This content is from: Local Insights

Hungary

In the past, Hungarian offshore companies (HOCs) registered in, and performing activities outside, Hungary paid a beneficial 3% corporate profits tax. Companies that requested HOC status before December 31 2002 may benefit from the 3% tax rate and the related HOC regulations during a transitional or grandfathering period, which expires on December 31 2005. However, no company can request HOC status after January 1 2003.

Instead, the amended new Corporate Tax Act (CTA) affords some tax advantages to companies involved in business activities that previously were typically conducted by HOCs.

The CTA permits a 50% reduction of pre-tax profit attributable to income recognized from interest payments received from related parties, when payments exceed the interest payments made to related parties (the interest margin). Conversely, if interest paid to, exceeds interest received from, related parties, then 50% of the excess interest is not tax deductible. Furthermore, if Hungarian thin-capitalization rules apply to a company, the non-deductible interest on the debt amount exceeding the three-to-one debt-equity ratio may be reduced by the non-deductible excess interest arising from related party transactions.

HOCs also typically receive royalty income. The CTA permits a pre-tax profit reduction for 50% of income derived from royalty payments.

Furthermore, the CTA permits a 50% reduction on the capital gains payable on income arising from financial transactions conducted in a regulated market, as defined by the Capital Market Act, which exceeds expenditures incurred in connection with transactions.

The CTA caps the maximum allowance attainable from these tax benefits, at 50% of a company's total pre-tax profit.

Gergely Riszter

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