Taxation in Hungary

A two tier progressive corporate income tax system was introduced as of 1 September 2010 in Hungary.

1) Corporate Income Tax

The tax rate of income tax depends on the amount of tax base and constitutes:

• 10% - up to a tax base of HUF 500 million (app. EUR 1.8 million),
• 19% - if the tax base exceeds HUF 500 million (app. EUR 1.8 million)

Hungarian resident companies are compelled to pay corporate income tax on their worldwide income.

Following items are exempt from corporate income tax:

• 100% of inbound dividend except for dividend received from a controlled foreign company
• 100% of capital gain realized upon sale of "Declared Participation"
• 75% of interest received from non-Hungarian resident persons
• 50% of inbound royalty
• 100% of direct costs relating to own R&D (research and development) activity and/or R&D services rendered from non-Hungarian resident persons
• 10% of wages associated with R&D
• 15% of wages of software developers engaged in R&D in case of small a middle size companies.

“Declared Participation” means that the company owns 30% or more for the period of 1 year at least and that the Hungarian Tax Authorities are aware of that fact.

A company is considered to be an SME if number of its employees does not exceed 250 and that the company generates less than EUR 50 million net revenues, or aggregate assets and liabilities do not exceed EUR 43 million.

2) VAT

Hungarian VAT legislation is based on the EU VAT directive accordingly Hungarian VAT principles and practices are fully in compliance with respective EU VAT provisions. Financing activities (including group financing) just like holding operations are exempt from VAT. Hungarian VAT rates applicable in Hungary are 25% (standard rate) and 5% (preferential rate).

3) Withholding Tax

Dividend paid to companies and non-Hungarian resident individuals are exempt of withholding tax in Hungary.

In relation to interests, royalties and service fees paid to a foreign person the tax rate is usually established by the DTA (Double Taxation Agreement). Hungary has signed about 60 DTA, including the Agreement with the Russian Federation.

In absence of a DTA the tax rate for interests, royalties and service fees paid to a foreign person is 30%. Service fee payment is defined as management consulting, marketing, market and public-opinion research, and certain commission payments.

The DTA between Hungary and Russia establishes the following withholding tax rates:

4) Local Business Tax

Hungarian companies are obligated to pay local business tax imposed by municipalities where the company carries on its business activities. The actual rate of local business tax is to be set by the local municipality, however rate may not exceed 2% according to the respective law. It is important to mention that some municipalities (near Budapest) do not impose local business tax.

Local business tax is imposed on gross profit. Inbound royalty, interest and dividend is exempt of local business tax.

5) Innovation Tax

The tax rate of innovation tax is 0.3%. Innovation tax is imposed on gross profit. Small and middle size companies are exempt from obligation to pay innovation contribution.

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