As of 1 January 2017, Hungary reduces its corporate income tax rate to flat 9% instead of the currently applicable progressive 10% / 19%. The new rate is applicable for all taxable persons without any activity restrictions.
The flat 9% CIT rate combined with the various tax allowances and tax base reductions; further, with the withholding tax exemption of dividends, interests, royalties and any other services fees to corporate recipients make Hungary a very attractive location for foreign investments.
At the same time, special attention should be made on the potential counter-effects of the low Hungarian tax rate that may result in taxation at the level of parents or other group entities by way of CFC or other anti-taxavoidance regimes.
It is also time for recalculation of tax allowances, as the already granted development tax allowances might not be able to utilized in full due to the tax base reduction.
LeitnerLeitner is at your kind disposal for any relocation questions, investment planning and tax allowance optimization. We are also for your assistance in determining and minimizing the potential counter effects of the low Hungarian taxation.
Amendment of the Hungarian CFC legislation
From mid-January 2017, Hungary also amends its CFC legislation; contrary to the old CFC-rules, it is no more a condition to qualify for a CFC to have a Hungarian private person beneficial owner, or the majority of the income is deriving from Hungarian sources. Instead, any non-resident entity may qualify as a CFC for Hungarian tax purposes in which a Hungarian taxable person holds the majority (>50%) of the voting rights, or the participation in the subscribed capital, or profit entitlement; provided that the foreign CIT (or similar) tax burden is less than half of the CIT burden that would be due in Hungary.
Exemption from the CFC qualification may be available for entities engaged in real economic activities, or groups traded at a registered stock exchange. However, group financing entities may face with difficulties, as the definition of investment activities pertaining to financing is limited to the acquisition, holding or alienation of securities connected to lending, or to financial activities subject to official supervision; thus the pure granting of loan within the group is likely not sufficient enough to exempt from the CFC-status.
Resulting from the CFC status, the connected Hungarian entity shall be prepared for the re-jection of participation exemption and thus taxation of dividends received, the inclusion pf passive CFC-income, and the taxation of loss in value and alienation of a CFC participation.
The burden of proof lies with the Hungarian taxpayer connected to the CFC regulation, which need to be documented in an extensive CFC documentation.
In case of questions to the determination of CFC status of foreign group companies and its tax effects to the Hungarian members, LeitnerLeitner is at your kind assistance.
Reduction of taxes on employment
In addition to the corporate tax rate reduction, the taxes over employment will also be re-duced in Hungary: on the employment side from 2017 the social security tax rate will be 22%, from 2018 20%. The personal income tax rate remains 15%, which makes Hungarian labour force more effectively taxed too.
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