Following a Hungarian legislation change on 18 January 2017 the
Corporate Income Tax law (CIT law) contains a new definition for
the controlled foreign company (CFC). The effect on companies in
Hungary is simpler regulation, and easier classification.
The following foreign companies are now classified as CFC
taxpayer has majority control of the voting rights (more
than 50%) directly or indirectly; has majority control of the
registered capital directly or indirectly; has majority right to
the profit after taxation; in that year in which the paid CIT by
the foreign company is lower than 50% of Hungarian CIT (9%).
The foreign branch of the
Hungarian taxpayer in that year in which the paid CIT by
the foreign branch is lower than 50% of the Hungarian CIT.
Foreign companies and branches won't be classified as CFC
They have the appropriate staff,
facilities, assets and premises to perform substantive business
activity. This 'substantive business activity' is where the
income (manufacturing, processing, agricultural, service providing,
holding or trading) performed using own staff, facilities, assets
and premises reaches at least 50% of the total income.
They have an owner with a minimum 25%
share that has been registered on the stock exchange for more than
five years, or the owner's affiliated company has been a listed
company for more than 5 years.
The burden of proof to verify the classification lies with the
Hungarian companies receiving income from foreign companies must
prepare documentation (eg. a declaration from the foreign company,
foreign branch) on the above-listed terms to confirm their
The received incomes from CFCs form part of the CIT base while
the incomes received form a non-CFC can be calculated as a tax base
reducing item. Paid costs to CFCs are often considered non-business
related costs, and are tax base increasing items as well.
From the personal income tax (PIT) perspective, the legislation
modification simplifies the taxation of the received dividend,
because the definition of the CFC is removed from the PIT law, and
the tax liability of the non-divided profit as well.
Only incomes received from low-tax-rated foreign companies can
generate a PIT tax base (and health contribution liability) and
must meet the following criteria:
there is no corporate tax
the rate of the implemented corporate
tax is less than the Hungarian 9%
Hungary has no agreement with the
state to avoid double taxation in the income and wealth tax
As a transitional rule, the PIT law contains a new point and
based on this, individuals can also choose to use the regulation
from previous years for their dividend and non-divided profit
income received from foreign companies.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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