Hungary

Tax residency – A company is resident in Hungary if it is incorporated in Hungary or its place of effective management is in Hungary.

Basis – Hungarian companies are taxed on their worldwide income.

Corporate income tax rate – Corporate income tax rate is 9%.

Municipal tax rate - A local business tax is applied to the net revenue of a company. The local business tax rate varies depending on the municipality - the local business tax in Budapest is 2%. The local business tax is levied on net sales revenue (as opposed to profits) (with deductions available for COGS, subcontractors’ work, material costs, mediated services, and research and development (R&D) costs). If the company has presence in various locations in Hungary, then revenue would need to be attributed to each municipality according to the level of activities in such municipality (considering various variables, such as permanent establishment definition, tangible asset value and payroll costs in each municipality, when applicable).

Capital gains – Capital gains are taxed as ordinary income.

An exemption may apply for those gains from the sale of shares of a subsidiary, provided that shareholder owns at least 10% of shares for at least 1 year, and subsidiary is not considered a controlled foreign company (CFC).

Dividends – Dividends received by a resident entity, whether from a local or foreign source are usually tax-exempt unless foreign-source dividends are derived from a CFC and are paid out of profits that are subject to a tax lower than 9%.

Interests - Interest income is subject to tax at the standard rate.

Royalties – 50% of royalty income may be exempt from taxation, subject to certain requirements.

Foreign-source income – Foreign-source income is taxable according to tax treaties provisions. If no tax treaty is available, a tax credit for foreign tax paid may be available.

Withholding taxes – Dividends, interests, and royalties paid to a non-resident company are exempt from withholding tax. A 15% withholding tax may apply for dividends, interests, and royalties paid to non-resident individuals.

Losses – Losses arising from taxable income may be carried forward for 5 years and may be offset against up to 50% of the profit before tax. Carryback of losses is not allowed.

Inventory - Inventory valuations are generally stated at the historical cost or their fair market value, whichever is lower. First in first out method (FIFO) or average values may be used for book and tax purposes. Last in first out (LIFO) is not allowed for tax purposes.

Anti-avoidance rules – Transfer pricing rules require related-party transactions to be done at arm’s length. Transactions may be required to be documented and advance pricing agreements are available.

Thin capitalization rules apply, interest on non-bank debt exceeding three times the taxpayer’s equity is not deductible for tax purposes.

Hungary has controlled foreign company regulations, CFC is a foreign company in which a resident holds a participation exceeding 50% (direct or indirect) and a foreign P.E., if the tax paid is less than the tax payable in Hungary, and 50% or more of its revenue is passive income. Certain profits derived from passive income from a CFC may be taxable in Hungary, although foreign tax paid on these profits may be creditable.

Labor taxes – Employers and employees are required to make contributions to social security fund at 22% and 18.5% on employees’ monthly wage, respectively. Employers also have to pay a vocational training contribution of 1.5% on employee gross salary.

Tax credits and incentives – A tax credit for foreign tax paid is usually available up to the Hungarian tax payable on the creditable income and up to 90% of the tax paid abroad.

Tax credits are available, under the development tax incentive, for certain investments, depending on the amount, the industry and the region where the investment is carried out. There are also

Tax deferrals for growing companies are also available.

Projects aimed at improving energy efficiency may benefit from tax credits up to 30% of eligible costs.

Film and theatre subsidies, developments, business startups and small and medium-sized entities may apply for tax incentives.

Compliance – On average, a company in Hungary may require 11 payments and 277 hours per year to prepare, file and pay corporate income tax, value added tax, and labor taxes, including payroll taxes and social contributions.

Personal income tax – Tax residents in Hungary are Hungarian nationals, EEA nationals with a registration card issued in Hungary and spending at least 183 days per year in the country, foreigner permanently settled in Hungary, or not permanently settled but his or her centre of vital interests in the country or spends at least 183 days per year in the country.

Tax residents are subject to income tax on their worldwide income, while non-residents are only taxed on their income arising from Hungarian sources.

Income tax rate is currently 15%. Capital gains, dividends, interests and rental income are generally taxed at standard rate.

Other taxes – There is a local business tax whose rate varies depending on the municipality - the local business tax in Budapest is 2%. The local business tax is levied on net sales revenue (as opposed to profits) (with deductions available for COGS, subcontractors’ work, material costs, mediated services, and research and development (R&D) costs).Municipalities levy property tax on buildings and plots. There is an inheritance tax of 18%, but inheritances to direct descendants and spouse are fully-exempted. Certain transactions involving the sale of immovable and movable properties are subject to transfer tax. There is no wealth tax.

V.A.T. standard rate is 27%, with reduced rates of 18% and 7%.