Hungary seeks to impose a 35% withholding tax on offshore assets

The Hungarian government plans to tax and drive back to the country wealth held by Hungarians in foreign financial institutions. The government is set to impose a 35% withholding tax with retroactive effect on offshore assets, which according to governmental and other estimates amount to HUF 1,000 - 2,000 billion (ca. EUR 3.45 – 6.9 billion).

To investigate how Hungarians keep such large volumes of funds in offshore deposits, the government has set up a task force and will ask Switzerland to disclose all relevant information on the bank accounts held by Hungarian citizens in Swiss banks. The Prime Minister's chief of staff, János Lázár, told the press that Hungary was a front-runner in Central Europe in terms of offshore deposits at Swiss banks. In 2010, the government introduced a tax holiday that allowed profits/assets repatriated to Hungary to be taxed at a reduced rate of 10%. The measure led to the return of HUF 67 billion to the country and generated HUF 6.7 billion-tax revenue for the state. With this tax holiday having expired 1 January 2013, the government now intends to take austere measures regarding those offshore assets that have remained abroad.

The government faces several problems related to taxing offshore profits, including the lack of a treaty in force between Hungary and Switzerland that would enable information exchange on tax matters, as well as the confidentiality laws by which Swiss banks are generally bound.

Even in the event that account holders could be identified, enforcing the measure would prove challenging, as many/most of the accounts belong to companies that, feeling threatened, could easily move their assets to a third country.

In addition, under current law, the limitation period for tax avoidance in Hungary is five plus one year (as tax returns must be submitted by various dates between 20 February and the end of May of the calendar year following the year in which the income was generated, and the limitation period begins on the last day of said subsequent calendar year), which means that income/wealth accumulated before 2007 cannot be subject to the agreement if the owner can prove it was generated earlier

Despite these difficulties, the government plans to submit similar requests to additional countries, such as Austria and Cyprus.

The wording of the new law on the contemplated withholding tax on the offshore wealth has not yet been put forward. However, the treaties that Switzerland concluded with Germany and the United Kingdom are very likely to serve as models.

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