In our current newsletter we would like to inform you about the most important taxation questions when it comes to property investment in Hungary. We hope by showing the opportunities and obligations within these rules, we can help you make a wiser and more well-informed decision about your next property investment.
The Corporate Tax Act contains specific rules that affect companies with properties. Businesses with real estate, more specifically, the members of these companies qualifying as foreign persons or nonresidents whose place of effective management is in Hungary, are explicitly mentioned in the legislation as taxpayers. The law exactly says those taxpayers are the above mentioned members who realize income on the sale or withdrawal of their shares in a business with real estate.
The foreign member of a business with real estate will not be subject to corporate income tax solely because of being a member/owner in a company like this – share needs to be withdrawn or sold and income needs to be realized in order to become subject to tax. In this case, the tax base is the positive amount of the consideration received for the shares decreased by the acquisition cost of the shares and the verified amount of costs incurred in connection with the acquisition and the holding of shares. Tax rate is 10% up to a tax base of HUF 500 million and 19% for amounts higher than 500 million. Tax should be declared using the appropriate form and paid by 20th November the year following the disposal of the shares. However, this should be done only when the double taxation convention between named countries allows exchange gain to be taxed in Hungary.
What exactly qualifies as a business with real estate? By the Corporate Tax Act the following 3 conditions need to be met at the same time in order to be considered as business with real estate for CIT purposes:
- Shares are not listed on recognized exchanges; and
- In its income statement, the value of the real estate is more than 75 percent of book value by the balance sheet date of the assets recognized in the financial statements of its affiliated companies or in certain reports of the group; and
- One of its members, or a member of either group is a foreign national, and the entity is established at least 1 day of the tax year in a state which did not sign the double taxation convention with Hungary so exchange gain is subject to tax in Hungary due to the agreement.
This means that a company can be a business with real estate by definition either by its own rights or by the groups’ aggregate data. The business with real estate has to report this status to the tax authorities yearly by 31st August. It also needs to declare if there was any sale or withdrawal of shares in that given year. Importance of declaration is that failure of doing so will force the business with real estate to take full and universal responsibility for its members’ tax obligations.
Tax base of business with real estate – by general rules – should be calculated from the annual business report’s pre-tax profit modified by the Corporate Tax Act’s adjustment items. Just like at other companies, tax obligations may arise even when the company is making loss, because if the company’s pre-tax profit or tax base – whichever is higher from these amounts – does not reach 2 percent of the adjusted sales revenue, the company has to submit a declaration in its tax return, or the income (profit) minimum will be its tax base. Corporate tax rate is the same as mentioned above (10 or 19 percent).
Companies that lease out real estate may be interested that that they are allowed to apply an annual 5 percent depreciation rate eroding the corporate tax base.
Tax for Dividends and other Incomes
In Hungary, by default paying dividend is not subject to taxation between companies. The Corporate Tax Act grants the opportunity for companies to reduce their corporate tax base with the received dividend (except dividends received from Controlled Foreign Companies). Dividend payments are also exempt from tax even if they are transferred abroad, because Hungary has abolished withholding tax previously, which levied tax obligations on dividends. This means that dividend payments forwarded abroad are exempt from tax even if double taxation conventions would otherwise let these type of incomes be taxable for Hungary.
However, taxation of other incomes arising from activities such as leasing out or selling real estates, exchange gain should always be examined individually by paying attention to double taxation conventions of involved states.
Pricing of intra-group transactions (like selling or leasing out real estate) should follow arm’s length principles and need to be documented according to the relevant requirements..Failure of doing so will certainly result in penalties in the case of an audit by tax authorities. The tax authority may modify the tax base based on transfer pricing rules and impose sanctions due to missing tax amounts. It is important to know that transfer pricing assessments can be made by tax authorities regardless of other assessments, so the tax authority may impose penalties twice for the same deficiency. If the documentation is not done properly, a notable penalty(even up to HUF 16 million per documentation) can be imposed.
The sale of a new real estate (if it is not in use yet, or the occupancy permit was issued less than 2 years ago) and building site is always subject to VAT and direct taxation. Sale of other types of real property is exempt from tax without deduction rights by default. Should the seller opt for taxation when selling the real estate, the transaction will be subject to VAT. In this case, VAT should be assessed at 27 percent based on the rules of reverse taxation. In this case, the input VAT related to real estate will become deductible.. Tax obligation is optional for 5 years, cannot be changed during this period of time.
Leasing out property (apart from a few exceptions such as accommodation in the hotel sector or in sectors with a similar function, leasing a safe, etc.) is exempt from tax without deduction rights by default too. However, it can be taxable as well. The law gives an opportunity to make real estate used for non-resident purposes subject only to tax obligation, while real estate for resident purposes remain taxable (there is no possibility to switch this up). This decision is for 5 years as well and sets the ground for the deduction of the related VAT.
Acquiring real estate is subject to transfer tax obligations. The tax base is the gross market value of the property by competent tax authorities’ practice. Payable transfer tax for real properties is based on the acquired estate’s open market value and is 4 percent up to HUF 1 billion and 2 percent by excess. Maximum amount of transfer tax payable per estate is capped at HUF 200 million.
Transfer tax liability may also arise if the real property is not acquired directly but by buying shares of the SPV (Special Purpose Vehicle) holding the property. If the acquisition is made through a share deal and the SPV holding qualifies as a property holding company by definition of the transfer tax act, furthermore the buyer obtains more than 75 percent of direct or indirect shares of the SPV – the deal is subject to property transfer tax. A company is by definition of law a property holding company if the value of its assets shown in the balance sheet (except liquid assets and cash receivables, and from 2015 and onwards active and deferred accruals and receivables) represent more than 75 percent of their book value and consist of real estate property in Hungary, or the taxpayer has at least 75 percent indirect or direct shares in such company. The transfer tax duty in this case is not connected to the taxpayer’s main activity – these conditions are the benchmark.
It is important to consider when making tax planning decisions that property transactions and sale of shares in property holding companies between affiliated companies are generally exempt from transfer tax liabilities. Please note, however, that this can only be utilized if the acquiring party is registered in a state where corporate tax rate or the effective tax rate does not reach 10 percent, or the income from sale of shares is not affected by 10 percent tax rate which is equivalent to corporate tax.
The 2011 act of Hungarian REITs (Real Estate Investment Trust) is an initiative to improve the property investment industry in Hungary based on the foreign REIT structure. Activities strictly consist of listed Hungarian real estate NACE codes: buying and selling of own real estate, renting and operating of own or leased real estate, management of real estate on a fee or contract basis, and asset management. Most importantly the subscribed capital has to be at least HUF 10 billion for Hungarian REITs. Companies that fulfill all the requirements enjoy significant tax benefits. Property acquisitions are only subject to 2 percent transfer tax duty instead of general 4 percent tax and companies are exempt from corporate tax as well as local business tax.
Local Business Tax
The local business tax is the most important tax from all local taxes which is in connection with business activities performed at the local government’s territorial jurisdiction on a temporary or permanent basis. Tax base of local business tax for permanent business activities is the net sales revenue decreased by acquisition costs of sold goods, value of mediated services, the value of subcontractors’ performance, material costs and direct value of research and experimental development (or above a certain amount of sales revenue by the proportional share of the above mentioned). The maximum amount of tax payable is 2 percent. Tax allowance or exemption can apply based on the local government’s decision. Temporary business activities (performed for not less than 30 and not more than 180 days) create tax liability of HUF 5000 per day, which is used widely in the construction and maintenance sectors.
The tax is applied both for residential and non-residential buildings, parts of buildings (structures) – regardless of what it is intended or used for. Tax subject is whoever is owner on 1st January. If there is more than just one owner, all owners are subject to tax by their proportional shares in the structure. Tax base is assessed by local government’s decision either in the building’s useful space calculated in m2 or its adjusted market value. The maximum rate of tax calculated by useful space is HUF 1100/m2 per annum or 3.6 percent at most of adjusted market value of the building.
Owning land in the local government’s territorial jurisdiction creates tax obligation and tax subject is whoever is owner on 1st January. The applicable part of the Building Tax Act should be followed when majority of ownership is present. Tax calculation is subject to the local government’s decision – either the land’s area in m2 or the adjusted market value of the land. Maximum tax rate is HUF 200/m2 per annum when area is taken into consideration or 3 percent per annum if municipalities opt for the value calculation method. The amount of land that correlates with the building’s (structure) useful space is exempt from tax. Since building tax and land tax liabilities and amounts are both subject to municipality jurisdiction, it can range widely by different administrative areas, which is definitely something to keep track of when making investment decisions.
Should you have any questions regarding useful taxes connected to property investment, do not hesitate to contact our team of experts.