Category: Hungary

Hungary is an ideal location for international tax planning. Below we summarize the 5 most important features of the Hungarian tax system that can make the country attractive for international investors and public and private multinational groups.

1. 9% CORPORATE INCOME TAX RATE

The corporate income tax rate in Hungary is only flat 9%. 

In addition to corporate income tax, Hungarian companies are also subject to local business tax at a maximum rate of 2 %. This tax is imposed on the adjusted gross turnover. Interest, royalties, dividends and capital gain are fully exempt from this tax. Furthermore, this levy may be lowered or completely avoided by the appropriate selection of the place of operation of the company.

2. NO WITHHOLDING TAX ON PAYMENTS TO FOREIGN CORPORATIONS

Based on its domestic tax laws Hungary does not levy withholding tax on outbound dividends, interests, royalties and service fees paid to foreign entities. The sole exemption is the source taxation of the capital gain realized on the sale of a domestic real property (either in the form of an asset deal or a share deal). The general exemption from withholding taxation allows flexible forms of tax-free profit repatriation.

3.IDEAL HOLDING LOCATION

Hungary is an ideal location for establishing a holding company. Based on the participation exemption rules, dividends and liquidation proceeds are tax exempt without holding period or minimum shareholding requirements. Furthermore, the capital gain realized on the disposition of shares is also exempt, regardless of the size of the shareholding, subject to a minimum one-year holding period. 

4. 4.5% EFFECTIVE TAX ON INTELLECTUAL PROPERTY INCOME

Hungary has a favourable IP box regime. This allows companies to deduct 50% of the profit derived from qualifying IPs (software, patent and certain other types of IP) from the CIT base. Taking into account that IP income is not subject to local business tax, this results in an effective tax rate of 4.5%. Further, the income arising from the sale of a qualifying IP is fully exempt from CIT and local business tax, subject to a one-year holding period and the registration of the IP with tax authority. This can result in tax free exit through asset deals, tax-free step-up and various other tax planning opportunities. 

5. NO TRANSFER PRICING WORRIES THROUGH GROUP TAXATION

Upon their choice, members of a company group (or some of them) may opt for group taxation. This election entitles the following benefits: (i) transfer pricing rules are, basically, not applicable on the transactions between group members; and (ii) both current losses and losses carried forward can be consolidated on a group level. 

By István Csővári, Partner, Jalsovszky

While the number of people employed in teleworking or home office is growing rapidly across the world, many firms are not aware of what this entails in legal terms. Yet, those employing workers outside of the office are often faced with unexpected risks.

Chronic labour shortage. Increasing demand for flexible employment. Geographical mismatches between labour market participants. Saving on office rents. These are just a few of the reasons for the rapid expansion of teleworking. Recently, the number of employees who work outside of the company’s office has multiplied. So much so that, according to statistics from the International Labour Organisation, they already accounted for 17% of all employees in the European Union at the end of 2017. While this process is slower in Hungary, there is no doubt that teleworking is spreading rapidly here as well. But what does an employer risk when employing a worker outside of the office?

Home accident = work accident

At the workplace, it is the employer’s responsibility to ensure and monitor health and safety at work. But how does this work in the case of “home office”? 

Legal rules on teleworking do not contain any specific requirements for workplace safety. Therefore, even in the case of working from home, the employer must make sure that the conditions for safe working are in place. Yet, with teleworking, this can lead to extremely unrealistic and bizarre situations. It is questionable, for example, how an employer can ascertain whether an employee’s home is suitable for work. Or whether his or her laptop is adequate. And how can they check this continuously, at regular intervals?

Yet, if the place of work is the employee’s place of residence, even a household accident at home can be classified as a work accident. So if, for example, the employee slips on the floor in his or her study, injures himself or herself and becomes incapacitated for months, the employer can be held liable for the accident or loss of income. Thus, an employer who does not check whether the flooring of the employee’s apartment is made of adequate material may face serious consequences in terms of damages.

The traps of working abroad

Finding suitable workers outside the country is often easier than finding them within it. However, having the work done abroad can further complicate certain legal aspects of employment.

Obviously, a Hungarian employer would like to apply Hungarian law to a foreign employee’s teleworking, as that is what the employer is familiar with. There is no obstacle to this, since the governing rules allow the parties to freely agree on the law governing the work. However, one rule must be taken into account here: the application of Hungarian law must not deprive the worker of the benefits that the law of the place of employment affords him. 

That is to say, even though the parties agreed to apply Hungarian law, it may come as a surprise to the employer when the employee wishes to take more leave than would be granted under the Hungarian Labour Code. Or the employer may be in trouble if it is significantly more difficult to terminate the employment than it is in Hungary. It’s important to keep these matters in mind from the start, when employment contract is concluded.

Social security and tax complications

In the case of a foreign worker employed in teleworking, it is also necessary to be prepared for unusual social security and tax consequences. Thus, if a foreign worker performs its job from home, it will still be covered by its own social security system. This may also mean that the social security contribution due will not be deducted from the salary by the employer, but the payment will be the responsibility of the employee – including the appropriate official administration. 

In general, income tax on wages will also be payable in the country where the work is performed. Questions may arise, however, if the teleworker occasionally comes to Hungary and performs his or her job, even to a minimal extent, in the employer’s office. Should the tax base be divided in such a case and should the personal income tax on the Hungarian part of the employment be paid in Hungary? In principle, the answer is yes, but it wouldn’t be surprising if few people actually thought of this. 

Should we employ people at home or not?

The many complications and strict occupational safety responsibilities obviously raises the question of whether it is worth employing a worker in a “home office”. The surge in the popularity of teleworking suggests that it is. However, until the legislators adequately adapt certain labour-law regulations to teleworking, the parties should consider using another form of employment (eg. agency or business contract, etc.) instead of an employment contract. 

By Ágnes Bejó, Senior Attorney, Jalsovszky

Monika Nacsa, the former Head of Litigation at Hungary’s Competition Authority, has joined Kinstellar as an Associate in the firm’s Competition and Dispute Resolution practices in Budapest.

Nacsa joined the Hungarian Competition Authority (the GVH) in 2013 and was appointed Head of the Litigation Department in 2017. According to Kinstellar, “during her tenure Monika represented the GVH before the Hungarian Courts and the European Court of Justice in most of the administrative lawsuits against the GVH’s decisions, including high-profile cartel and unfair commercial practices cases.”

Nacsa earned her law degree from the University in Szeged in 2010, where she also completed post-graduate studies in the field of civil procedure law.

‘We warmly welcome Monika to our experienced and dynamic team in Budapest,” commented Peter Voros, Partner and Head of Kinstellar’s Hungarian Competition and Dispute Resolution practices. “I am delighted to have such a reputable practitioner on-board. I am confident that Monika’s knowledge and experience in both litigation and competition law will add new impetus to the further development of Kinstellar’s growing practices in Hungary.’“

Every single business that trades with the UK, both in goods and services, will be affected by a “no-deal Brexit” scenario, i.e. the withdrawal of the UK from the EU without an agreement. On 4 September 2019 the Commission published a “Brexit preparedness checklist”, to provide information and to help enterprises conducting business in the EU and/or in the UK to double-check their state of preparedness.

The Commission highlights in its communication that it is the responsibility of all stakeholders to prepare for all scenarios of Brexit, i.e. the withdrawal of the UK from the EU with or without a withdrawal agreement. Given that a “no-deal” scenario remains a possible outcome, the Commission strongly encourages all stakeholders to use the extra time provided to ensure that they have taken all necessary measures to prepare for Brexit.

The checklist contains the most common issues and relevant aspects that may arise as a consequence of a withdrawal without an agreement. It deals with three main topics, including (i) Placing goods on the EU market / exports, (ii) Provision of services in the EU and (iii) Other relevant aspects, in particular: VAT, trademarks & designs, contracts and personal data matters.

The above checklist is non-exhaustive, additional guidance may be found from the ‘Brexit preparedness notices’ published by the Commission Services and information by national authorities.

By Adrienn Megyesi, Attorney at law, KCG Partners Law Firm

From 1 January 2020 a new European Union Directive (nicknamed „Quick Fixes”) will enter into force. Among several changes, rules that regulate the customer VAT numbers has been reformed. Under the new reform, obtaining a valid VAT number that the customer provides to the supplier will be regarded as a material requirement for applying the 0% VAT rate. If the supplier fails to include the customer’s VAT number on the invoice, it should not be possible to apply the 0% VAT rate. In addition, filing of a cumulative declaration is also required to invoke the 0% VAT rate. The Directive puts higher administrative burden on undertakings, since it expects a constant inspection mechanism for the validity of the customer’s VAT number at the time of sale.

In order to be eligible for the 0% VAT rate on intra-community sales, the supplier should be able to provide evidence that the goods were dispatched from one EU Member State to another. Under the new Directive, it will be assumed that goods were transported to another EU Member State if the supplier can provide at least two independent, non-contradictory documents evidencing the transport of the goods. The supplier will also be required to check the identity and VAT identification number of the potential customer in the VIES (i.e. the EU Commission’s VAT Information Exchange System) portal. In conclusion, the implementation of an automatized system which would cover the arrangements involving chain transactions could be a time-saving solution, which could result in that certain EU VAT registrations become redundant. 

By Eszter Kamocsay-Berta, Managing Partner, KCG Partners Law Firm

Lakatos Koves & Partners has advised Munich-based GLL, part of the Macquarie Group, on the sale of the Roosevelt Office Center on Szechenyi Square in Budapest to OTP Real Estate Fund. The buyers were advised by DRD Ugyvedi Tarsulas.

The LKT team included Partner Attila Ungar and Lawyers Tamas Olah, Orsolya Pass, and Esztella Cseh.

The DRD Ugyvedi Tarsulas team included Attorneys at Law Tamas Doczi and Laszlo Bone.

Image Source: houseofbusiness.com

The challenge to mitigate climate change is now present in every industry, and not surprisingly in the construction sector as well. Yet the building regulations adopted for this purpose often give rise to controversy and, in many cases, pose a serious challenge to participants in the domestic real estate market.

Fires of unprecedented intensity are destroying the Amazon rainforest… a terrible hurricane hits the Bahamas… news stories appear daily about yet another disaster caused by global climate change. Protecting our natural environment is becoming a top priority around the world. The construction industry is very much a part of this story, and these days, standards based on EU directives determine what the buildings of the future should look like. However, these rules are not always easy to follow. 

Solar panels on the roof… 

All buildings are affected by the requirement that after 31 December 2020, only ‘zero-energy buildings’ will be given an occupancy permit. A near-zero-energy building must meet a number of technical requirements, including some related to the heat-reflection coefficient of boundary structures and of doors and windows, and to the minimum rates of renewable energy used. The latter requirement also means that a certain part of the building’s energy needs must be met from renewable energy that is generated in the building, that is coming from the property (such as energy collected by solar panels or heat pumps) or that is produced near the property (such as district heating or district cooling).

…electric car in the garage…

In addition, commercial property developers and operators are also required by law to build charging stations to cater for the increasing numbers of electric cars being used. A regulation that has been in force for several years now specifies how many of the parking spaces at stores that sell fast moving consumer goods, and with a gross area of more than 300 m², need to have an electric vehicle charging point. The regulation imposes a similar obligation on the operators of structures that sell parking spaces for payment. 

…the devil in the detail…

However, the above rules often give rise to difficulties of interpretation and pose a serious risk to real estate companies. For example, take a property owner who has a valid building permit to construct a building that does not comply with the near-zero-energy building regulations. The building is scheduled to be completed before the end of 2020. What happens, then, if the construction work is delayed and is not completed until 2021? Even though the owner has a building permit, the occupancy permit will only be issued if the building complies with the new regulations. This will result in significant additional costs and damage, with the investor and the contractor pointing at each other as to who should bear these additional expenses. 

There may also be a question as to which energy source will meet the requirements in force from 2021 onwards. The requirements regarding an energy source produced close to the property will, for example, only be met by district heating or district cooling that, apart from the electricity used for energy transmission, only uses the energy sources specified in the law and only if, besides these, there is no possibility of using another energy source in the district cooling or district heating system. However, it is questionable how the fulfilment of these requirements can be ensured and monitored in practice. 

There is also the perplexing requirement that “structures serving the sale of parking spaces for payment” must offer parking spaces fitted with electric charging points. What exactly are these structures? A multi-storey car park obviously falls into this category but should the car park of an office building also be classified here? Does the answer depend on whether parking is included in the rent or payable separately? A similar problem of interpretation is raised by the parking lots of shopping centres. The practice of whether customers have to pay for parking or not is changing… does this affect the obligation to install electric charging stations?

At what price?

Climate protection is one of the greatest challenges of the 21st century. However, it is important that the objectives are achieved through transparent and clear regulations that take due account of the situation in the market. Otherwise, in addition to the legal uncertainties and risks burdening real estate market participants, climate protection goals will also be more difficult to achieve. 

By Peter Gyimesi, Senior Attorney, Jalsovszky

CMS Budapest has advised the Bank of China on raising the credit line of Hungary’s MVM power company from EUR 250 million to EUR 350 million and extending it by two years, until 2026.

The CMS Hungary team consisted of Partner Erika Papp and Senior Counsel Csongor Tompa. 

CMS Budapest has advised the Bank of China on raising the credit line of Hungary’s MVM power company from EUR 250 million to EUR 350 million and extending it by two years, until 2026.

The CMS Hungary team consisted of Partner Erika Papp and Senior Counsel Csongor Tompa.