Undoubtedly, one of the most interesting aspects of the Hungarian business environment is taxation. In Mundo´s view, Hungary is one of the best places to establish a company because, like we have stated in other sections of this page, the corporate tax is only a flat 9% annual rate. This makes Hungary the EU country with the lowest corporate tax.

If you have a company that is officially resident of Hungary, then you will be subject to worldwide income tax, but still can benefit from some interesting incentives such as double taxation treaties. This country has double taxation agreements in place with more than 40 jurisdictions, and does not impose withholding tax on dividends, interest or royalties paid to companies in those countries.

If you are looking for a jurisdiction that provides substance, then Hungary is a great option as it is in full compliance with EU accounting and reporting standards.

Business taxation

The Hungarian taxation system is close to the level of complexity found in Western Europe and harmonized with EU directives and provides a secure legal framework for the conduct of business. Tax laws in Hungary are enacted by Parliament. The Tax Authority provides only interpretative and administrative guidelines for these laws. Court decisions currently play an increasing role in interpreting tax laws and the European Court of Justice (ECJ) case law is also applicable. 

Hungarian taxation operates under a self-assessment system. Taxpayers are required to register, determine their tax obligation, make advance payments, file tax returns on their own behalf, make corrections to the tax returns as needed, keep records and supply information as required by law. Authorities randomly examine tax returns to enforce the self-assessment system. Corporations are subject to continuous assessment throughout the year. The authorities randomly examine tax returns to enforce the self-assessment system.

The tax year is the calendar year for individuals and the calendar year or the business year for companies. In general, tax returns must be filed annually. However, for VAT, payroll, quarterly or monthly filing may be required. 

Generally, monthly (health insurance contribution) or quarterly (VAT) tax advances have to be paid during the year. In addition, companies should top up their annual tax payable for the given tax year by 20 December each year up to 90% of their expected annual liability.

Corporate income tax returns for companies are due by 31 May following the calendar year-end (or should be submitted within 150 days of the year-end with regard to companies whose business year differs from the calendar year). 

Subject to the fulfillment of the general, size related conditions, private companies limited by shares and the Hungarian branches of non-Hungarian companies can also choose to prepare a simplified annual report. For companies involved in consolidation, which my still not prepare a simplified annual report, the lax states that this is also applicable for the parent companies. Non-calendar year companies can also choose to prepare a simplified annual report.

The law repeals the condition that the impact of exchange rate changes upon the year-end revaluation of balance sheet items is to be recorded only if the effect is significant.

A simplification is that the gain or loss is the value of participations or debt securities denominated in foreign currencies can be determined without filtering out the foreign exchange effects.

Any enterprise is entitled to keep its books and prepare its financial statements in Euros (without any restriction) and keeping books in foreign currency other than euro are also possible.

Hungary’s corporate tax rate is competitive in the region, although the relatively low corporate rate is balanced by high local business taxes levied by the municipalities, and high employment charges.

Hungary has bilateral tax treaties on double taxation avoidance; therefore, Hungary does not impose withholding tax on dividends, interest or royalties paid to companies in treaty countries.

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In connection with the double taxation avoidance treaties between Hungary and the countries the opposite relation of withholding tax is remarkable. The taxability and tax rate depends on the nature of the income receiver, if a beneficiary or not.

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Significant Taxes and Levies in Hungary

Currently, the following significant taxes and levies are imposed in Hungary: 

1.Central Taxes

• Corporate income tax, dividends
• VAT
• Personal income tax

2. Local taxes

• Building tax
• Land tax
• Local business tax

3. Levies

• Real estate tax
• transfer tax of motor vehicles

Corporate Income Tax

If a company is a Hungarian resident, it is taxed on its worldwide income. The taxable income of both resident and nonresident corporate taxpayers is based on pretax profits, calculated in the profit-and-loss statement prepared in accordance with the accounting rules, with a number of corrections for the differences in deductive and nondeductible items recognized by accounting and tax law.

Hungarian-registered subsidiaries of foreign companies are taxable under ordinary domestic rules. Foreign companies are deemed to be resident in Hungary if their actual place of management is in Hungary.

Registered branch offices and non-registered permanent establishments are taxed under the same regime applicable to Hungarian-registered companies. The corporate income tax rate is 9% flat rate.

For transfer pricing, the transactional net margin and the profit split methods have been added to the existing comparable uncontrolled price method, resale price method and cost plus method as being generally applicable in related party transactions.

The shareholder of a company whose Hungarian real estate property exceeds 75% of the aggregate market value of assets shown in its financial statements is subject to Hungarian taxation when transferring the shares in the company, assuming a member of the company is resident in a country with which Hungary has not concluded a tax treaty or if an applicable treaty allows the taxation of the capital gains in Hungary. 

Main tax-deductible items

Allowable deductions include:

• Losses carried forward;
• Recognized provisions;
• The costs of switching to double-entry accounting and switching between accounting currencies;
• Foreign currency gains and losses;
• And depreciation and amortization of assets as set out in the Corporate Tax Act.
• Corporate taxpayers can deduct 50% of royalties but the deduction may not exceed 50% of the taxpayer’s total pretax profits.
• The tax base can be reduced by R&D costs.

Non-deductible expenses include:

• Non-business expenses;
• Loss in value accounted for in the tax year for receivables;
• Interest on loans if the company is thinly capitalized;
• Fines.

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Depreciation

Accounting depreciation of assets is generally calculated by the straight-line method, under which the same percentage of the original value of the asset is deducted each year.

The general rate of tax depreciation for machinery and equipment is seven years (14.5 % per year). A three-year tax depreciation period (33.33% per year) applies to computers, office equipment, advanced industrial equipment, and many types of environmental protection, medical and laboratory equipment. Motor vehicles are depreciated over five years (20% per year).

Tax depreciation can be accelerated by applying a 50% rate instead of 33% or 14.5% rate to computers, computer accessories and new tangible assets purchased or produced in 2003 or thereafter. Equipment used for film and video production may be amortized at a 50% rate.

For buildings, tax depreciation is set at 50 years (2% per year) for structures of long duration, 3% for those of medium duration and 6% for those of short duration. Building that are leased out are depreciable at 5% per year, and the equipment in the buildings at 30% per year. Industrial and agricultural structures are depreciable at annual rates of 2% and 3%, respectively. Other structures depreciate at annual rates ranging from 2% to 20%.

Non-depreciable assets include registered land and works of art.

Companies may set aside a tax-deductible reserve for the purpose of general development up to 50% of the taxpayer’s entire pretax profits, or up to 500 million in a tax year and make an immediate deduction by this development reserve from their tax base.

Enterprises may revalue liquid assets, intellectual property, tangible assets, except investments and financial investments, except for securities loans at the balance sheet date.

In revaluing assets, where market value is less than book value, the difference must be accounted for as an added depreciation expense above the amount planned. When the market value is greater than book value the difference can be accounted for in a valuation reserve under the equity account and as a valuation adjustment under the relevant asset account.

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No Withholding Tax

In Hungary, there is no withholding tax on dividend, royalties and interest payments made between corporate entities from a Hungarian source.

Dividends

Dividends paid on corporate entities are not subject to withholding tax, irrespective of the residence of the corporate recipient. Dividends received; except for dividends received from controlled foreign company are tax base decreasing items.

Capital Gain Taxation

Capital gains realized by Hungarian taxpayers are normally treated as ordinary business income, with no difference in the tax treatment of long-and short- term gains. Thus, capital gains are included in the corporate tax base and taxed at the 9% rate; capital gains of foreign companies are generally tax-exempt.

Other Taxes

Real estate tax which is payable by the purchaser, is levied on the market value of the property. The rate is 4% for flats and houses with a value up to HUF 1 billion and 2 % for the value exceeding HUF 1 billion with a maximum of 200 million HUF. The transfer of all other types of real property or the transfer of shares in companies holding Hungarian real estate are subject to a transfer tax payable by the purchaser at a rate of 4% of the value of the property.

The transfer of motor vehicles is subject to a transfer tax, amounting to HUF 300-850 per kilowatt.

Value Added Tax (VAT)

The general rate is 27% applied to most products and services (18% is applied to basic food products and the provisions of accommodation, 5% is applied to pharmaceuticals and certain medical equipment, aids for the blind, books and newspapers). Certain services, e.g. financial, postal, educational (with exceptions), rental of business property (or other property excluding residential properties and land) and utilization of such properties in other ways (with options to tax), assignment, etc. are tax exempt.

Non-resident EU taxpayers or taxpayers from countries that have concluded bilateral agreements on reclaiming VAT (Liechtenstein and Switzerland) may obtain a VAT refund in certain circumstances. Based on the new VAT rules, certain domestic transactions (especially in connection with real estate) are taxed according to the reverse charge mechanism, i.e. the buyer pays the VAT.

Following the elimination of trade barriers with the EU, sales transactions between Hungary and other EU member states are considered intra-community acquisitions or supplies. In intra-community supplies, the taxpayer may issue an invoice to its EU-based purchaser without charging VAT if it has proof that the goods left Hungary.

Imports are subject to VAT at the same rate that is applied to similar products of Hungarian origin. The basis of assessment is the sale value of the products and services. In the case of imported products, the basis of assessment is the value for customs duty, increased by the amounts of customs duty and customs clearance charges.

Nonresident companies may reclaim Hungarian VAT if registered for VAT purposes in their home country. For firs registered outside the EU, Hungarian VAT may be reclaimed based on bilateral agreements.

Branch offices of foreign companies in Hungary are subject to VAT. Each branch of a single foreign company in Hungary is treated as a separate entity and must file separate VAT returns. The supply of services between a branch and its head office falls outside the scope of VAT unless the branch is member of a Hungarian VAT group.

All related firms and their branches in Hungary are eligible for group taxation and are collectively regarded as a single taxpayer. Services and products provided within the VAT group are not subject to VAT.

Providing the following services falls outside the scope of VAT in case if the registered seat of the recipient is located outside the European Community:

• Temporary or final transfer of intellectual property;
• Advertising;
• Providing business, legal, accounting, tax, translation, computing and certain engineering advisory;
• data processing and information broadcast;
• Financial services as insurance and reinsurance and other services except safe deposit box service;
• Hiring-out of labor and staff service
• Product leasing, except real estate and vehicles;
• Energy transport, distribution, and related services, access to the natural gas-, heat- and cooling or electricity network located in EC;
• Telecommunication service;
• Radio and television service;
• E-services.

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Excise Tax

Excise tax is levied on alcoholic beverages, petrol, and tobacco products.

Personal Income Tax

The tax payable on the incomes covered by Personal Income Tax Act shall be 15 per cent of the tax base.

In respect of the income of resident private individuals, the tax paid in a foreign country on such income shall be deducted from the tax. Unless otherwise provided for in this Act, in the absence of an international agreement, the inclusion of tax paid abroad shall not reduce the tax payable below 5 per cent of the tax base, and any tax refund that is due to the private individual by virtue of an international agreement or on the basis of foreign law from the income tax paid may not be claimed under taxes paid abroad.

The consolidated tax base includes all income earned by a private individual during the tax year by self-employment and by activities other than self-employment, as well as other income, furthermore, in connection with flat-rate taxation the standardized income calculated from revenues from private entrepreneurial and all agricultural smallholders’ activities.

Foreign Person’s Tax-paying Obligation

A foreign employee is obliged to pay income tax in Hungary even if receives salary from abroad. In case of permanent residence (that means staying in Hungary for more than 183 days a year) have to pay tax on all income. In the case of temporary residence, tax has to be paid only on the income received in Hungary. 

Foreign nationals living and working in Hungary are required to register as a taxpayer  there. Those who are permanently resident in Hungary are taxed on any income generated in Hungary or overseas, while foreign residents who are living and working on a temporary basis in Hungary are only taxed on their Hungarian income. Criteria used in defining  permanent residence for taxation purposes include the usual family place of residence, property ownership and whether the taxpayer spends more than 183 days per year in  Hungary.

Employees with no other income have their tax deducted direct from salaries on a monthly basis. Those with additional income, the self-employed and people with overseas-generated income are required to make advance payments of tax and to complete a tax return at the end of the financial year, at which point they must pay any additional tax due, or are reimbursed if their advance payment exceeded the amount of tax actually payable.

It is not necessary to pay Health Care payroll tax for people who do not receive a salary in Hungary. In this case, it is advisable to hold private health insurance. If you do not have cover you’ll have to pay for each and any medical treatment you require when in Hungary.

As long as you pay payroll tax in Hungary, you will be issued a Social Security card which entitles you to public medical treatment. In this case it is advisable to also apply for the European Health Insurance Card (which you become eligible for as soon as you start paying social security contributions under the Hungarian system). The EU Health Card entitles you to free emergency treatment in all European countries. 

Social Security

The employee must pay healthcare contribution, with a the tax base of 18,5% of the gross salary of the employee.

The employer must pay social security contribution, with a tax base of 15,5% and qualification contribution, with a tax base of 1,5% of the gross salary of the employee.

Local Taxes

The taxes actually levied are at the local municipality’s discretion. In some cases, e.g. in case of the local business tax, the rate of the tax actually levied is also decided by the local municipality. The maximum rate of tax is set by legislation in effect throughout Hungary.

• Building tax: Maximum HUF 1100/m2/year or a maximum of 3,6% of the adjusted market value of the building (as determined by the local government). To be paid based on the floor space of buildings.
• Land tax: Maximum of HUF 200/m2/year or a maximum of 3% of the adjusted market value of the land. To be paid on undeveloped land. 
• Local business tax: The local municipalities can levy business taxes at up to 2% on gross sales revenue, less the cost of goods acquired for resale, subcontractors’ fees, the cost of materials and direct R&D costs incurred in the tax year. Companies may exclude royalty and interest income from the local business tax base.

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