated with the applicable withholding tax rate under the double tax treaty.

No Double Tax Treaty

If there is no double tax treaty between the relevant country and Hungary, only the tax paid abroad can be offset against the payable Hungarian CIT. In such cases, 90% of the amount of tax paid abroad on income may be deducted from the calculated CIT up to the tax amount that is calculated with the average tax rate.

Local corporations should adjust their CIT base so that it contains no income that is subject to taxation abroad if the respective double tax treaty so provides.

Direct Expenses

When determining the income from abroad, those costs, expenses and items modifying the pre-tax profit that can be directly attributed to the income from abroad should be taken into account.

Indirect

Costs, expenses and items increasing and decreasing the pre-tax profit that indirectly attributed to the acquisition of income from abroad, but were not incurred exclusively in relation to the domestic income, shall be taken into account in proportion to the foreign income in the total income.

In accordance with the provisions of the CIT Act, dividends received from a foreign subsidiary should decrease the pre-tax profit of the local corporation (making it practically tax exempt), provided that the foreign subsidiary cannot be deemed a CFC.

Rules on CFCs can be found in 6.5 Taxation of Income of Non-local Subsidiaries under Controlled Foreign Corporation-Type Rules.

Non-local subsidiaries will need title to use the intangibles developed by local corporations, becoming either the owner or licensee of such intangibles. The sale or granting of the licence will be subject to the general transfer pricing regime, due to which the transferor is expected to earn an arm’s-length income on the transfer.

The positive taxed income of the taxpayer’s CFC, arising from non-substantive transactions, is included in the taxpayer’s taxable base to the extent that it is related to the risks and assets relating to the significant personal functions carried out by the taxpayer. Dividends received from a CFC are not exempt – contrary to the general rules – unless the income of the CFC from which the dividend is paid was previously included in the taxable base of the taxpayer under said rule.

A non-local affiliate can qualify as a CFC if the CIT actually paid by the affiliate is less than the excess on which the non-local affiliate would have paid more CIT in Hungary. If the total income arises from genuine arrangements, the affiliate shall not qualify as a CFC. If not, the affiliate can still qualify as a non-CFC if its profit before tax is less than HUF243,952,500 and its income from non-trading activity is less than HUF24,395,250, or if its profit before tax does not exceed 10% of its operating costs.

Income from non-trading activity includes:

• interest;
• income from financial assets;
• income from intellectual property rights;
• income arising from the holding and de-recognition of stocks and shares;
• income from finance leasing;
• income from insurance, banking and other financial activities; and
• income received from a person earned by the supply of goods and services to, or by purchasing goods and services from, affiliated companies, if the activity of such person does not represent any added economic value, or the added economic value is insignificant.

Capital gains or losses are included in the pre-tax profit of the company. CIT is calculated on the positive tax base – ie, the pre-tax profit of an entity adjusted by various items (please see 1.4 Tax Rates).

The CIT Act contains a general anti-avoidance rule (Section 1(2)) under which any rule or tax advantage (tax relief or tax allowance) affecting the tax liability can only be applied to the extent that the underlying arrangements fulfil the purpose of the rule or tax advantage and, in substance, are based on genuine economic, commercial reasons. If the arrangements are put into place with the main purpose of obtaining a tax advantage, the costs and expenditures charged on the basis of such arrangement shall not be treated as having been incurred in the interest of business operations, and no tax advantage may be claimed.

As a general rule, an audit of the annual financial statement is obligatory unless the following occurred within the two financial years before the financial year for which the auditable financial statement is being prepared:

• the company’s average net sales revenue did not exceed HUF300 million; and
• the average number of employees of the company did not exceed 50.

Notwithstanding the general rule, an audit of the annual financial statement is obligatory for Hungarian branch offices of a foreign enterprise whose registered seat is in a non-EU country, and for enterprises that are included in a consolidation.

The financial statement of the company shall be filed for publication until the last day of the 5th month from the end of the business year, together with the audit opinion and the decision of the shareholders on the payment of dividend.

As of January 2022, Hungary has implemented the BEPS recommended changes addressing the following, mainly through the implementation of the relevant EU directives (such as the ATAD I and II directives):

• neutralising the effects of mismatched arrangements;
• CFCs;
• limitation on interest deduction;
• harmful tax practices;
• prevention of treaty abuse;
• hybrid mismatches;
• transfer pricing;
• mandatory disclosure rules;
• country-by-country reporting;
• mutual agreement procedures; and
• multilateral instrument.

As Hungary is a favourable jurisdiction for holdings and competes for investments with its low CIT rate, the Hungarian government has shown reluctance to implement the BEPS measures. However, as most of the BEPS actions are implemented by EU law, they already have Hungarian equivalents.

Due to the high number of foreign investors and having an open economy, the international tax environment has a high public profile in Hungary, which is a member state of the EU as well as the OECD.

BEPS will certainly restrict the possibilities for tax planning as regards international holding structures. Hungary is deeply integrated into the economy of the EU, the policies of which even surpass the intentions of BEPS. Caught between a rock and a hard place, Hungary will have no other choice but to phase out the tax policy measures that are not compliant with BEPS or the EU’s own tax policies in the long run.

The low rate of CIT (9%) is not sustainable in the long term, due to the global minimum tax initiative. From the perspective of the Hungarian government, the most pressing issue is whether the local business tax (levied by the municipalities at the maximum rate of 2% on the sales revenue of the company) and certain sectoral surtaxes would be included in the effective tax rate.

Hungary has implemented the provisions of ATAD 1 and ATAD 2 on hybrid instruments, so the Hungarian tax legislation is in line mainly with the BEPS Action 2 standard.

The tax regime of Hungary is not territorial.

This is not applicable in Hungary.

Even without the relevant provisions of the DTCs, the Hungarian Tax Authority has strong powers to assess any transaction on the basis of its substance, and may reject the application of any tax advantage on the basis of improper application of the law.

It was not necessary to alter the Hungarian transfer pricing regime as Hungary already follows the OECD guidelines, even implementing certain aspects as part of the Hungarian tax laws. Updates to the guidelines basically become industry standards, observed by the Tax Authority as well.

Although intellectual property income is reviewed within the general transfer pricing regime, special emphasis is placed on the field.

Country-by-country reporting is implemented in Hungary. It is considered to be a step in the right direction, although the current limit of EUR750 million does not make this tool very effective.

While there is no general tax on digital economy businesses, Hungary has introduced a tax on marketing, which applies to digital marketing services, thus rendering the likes of Facebook and Google subject to tax.

The CJEU has reviewed the Hungarian marketing tax and found it compatible with the laws of the EU.

The Hungarian government has strongly supported any initiative for the taxation of the digital economy, as Hungary is a typical target country for such services. As far as is known, however, there are no current proposals.

There is no special tax regime for offshore intellectual property deployed in Hungary or withholding tax on outbound royalty payments. Such arrangements are to be dealt with within the framework of the CFC regime (see 6.5 Taxation of Income of Non-local Subsidiaries under Controlled Foreign Corporation-Type Rules) and the transfer pricing regime (see 4.6 Comparing Local Transfer Pricing Rules and/or Enforcement and OECD Standards).