Corporate Taxation

Introduction

From 1 May 2004, Hungary is a Member State of the European Union. Important features of the Hungarian tax system have been harmonized with EU tax law, including direct taxes, VAT, excise duties, mutual assistance and administrative cooperation.

Companies are subject to corporate income tax, social security contributions, VAT, property tax and excise taxes. Municipal authorities are authorized to levy local taxes, including local business tax and real estate taxes.

Corporate Income Tax

Corporate profits are subject to corporate income tax. The general rate of corporate income tax is 19%. If certain conditions are fulfilled, a rate of 10% is applicable to the part of the taxable base which does not exceed HUF 50 million, while any excess is taxable at the general rate.

Value Added Tax

The standard rate is 25%. A reduced rate of 5% applies to text books and specified medicines, medical materials and supplies. An additional reduced rate of 18% applies to certain basic foodstuff, hotel services and district heating.

Non-residents are taxable in the same manner as residents if they carry out any taxable transactions in Hungary.

EU resident registered taxpayers who are not established in Hungary are entitled to reclaim VAT according to provisions implementing the relevant EU directives.

Non-EU resident registered taxpayers who are not established in Hungary may be entitled, on the basis of reciprocal arrangements, to reclaim the VAT paid on domestic supplies of goods (including the importation of goods) and paid on services used in Hungary for their business activities. Hungary currently has reciprocity agreements with Liechtenstein and Switzerland.

Local taxes

The municipalities are authorized to levy a local business tax at rate of maximum 2% on corporate taxpayers that have their legal seat or permanent establishment within their jurisdiction. This tax is generally levied on the turnover, decreased by the acquisition costs of goods sold, costs of mediated services and material.

Immovable property situated in Hungary may be subject to municipal real estate taxes, including building tax and land tax. The owner is the taxable person. The building tax is HUF 900/m2, while the land tax is HUF 200/m2. These taxes are deductible for corporate income tax purposes.

Payroll tax

Employers’ social security contributions on top of the gross salary are:

• pension and health insurance contributions at 27%; and
• vocational training contribution at 1,5%.

The above contributions are deductible for corporate income tax purposes.

Withholding taxes

Dividends paid to (resident and non-resident) corporate shareholders are not subject to withholding tax. Only dividends paid to (resident and non-resident) individual shareholders are subject to withholding tax.

A 30% withholding tax is levied on interest, royalties and certain service fees (including fees for business consulting and advisory, advertising, marketing, etc.) paid to non-resident companies if Hungary does not have an income tax treaty with the country of residence of the recipient.

Transfer tax

Transfer tax is levied on the transfer of ownership (for consideration) of immovable property and rights. The tax is payable by the transferee. The taxable base is the fair market value (generally the sales price), not reduced by debts. The regular rate of the transfer tax is 4%.

Transfer tax is also due on the acquisition of vehicles. The acquisition of shares and other securities for consideration is not subject to transfer tax.

Property tax

A property tax applies to owners of water vehicles, aircrafts and heavy duty passenger cars.

Author: Tamás Bajor, Vienna Consult Kft., www.viennaconsult.hu

Politically Germany is one of the driving forces of European unification. But all good intentions seem to vanish if money is involved. In this respect Germany’s finance minister is no different from others. He is responsible for drafting tax laws with doubtful EU-comparability.

A good indication that German tax law is not in line with EU law is the sheer number of cases in front of the European Court of Justice. No other European country produces more cases in regard to direct taxes. In the last ten to fifteen years Germany lost a lot of cases. And it looks as though many more are to follow. A German professional magazine publishes every year a list of tax provisions which might not be in line with EU law. This year’s list names 146 different provisions! And this list does not contain potential cases on indirect taxes such as Value Added Tax (VAT) or excise taxes on energy, tobacco or alcohol.

German tax law discriminates in certain cases against foreign enterprises as well as individuals. Anti-discrimination provisions of the EU-treaty are

• General freedom right/Right to choose residence
• Freedom for employees
• Freedom of trade
• Freedom to conduct services
• Right of establishment
• Freedom to transfer capital funds

For business activities e.g. the following German regulations can be subject to court cases:

• Deduction of foreign losses
• German thin capitalisation-regulations
• Capital gains taxation if assets are transferred abroad
• Taxation at source of dividends and profit distributions
• German CFC-regulations
• German restructuring regulations

The following German taxation of individuals may breech EU freedom rights:

• Deduction of foreign losses
• Deduction of personal allowances
• Taxation of foreign investment funds
• Extensive double taxation concerning inheritances and gifts

Enterprises and individuals from other EU-countries have good chances to argue against discriminating tax regulations. For enterprises and individuals resident in non-EU countries such as the USA or Switzerland, it is much more difficult to achieve protection of EU anti-discrimination jurisdiction. But it is not impossible. This is due to the fact that the Freedom to transfer capital funds provides cover to respective world-wide activities. Companies and individuals from non-EU countries who are subject to German taxation and feel discriminated by German tax legislation should always check whether appeals against tax assessments could prove to be successful.

But to be fair it has to be said that in recent years a lot of German tax provisions have been brought in line with EU law by the German government. But in many cases it was only after Germany lost cases in front of the European Court of Justice or German fiscal courts.

Glossary

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de