Doing business in Hungary
Hungary is an excellent low-tax environment for doing business in Central Europe. Businesspeople who want to minimise the corporate tax leakage should definitely consider Hungary as a business location in Europe. Hungary is excellent for companies who want to minimise their taxes and who are active in international trade or in the development and commercialisation of Intellectual Property.
Hungary is a landlocked country situated in Central Europe. It’s bordered by Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest, Austria to the west, and Slovakia to the north. The territory of the country is 93,030 square kilometers. Hungary’s population is estimated at about 9,9 million people. Hungary is a democratic republic with a parliamentary government and is a member of the Council of Europe, the EU, NATO, the OECD, the Organization for Security and Co-operation in Europe (OSCE), and the Visegrád Group.
Types of companies
Four types of companies are available in Hungary: the unlimited partnership (KKT), the limited partnership (BT), the limited liability company (KFT) and a company limited by shares (RT). In most cases, foreign investors and entrepreneurs opt for a limited liability company or a company limited by shares. If the shares of a company limited by shares (RT) are not in public circulation, it operates as a closed company limited by shares (ZRT). If the shares are put into public circulation, a company limited by shares operates as a public company limited by shares (NYRT).
Unlimited partnership (KKT)
An unlimited partnership (KTT) must have at least two members. All members of a KTT who make monetary or non-monetary contributions are regarded as general partners and are entitled to represent the company, unless the company’s articles of association state otherwise. The liabilities of all members of a KKT are unlimited for the partnership’s obligations. There is no requirement for a minimum capital and an unlimited partnership is not regarded as a legal entity.
Limited partnership (BT)
A limited partnership (BT) is founded for the purposes of joint commercial activities. At least one member (the general partner) of a BT must have unlimited liability for the obligations of the company and at least one other member (associate member) bears limited liability. Only the general partner has the right to represent the partnership, unless the company’s articles of association state otherwise. A limited partnership is not regarded as a legal entity.
Limited liability company (KFT)
The capital of a limited liability company (KFT) consists of the capital contributions of the individual members. These contributions can be made both in cash and in kind. The initial capital must be at least HUF 500,000. Each member must have an identified percentage of the total capital (“quota”), which cannot be less than HUF 100,000. A limited liability company may be owned by one or more persons.
Company limited by shares (RT)
The share capital of a public company limited by shares (NYRT) must not be less than HUF 20 million. The share capital of a closed company limited by shares (ZRT) must not be less than HUF 5 million. Pursuant to the Companies Act, the share capital of a ZRT might consist entirely of in-kind contributions.
The corporate tax applies to (1) companies established under Hungarian law, (2) other organizations (e.g. foundations, associations), and (3) non-resident taxpayers performing entrepreneurial activities at business premises in Hungary.
Under the rules effective until June 2010, the Hungarian corporate tax rate was 19%. As of July 2010, a lower 10% rate was introduced in respect of the first HUF 500 million of the taxable income.
The taxable income is the profit indicated in the financial statements of the company, adjusted by certain additions and deductions specified in the Corporate Tax Act. Allowable deductions which lower the taxable income include (1) revenue from dividends (except dividends from a controlled foreign company), (2) provisions built up for expected liabilities and recaptured costs accounted for as revenue in the tax year, and (3) write-back of unplanned depreciation which increased the corporate tax base in previous tax years.
Hungary does not levy withholding tax on (1) dividends paid to foreign companies, (2) payments of interest made to non-treaty countries, and (3) payments of royalties and service fees made to non-treaty countries.
Tax allowance for small and medium-sized enterprises
Small and medium-sized companies are eligible to apply for a tax incentive in respect to the interest payable on loans borrowed from a financial institution with the aim of purchasing or manufacturing tangible assets. The available tax incentive is 40% of the interest paid on the loan in a tax year. The maximum tax allowance is HUF 6 million per tax year.
The Hungarian Ministry of Finance provides tax incentives for certain investments for a period of maximum 10 years, including:
- Investments of at least HUF 3 billion or in case of certain special investments of at least HUF 1 billion, which meet either of the two following requirements during the four years following the first year in which the tax allowance is utilised. The requirements are: (1) the investment should result in an increase in the number of employees by at least 150 (or 75 in underdeveloped regions); (2) the investment should result in an increase in the salary costs by at least 600 times (or 300 times in underdeveloped regions) the annual minimum salary;
- Investments of at least HUF 100 million intended for environmental protection, broadband internet services, film and video production, as well as basic research, applied research and experimental development;
- Investments creating new jobs;
- Investments by small- and medium-sized enterprises exceeding HUF 500 million which meet either of the two following requirements. The requirements are: (1) the investment should result in an increase in the number of employees by 20 (for small enterprises) or 50 (for medium-sized enterprises) within the following four years; (2) the investment should result in an increase in the salary costs by at least 50 times (small enterprises) or 100 times (medium-sized enterprises) the annual minimum salary.
Tax benefit on R&D and software development salary costs
10% (15% for small- and medium-sized enterprises) of the payroll costs accounted for as direct R&D costs of applied research, basic research, or experimental development and payroll costs of software developers may be deducted from the corporate income tax liability in the tax year and in the next three years in equal installments. The maximum amount of the tax benefit cannot exceed 70% of the calculated tax liability.
Motion picture and video production
The Hungarian government offers tax incentives for movies and related projects. The taxpayer may reduce his corporate tax liability by not more than 20% of the eligible costs approved by the Hungarian Film Office. The reduction can be utilised either in the year of investment or in the subsequent three years.
Donations through the Office of Art and Performance
As of the first of March 2010, donations supporting the Arts made through the Office of Art and Performance are deductible for corporate taxation purposes. The deduction cannot exceed 70% of the corporate tax liability and should be utilised within a 4-year period (including the tax year when the donation was made).
Corporate tax saving through sport financing
Donations supporting the five most popular team sports in Hungary, namely, football, handball, basketball, water polo and ice hockey, reduce both the corporate tax basis (as a recognised expense) and the tax liability. The tax credit is limited to 70% of the annual tax liability. Because of the reduction of the corporate tax basis and tax liability, taxpayers may receive a total tax saving amounting to 110% of the financing provided.
Hungary as an Intellectual Property (IP) holding location
Hungary is one of the top IP-holding locations within the European Union and is becoming an important and internationally recognised location for IP developments and distribution.
Hungary has been an attractive location for IP investment and distribution structures since years. As opposed to the comparably high tax burden of the surrounding countries, in Hungary the tax rate on the profit realised from the utilisation of different types of IP rights (patent, trademark, IP protected by industrial property rights, know how, etc.) can be decreased to 5%. IP acquired or developed by a Hungarian entity after 1 January 2012 can later be sold tax-free, provided that the taxpayer acquiring the IP has reported the acquisition to the tax authority within 60 days and the sale is completed after the elapse of a one-year holding period.
Furthermore, due to the double tax treaties Hungary has concluded with numerous countries, it is ensured that no (or only limited) withholding tax is levied on cross-border royalties received by a Hungarian entity.
Hungary provides an extremely flexible framework for building up IP structures. Both the development and the utilisation of the IP rights can be carried out at the level of a Hungarian company, with a minimum of taxes to pay.
Hungary as a holding location
The Hungarian holding regime allows for the receipt of a tax exempt dividend and provides a general exemption from withholding tax in respect of dividends paid by a Hungarian company to another company. Hungary does not levy withholding tax on (1) dividends paid to foreign companies, (2) payments of interest, and (3) payments of royalties and service fees.
Double tax treaties
Hungary signed double tax treaties with the following countries: Albania, Australia, Austria, Azerbaijan, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, France, Iceland, Germany, Indonesia, India, Israel, Ireland, Japan, Italy, Kuwait, Kazakhstan, Malaysia, Luxembourg, Moldova, Malta, Morocco, Mongolia, Norway, Netherlands, Philippines, Pakistan, Portugal, Poland, Russian Federation, Romania, Serbia, Singapore, Slovakia, South Africa, Slovenia, Sweden, Spain, South Korea, Switzerland, Tunisia, Thailand, Ukraine, Turkey, Uruguay, United Kingdom, USA, Vietnam, Uzbekistan.