The following is a summary of proposed taxation and legal changes in Hungary for 1996. A more detailed description of the changes will follow in due course.

Foreign Exchange Law

A new foreign exchange law to take effect January 1, 1996 will take the Hungarian forint a big step closer to convertibility, and considerably ease financial transactions between Hungarian and foreign entities. For example, under current law a wholly-owned Hungarian subsidiary of a foreign company must obtain a permit from the National Bank of Hungary in order to borrow money from the parent company. This requirement will be removed for loans of over 12 months duration. Furthermore, under the new law foreigners working in Hungary will no longer be restricted to converting only half of their Hungarian forint earnings into hard currency; expatriates will now be able to convert all their forint salary into hard currency. Another aspect of the new law allows Hungarian companies to acquire equity in foreign companies without a licence from the National Bank of Hungary, but only if their holdings are 10% or more. Such transactions must still be reported to the National Bank of Hungary.

Social Security Contributions

As of January 1996 employers' social security contributions are expected to decrease by 2% or 3% (yet to be determined), that is from the current 44% to 41/42%. Employees' contributions are expected to go up by a similar amount.

Corporate Dividend Tax

The 23% supplementary tax on non-reinvested dividends implemented in January 1995 remains in force. However, for companies resident for tax purposes in countries which have a double taxation treaty with Hungary, the tax rate on the dividend is reduced to between 5% and 15% (depending on the treaty). For dividends paid to Hungarian shareholders, the full 23% rate is applicable.

Customs Duties

The 8% import surcharge implemented in March 1995 has already had a significant dampening effect on purchasing power, which has been felt by retailers in all sectors. Consumers are switching from high quality, higher priced goods to lower priced (and usually lower quality) imports or local products. Importers of capital goods, however, have not been as drastically affected, since under current law imports of plant and equipment, including such items as company cars and office equipment do not have to pay duties if financed by hard currency equity capital contributions. Under proposed legislation, however, the companies importing this type of equipment from 1996 would have to pay full import duties. At current time it is thought that the import duty exemption for productive plant and machinery will remain, however, this is yet to be confirmed.

]Personal Income Tax

Expatriates in Hungary may end up paying higher taxes after January. Draft legislation now before parliament would eliminate the current 30% concession on foreign employee's gross salary income, which would raise the marginal tax rate for an expatriate from 31% to 44%. Opponents are pushing for a retention of the 30% concession, or at least, a step-by-step reduction of the concession, rather than the large jump proposed in the legislation.

Corporate Tax Allowance

On the bright side, a proposal has come from the Ministry of Trade & Industry to reinstate a tax allowance for large-scale, export-oriented investors. Under the proposed legislation companies with a minimum capital investment of Ftlbn ($7.5m) and export revenues which show a minimum annual growth of 25% (but a minimum of Ft600m) will qualify for a 50% break in corporate taxes. This allowance is available for a maximum period of 5 years and means that companies which qualify will be taxable at a rate of 9%, calculated as 50% @ 18% (general corporate tax rate).

Tax Collection

The country's taxation administration body - the APEH (equivalent of the IRS) is seeking to introduce greater powers to investigate individuals' and companies' business transactions. Under current law the APEH has minimal power to investigate an individual's or a company's records. The IMF has criticised this, saying that if Hungary wants to combat tax evasion and the black economy the burden of proof should not be on the tax authorities, as is still the case in Hungary, but on the taxpayer, as is the norm in Western countries.

The content of this article is intended to provide general information on the subject matter. It is not a substitute for specialist advice.

If you require any further information on Hungary, please call Peter Gerendasi at Price Waterhouse, Budapest, telephone ++36 1 269-6910, fax ++36 1 269-6938, or E-mail: or enter text search 'Price Waterhouse Budapest' and 'Business Monitor'.