Regarding taxation the primary question is whether the investor concerned falls under the scope of the corporate tax and dividend tax (Act No. LXXXVI of 1996; hereinafter: CTA) or the personal income tax (Act CXVII of 1995; hereinafter: PITA), and whether such investor is qualified to be resident or non-resident for tax purposes.
General rules concerning taxation of non-resident investors
Taxation of foreign investors depends on the place of income earning and whether or not a treaty (or reciprocity) on avoidance of double taxation exists between the Republic of Hungary and the investor’s home country.
The majority of the treaties on avoidance of double taxation currently in force includes the taxation according the tax rules prevailing in the investor’s home country, though there can be different treaties as well. If there is no treaty in force on avoidance of double taxation, taxation of foreigners shall depend on the activity they are pursuing in Hungary.
Regulation concerning investors falling under the scope of corporate tax
In the operation of CTA Hungarian tax residents are the domestic entites which – among others - are:
-
business associations (including non-profit business associations), associations and european joint stock companies (Socieats Europaea (SE), including its holding form), european cooperative societies,
-
cooperative societies,
-
law offices, offices of bailiffs, offices of patent agents, notary public offices, forest management associations.
-
nonprofit companies, water management associations,
- private and public foundations, non-governmental organizations, public corporations, churches (including those organizational divisions which are vested with legal entity in the deed of foundation/articles of incorporation of the above-mentioned organisations), housing cooperatives and voluntary mutual insurance funds.
Pursuant to CTA non-resident taxpayers are the foreign entity and/or the foreign resident performing business activities in domestic business premises, provided, that such an entity is not qualified as resident taxpayer because of its place of business management (hereinafter foreign entrepreneur). Foreign entities are legal persons, business associations without legal personality, personal associations and other organizations. Foreign persons are qualified as domestic entities, if their place of business management is in Hungary.
Foreign entrepreneur has to calculate the base of its corporate tax together for all its domestic business premises (exclusive of branch offices), and separately for each of its Hungarian branch offices. The sales revenues, income, costs, and expenses of business premises are to be recorded as if it were a separate enterprise, independent from the foreign entreprenuer.
In the case of resident taxpayers and foreign entrepreneurs the corporate tax base is to be established by taking into consideration pre-tax profit, legal titles reducing and increasing pre-tax profit, special rules of modification of the tax base, rules relating the modification of prices used among interrelated enterprises and with the consideration of the amount of the tax corresponding to the corporate tax paid (to be paid) abroad accounted as cost. The tax liability of non-resident taxpayers shall be applicable to their income from activities carried out at their business premises in Hungary, and/or to their income originating from Hungary on the basis of the place of income earning (restricted tax liability). Resident taxpayers and foreign entrepreneurs establish their pre-tax profit on the basis of their financial statements prepared in line with the act on accounting.
Pursuing to CTA income deriving from securities has to be accounted among revenues and the corporate income tax rate is to be applied.
Presently the corporate tax rate is 16 per cent of the positive tax base, or 10 per cent of the positive tax base up to 50 million Hungarian Forints if other specific conditions are fulfilled.
Regulation for taxation of private individuals
Pursuant to the Act CXVII of 1995 on personal income tax („PITA”), as amended tax liability of resident individual taxpayers covers all the income of the taxpayer (full tax liability). The tax liability of non-resident individual taxpayers applies to their income originating from Hungary on the basis of the place of income-earning or to the income taxable within the Republic of Hungary upon a treaty on avoidance of double taxation or reciprocity (partial/restricted tax liability).
Pursuant to the PITA individual Hungarian tax residents are the following:
a)
who are Hungarian citizens (except those, who are citizens of other country, and do not have permanent or temporary residence in Hungary),
b)
those private individuals who exercise the right of free movement and presence exceeding three month - declared in the act on entry and residence of persons having the right of free movement and presence - on the territory of Republic of Hungary for at least 183 days within a calendar year,
c)
person with settled down or stateless legal status being under the scope of the act on entry and residence of citizens of Third Countries,
d)
private individuals not mentioned in point a)-c) above
da) who have a home permanently available solely in Hungary,
db) whose centre of vital interests is in Hungary, if there is not at all a permanent residence or not solely in Hungary,
dc) who maintain their habitual abode in Hungary, if there is not at all a permanent residence or not solely in Hungary,
provided that the centre of vital interests is the country which has the closest personal, family-related and financial contact with such a person.
Pursuant to the PITA revenues paid as interest and revenues accrued on price and the capital gains received on sale or redemtion of publicly offered and distributed government securities – as defined in the Act of CXX of 2001 on Capital Markets („Capital Markets Act”) - are liable to taxes. The actual rate – exceeding 0 % - of witholding tax
has to be enforced from 1st of September, 2006 in line with the transitional rules
prescribed by the amendment of PITA
in paragraph (12)-(13) of Section 223 of Act LXI. of 2006 on the amendment of certain financial acts.
The tax rate on interest revenues is 20 percent on the grounds of the current provisions of PITA.
The acquisition date of interest revenues is the date of transfer, the date of posting or the date when the investor acquires the amount.
Taxation of stock market transactions are regulated by separate provisions of PITA.
In the case of recipients who are tax residents of member states of the European Communities, disbursers are additionally required to file tax returns with the Hungarian tax authority on a monthly basis and are also required to provide information in relation to interest paid, taxes withheld and the beneficial owners of the income annually.
No tax shall be withheld if the provisions of the double taxation treaty exempt the interest from Hungarian taxation, provided that the recipient furnishes the disburser with the prescribed tax residency certificate and a certificate of beneficial ownership. If more tax has been withheld than prescribed by the applicable double taxation treaty, the recipient may apply for a refund at the Hungarian tax authority
The fee of securities lending transactions as defined in the Capital Markets Act paid for private individuals is considered as income, thus the tax rate for those income is presently 25 percent. The tax to be paid by the borrower has to be calculated in accordance with rules of capital gain revenues.
The tax rate on i
ncome from capital gain revenues is presently 25 percent.
Tax is to be withheld, paid and reported by the payer if it qualifies as a disburser under Hungarian laws. However, if the payer does not qualify as a disburser, the individual recipient has to pay the tax as well as report the interest income in the individual’s tax return within the deadline prescribed for such return. In the absence of applicable treaty on the avoidance of double taxation, rules governing the payment of interest income tax of Hungarian individuals are to be applied to the tax payment of foreign private individuals as well.
