1. The corporation tax rate remains at 18%.
2. The 23% supplementary tax was abolished but must still be paid on dividend payments approved with respect to 1996 profits.
3. The Act has introduced a dividend withholding tax of 20%, with the following main characteristics:
- The subjects of dividend withholding tax are foreign entities receiving a dividend from Hungary, with the exception of private persons. The provisions of the Personal Income Tax Act apply to the tax payable on dividends received by private persons.
- The dividend withholding tax must be deducted from interim dividends as well and must also be paid on dividends paid "in kind".
- Notwithstanding the above, the dividend withholding tax is payable where a domestic entity is paid a dividend in cash (rather than bank transfer) or to a foreign bank account.
- Unless the criteria set out in the recently announced Tax Authority Guidelines outlined below (see also separate article), the payer must deduct the entire 20% dividend tax from the dividend. In the event that, on the basis of the relevant double tax treaty, Hungary may only tax the dividend at a rate less than 20% (typically at a rate of 5-10-15%), then the recipient may reclaim the difference between the 20% and the treaty rate following the deadline for filing the corporation tax return for the year in relation to which the dividend payment was made.
- No dividend withholding tax must be deducted if the foreigner directly reinvests the dividend due to it back into a Hungarian company.
- The concept of dividend has been expanded to include, for example, certain subsidies, debts forgiven and debts taken over.
- According to the amendment of the Accounting Act, in the future, dividends can only be paid to the extent that, following the dividend payment, the amount of the company's "own equity" does not decrease to a level below its registered capital.
4. Several changes have been made in relation to items adjusting the tax base. The most significant are:
- in the case of, for example, a merger, under certain conditions, it will be possible to carry forward the losses of the predecessor company.
- The 1% cap with respect to management and consulting fees paid abroad has been abolished, but the right to deduct such fees from the Hungarian company's taxable base is limited if the provision of the services is not properly documented.
- When calculating tax depreciation, assets activated before and after 1992 will no longer have to be depreciated on the basis of separate rules. It will not be possible to deduct depreciation on "uncompleted investments". Due to the modification of the Accounting Act, the acquisition value of assets will change, and accordingly, so will the base for depreciation (taxes related to purchase, such as non-deductible VAT, duties, etc. now form part of the acquisition value.)
- The rules regarding provisions made for bad debts, inventory, investments and securities will change.
- The regulations have become more stringent with respect to undistributed profits from and dividends paid by companies located in "tax havens" (CFC legislation).
- The Act disallows the deduction of several types of non-business expenses, e.g. expenses with respect to cars exceeding HUF 6 million, cash payments in excess of HUF 1 million, certain securities transactions and "non-business" travel related expenses.
- Thin-capitalisation rules are to be applied not only with respect to loans from the shareholder but from all related parties. The definition of related parties has been significantly expanded.
5. Related parties may modify their transfer pricing policies on the basis of a mutual agreement between them. The so-called transaction based methods (e.g. cost plus or re-sale minus) are no longer the only acceptable methods for determining the "arm's length price". There is no priority between the various methods.
6. "Offshore" companies will no longer be entitled to a tax allowance, however, the corporation tax rate applicable to such companies will be 3% rather than the normal 18%. In addition to commercial activity carried out abroad, such enterprises will be entitled to provide only those services where the place of performance is abroad as defined in the VAT Act. Offshore companies cannot provide financial services as defined in the Statistical Office's List of Services.
7. Entitlement to the various tax allowances obtained previously (e.g. the 100% / 60% or 60% / 40% tax allowances) has not changed. Certain other tax allowances may be utilised up to a maximum of 70% of the calculated tax. In 1997, a tax allowance of 50% for five years will be available in relation to investments with a value in excess of HUF 1 billion (approx. USD 6.2 million) where the investment results in an increase in export revenues of 25% per annum in comparison to the prior year but at least HUF 600 million.
8. The regulations with respect to foreign entrepreneurs (foreign companies with a permanent establishment in Hungary) have changed. From 1997, the taxable income of such companies will be subject to Hungarian tax at the rate of 18% (18% plus 23% in 1996). The taxable income is calculated according to Hungarian accounting and tax regulations.
9. The most significant change with respect to foreign organisations (foreign companies without a permanent establishment in Hungary) is that the Hungarian company must deduct the entire 18% tax from certain payments (interest, royalties) made to a foreign organisation even if, on the basis of the relevant double tax treaty, the given income would be taxed in Hungary at a lower rate. The difference between the 18% and lower treaty rate can be reclaimed by the foreign company in accordance with certain administrative procedures, eg by supplying proof of tax residency in the treaty country. Under the criteria set out in the recently announced Tax Authority Guidelines, in outline, if the foreign organisation's income is taxable in Hungary, the "payer" must withhold Corporations Tax from the taxable income of the foreign organisation at the rate specified in the Act.
If the international treaty rules out the taxation of the income on the grounds that the entity earning the income is a foreign resident, the payer must provide the Tax Authority with information on the payments and the payee's foreign residence status.
If the income due to the foreign organisation is taxable in Hungary but an international treaty allows for withholding at a lower rate than the rate stipulated in the Act, the foreign organisation can then reclaim the difference. The payer may withhold only the tax at the rate specified by the treaty subject to giving certain undertakings with regard to such matters as repayment of the difference between the rate stipulated by the Act and the treaty and obtaining an interest-free postponement from the Tax Authority.
In the case of foreign residents receiving dividends, unless certain provisions of the Act are applicable, the payer must withhold dividend tax from such dividend at a rate of 20%. Where a treaty is in effect, allowing for a lower rate to be withheld in Hungary, the foreigner may reclaim the difference. The conditions for this are similar to those described above.
For the payment obligations of personal income tax by foreign resident individuals a parallel treaty / residency certificate regime applies to foreign resident individuals who are prima facie liable to personal income tax in Hungary.
10. In the future, the monthly tax advance will have to be calculated on the basis of the tax paid in the previous year. As a transitional rule, in 1997, the supplementary tax can be deducted from the base of the tax advance, however, a 20% "inflation correction" must be added.
11. A recent announcement by the Ministry of Finance now allows Hungarian companies to make a self-revision of their 1995 tax returns on the basis of the decision of the Constitutional Court which held that the modification of tax allowances in 1995 by the Government was not constitutional. This means that all affected companies (with a tax allowance) should make a self-revision as soon as possible as well as calculate their 1996 corporate tax liability on the basis of the Court decision, i.e. by applying the original tax allowances against both the normal corporate tax as well as the supplementary tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
If you require any further information on Hungary, please call Peter Gerendasi at Price Waterhouse, Budapest: tel: ++ 36 1 269 6910 fax: ++ 36 1 269 6938
E-mail: peter_gerendasi@europe.notes.pw.com
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