No wonder that real estate plays a major role in the overall M&A market, since these properties represent financial and emotional security too. Both buyer and seller try to maximize their cost-benefit ratio and are dependent on reliable data. Next to identifying, for example, future rental income and maintenance costs, the owner/lessor has to be absolutely sure about the funding of fiscal circumstances, including taxes. In this article, we would like to give an insight into the specialties of real estate taxation in Hungary.
In real estate transactions tax optimization that is tailored to each client’s need is very important. The team of LeitnerLeitner cooperates across borders and the offices in CEE work closely together and also backed with partners around the globe. Nevertheless, by this article, we would like to give an insight into the specialities of real estate taxation in Hungary.
In terms of real estate, Hungary levies taxes on the owner for holding, utilization and alienation of the property. Taxes are assessed both at the level of central administration and local municipalities. Upon alienation, moreover, taxes may be imposed for the alienator (capital gain taxation both for corporations and private persons) and the purchaser (real estate transfer tax, gift tax depending on the form of acquisition) too. Although in some cases real estate holdings are also taxable, it is still worth considering structuring real estate investments by share instead of asset deal – it is especially advantageous to combine that with a so-called reported participation scheme, which grants full exemption from the taxation of any capital gains in a future sale of the shares.
It is also advisable to be aware of potential tax savings concerning real estate investments. The 9% CIT rate introduced as of 2017 in Hungary is already an attractive factor; which made even friendlier considering the other tax advantage and allowance potentials. For planning an investment in real estate, one may consider the development reserve that represents a kind of accelerated depreciation. In case of long-term used tangible assets – such as real estate with a yearly depreciation of 2-6% – this is a good development loan from the budget.
Moreover, a special tax advantage may also be used for the maintenance costs of monument buildings and locally listed buildings and structures (double deductibility of costs), but only up to 50% of pre-tax profits. For renovation, the tax base may be reduced by triple the renovation cost (for accounting plus additional 2-times for tax purposes). Moreover, it is not limited by the amount of pre-tax profits either, i.e. the resulting negative tax base may be used as loss carry-forward. The scope of taxpayers eligible for the tax allowance may be owners, lessees under a financial lease, holding companies and finance companies. The tax allowance may only be used if the maintenance or renovation of monuments is not carried out upon a compulsory order. Investments aimed at safeguarding cultural heritage may also apply for the triple deductibility of costs. The tax allowance can be used in the tax year when the investment or renovation is completed and in the subsequent 5 tax years in instalments determined by the taxpayer. The tax allowance can be shared by the taxpayer’s related companies.
Real estate investments may also form part of a project eligible for development tax allowances (providing 80% credit from payable CIT, ending in an effective tax rate of 1.8%) and other state subsidies. Here, we would like to highlight a further novelty of the Hungarian tax system, as from 2017, a new legal title opens the opportunity for taking advantage of CIT incentive for the implementation and operation of asset investments aimed at energy efficiency. Such investments may include projects aimed at improving energy efficiency by reducing final energy consumption. The tax incentive is capped at 30% of the eligible costs (but not more than the HUF equivalent of EUR 15 million in present value), which can be further increased by 10-20% for SMEs. The mandatory operation period of the investment project is at least 5 years. The tax incentive may be used in the year in which the investment became operational, /or/ in the following tax year plus in the following 5 tax years.
For creating a full picture, the VAT which is in many times the most difficult issue in the real estate transaction shall also be mentioned. Generally, the alienation of real estate is subject to VAT at a rate of 27%. The sale of real estate occupied for more than two years, the sale of undeveloped land (except building plots) as well as the rental and leasing of property is tax exempt. Notwithstanding this general rule, the taxpayer may opt for taxation, but will be bound to his decision until the end of the fifth calendar year. With respect to real estate transactions, taxpayers may opt to be taxable on the sale or the lease or both. In the case of leasing it is possible to differentiate between residential and non-residential real estate. Considering the varieties, it is necessary to be well prepared for the VAT assessment of a real estate deal, also looking at the future utilization plans.
As a renowned M&A advisor, LeitnerLeitner had decades of practical experience in the M&A and real estate market. We provide our clients with high-end tax and financial advisory through all stages of the real estate lifecycle from establishment or purchase to initialization of sale or deconstruction of real estate. We implement a one-stop-shop principle covering all needs of our clients, including institutional investors, corporations, private clients, real estate funds, foundations, and public bodies. Our clients benefit from our efficient cooperation and internal crosslinking with experts in specific areas of for example financial advisors, auditors, tax experts specialized on VAT, real estate taxation, corporate taxation, and we also cooperate with lawyers.