Decreasing corporate tax rate
Under the rules effective until June 2010, the Hungarian corporate tax rate was 19%. With an effect of July, a lower 10% rate was introduced in respect of the first HUF 500 million (approximately, EUR 1.8 million) part of the taxable basis, with transitory rules being applicable to the determination of the 2010 tax liability due to the midyear change.
According to the recently adopted tax laws, the lower 10% rate will be applicable to the entire tax base from 2013. With the flat 10% corporate tax rate, Hungary will, together with Cyprus, have the lowest corporate income tax rate in the European Union.
Broader applicability of participation exemption
Since 2007, corporate tax regulations make it possible for the capital gain realised on certain investments to be tax exempt. Accordingly, if a taxpayer holds at least 30% of the share capital of a domestic or foreign legal entity for at least one year and reports such holding to the tax authority within 30 days following the acquisition of the investment, the amount of profit deriving from the sale of the so reported shares will decrease the corporate tax base. That is, the capital gain on the sale of such shares is tax exempt. The new tax package extends the applicability of theparticipation exemption to transactions where shares are not "sold" but contributed in-kind into the capital of another company. This amendment provides taxpayers with an additional tax planning tool and extends the benefits available under the Hungarian holding regime, which, amongst others, also allows for the receipt of a tax exempt of dividend and provides general exemption from withholding tax in respect of dividends paid by a Hungarian company to persons other than individuals.
Abolished withholding taxes
The 2010 tax amendments reintroduced the withholding taxation of interest, royalty and certain service fees (e.g., consultancy, marketing services and agency fees) paid to foreign individuals and companies. Under the effective rules, in case Hungary does not have a valid double taxation treaty with the state of the foreign individual or company, the aforementioned types of income paid by Hungarian companies or individuals in 2010 are subject to 30% withholding tax. The recently adopted changes abolish the above rules with an effect of January 2011, that is, from next year no withholding tax will be levied on such payments. This change will be an administrative simplification even for those interest, royalty and service fee payments which are not taxable under the effective rules, as, due to the abolishment of withholding taxation, there will be no need to obtain residence certificate before making such payments.
Corporate tax saving through sport financing
As part of the summer tax package, new corporate tax incentive was adopted in order to create a taxadvantageous economic environment for supporting the five most popular team sports in Hungary, namely, football, handball, basketball, water polo and ice hockey. According to the proposed regime, the amount of the financial support provided to sport teams and national sport organisations in the aforementioned fields of sports reduce both the corporate tax basis (as a recognised expense) and the tax liability, with the tax credit being limited to 70% of the annual tax liability. As the combined result of the recognised cost and the tax credit, taxpayers, in fact, can achieve a tax saving amounting to 110% of thefinancing provided.
It must be noted that compliance of the proposed tax regime with EU state aid regulations is currently examined by the European Commission and the new rules will take effect if and when the Commission grants its approval. Until such approval is granted, corporate tax payers can enjoy similar advantages available for financing of performer artist organisations and making motion pictures that are already in effect. The fact that the tax saving does not actually "cost" anything to the taxpayers has made the existing two tax incentives increasingly popular among Hungarian taxpayers and intensive interests can be expected in respect of the sport financing, too.
Decreasing personal income tax rate
Despite regular recent changes to the personal income tax rates applicable to employment income, the tax burden remained relatively high. While some of the neighbouring countries (like Slovakia, Romania) have recently introduced flat personal income tax rates, Hungary still used progressive tax scale.
Under the recently adopted laws, the progressive tax scale will be abolished from 2011 upon the introduction of a flat tax rate. The personal income tax rate will be set at the level of 16% which appears to be rather moderate. It is noteworthy, tough, that due to the concept of "super-grossing" (i.e. the social security paid by the employer is added to the tax base), the effective personal income tax rate will be slightly higher than 20%. The super-grossing will, however, gradually be phased out by the end of 2012.
I De Hoon in 'Investment Offshore Magazine' 2011