Country - Hungary
Corporate Vehicles
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A. DIRECT INVESTMENT
1. Acquisition of domestic real estate
The acquisition of domestic real estate as part of a purchase, exchange or similar transaction by a private individual is subject to real estate transfer tax at the normal rate of 10%. The basis for calculating transfer tax is the market value of the property. The Tax Authority will normally accept the amount (gross purchase price) stated in the transfer agreement, unless this is obviously below the market value.
The main exceptions to the 10% rate are as follows:
- 2% of the market value is payable if the real estate is acquired for trading purposes and is sold within two years;
- real estate transfer tax on the purchase of residential properties is progressive, payable at a rate of 2% for property up to the value of HUF 4 million, and 6% on the value exceeding HUF 4 million.
2. Income from the letting of real estate
Income deriving from the letting of real estate held by private individuals is subject to taxation at 25%. However, income derived from the letting of arable land is exempt from tax if the term of the lease, as stipulated in the relevant contract, is five years or more. Please note that other methods of taxation may apply to the rental income of private individuals.
3. Income from the sale of real estate
Personal income tax is payable by private individuals on profits from the sale of property at the rate of 25%. Profits are calculated as the sale price less the purchase price, any investments which have increased value and certain other costs. From the second year following the year of the acquisition a progressive tax scale is applicable resulting in 0 personal income tax in the fifth tax year after the year of the original acquisition by the seller. In case of the sale of properties acquired prior to 31 December, 2007, transitional rules are applicable.
B. INDIRECT INVESTMENT THROUGH CORPORATE VEHICLES
There are five types of corporate vehicle which can be used for real estate investment in Hungary.
1. Limited Liability Company (korlátolt felelősségű társaság)("kft.")
Minimum capital
HUF 500,000.
Set-up costs
Stamp duty: HUF 100,000;
Publication fee: HUF 25,000;
Cost of land registry title deed;
Notary fees;
Legal fees.
Time required to become operative
Time limits for the Court of Registration to make a decision regarding a request for registration:
If the articles of association are drawn up
a) the Court of Registration is to confirm within three working days from the date of receipt that the registration application complies with formal requirements. If not, the application will be rejected. Any appeal filed against such a decision has no delaying effect on the company's obligation to terminate operations, however if an application for registration is re-submitted within eight days following the rejection of the previous application, the legal consequences of the previous rejection will not apply and the documents submitted for the previous procedure may be used for the purpose of the new application;
b) the Court of Registration is to confirm within eight working days following the date of receipt of the application that the mandatory data for the registration of a limited liability company and other mandatory documents comply with the relevant statutory provisions. If the application is not complete, the Court of Registration will deliver a decision within eight working days following the receipt of the application for registration, ordering the missing documents to be submitted. The grace period for the submission of missing documents may not exceed 45 days. The Court of Registration shall, however, decide within 15 working days from the date of the receipt of the application as to whether to allow or reject the registration. If the Court of Registration fails to make a decision, the head of the Court of Registration is to take measures within three working days after the expiry of the above deadline, to resolve the application proceedings. If the application for registration is not resolved by then, the company is deemed to be registered on the fourth working day.
c) if the application is submitted in the statutory standard contract form, a simplified registration procedure applies. The Court of Registration is to confirm within one working hour from the time of receipt that the registration application complies with formal requirements, and is to deliver a decision within eight working days ordering any missing documents to be submitted. The Court of Registration is to deliver its final decision on the registration within 15 working days. If the Court of Registration fails to make a decision either to allow or reject the registration, the head of the Court of Registration is to take measures within eight working days after the expiry of the above deadline to resolve the application proceedings. If the application for registration is not resolved by then, the company will be deemed registered on the next working day. A rejected application may, however, be re-submitted within eight days following the rejection and the legal consequences of the rejection will not apply. The documents submitted for the previous proceedings may also be used for the new application.
Corporate governance
The Companies Act sets out the mandatory rules and regulations. The main governing body of the company is the shareholders' meeting. One or more managing directors represent the company with sole or joint authority to sign on its behalf. Managing directors are appointed by the shareholders' general meeting. A sole shareholder may also act as sole director. With some exceptions, a supervisory board is not mandatory but may be elected.
Regulatory control
Court of Registration.
Taxation of current income in Hungary
The corporate income tax rate is 16% of the tax base with some exceptions. From 1 September 2006, corporate taxpayers are subject to a solidarity surcharge of 4% which is based on the accounting profit subject only to a few adjustments. Corporate taxpayers are also subject to local business tax of up to 2%, based on net sales revenues, with exclusions for costs of materials, the cost of goods sold and the costs of obtaining third party services.
Taxation of the distribution of current income to investors
Dividends paid to entities other than private individuals are not subject to withholding tax.
Dividends paid to non-resident private individuals are taxed according to the rate specified in the relevant double taxation treaties. In the absence of a double taxation treaty, the withholding tax rate is 25% for that part of the dividends which do not exceed 30% of the adjusted shareholders' equity as calculated for the individual shareholder. The tax rate is 35% for the remaining part of the dividends (if any). Dividends distributed to Hungarian business associations (companies) are tax exempt in the hands of the shareholders.
Taxation of capital gains
Capital gains on the sale of real estate assets held by a corporate entity
Capital gains on the sale of real estate in Hungary by a non-resident company are subject to taxation at the rate of 16%+4% (corporate income tax and solidarity surcharge) if the income is generated by carrying out business activities through a permanent establishment in Hungary. Depending on the circumstances, local business tax may also apply in the case of a real estate transfer.
Capital gains on the sale of shares/interests in a corporate entity
Capital gains from the sale of shares/interests in a corporate entity by a non-resident shareholder are not subject to taxation in Hungary.
Capital gains on shares/interests in one Hungarian company made by another Hungarian company or the permanent establishment of a foreign entity are taxed at 16%+4% (corporate income tax and solidarity surcharge), However, as from 1 January 2007, participation exemption is available in relation to capital gains realised on the sale of shares, provided that the shareholding has exceeded 30% for an uninterrupted period of two years. As from 1 January 2008, the minimum holding period is reduced to one year.
Real estate transfer tax
The acquisition of domestic real estate as part of a purchase, exchange or similar transaction is subject to real estate transfer tax.
The basis for calculating real estate transfer tax (at 10%) is the market value of the property. The Tax Authority normally accept the amount (gross purchase price) stated in the transfer agreement, unless this is obviously below the market value.
The main exceptions to the 10% transfer tax are as follows:
- 2% transfer tax is payable in the case of an acquisition for trading purposes where the property is sold within two years;
- transfer tax on the purchase of flats is progressive, from 2% for property valued at up to HUF 4 million, and 6% on the value exceeding HUF 4 million.
2. Company limited by shares (részvénytársaság)
Minimum capital
For a private company limited by shares (zártkörűen működő részvénytársaság or zrt.):
HUF 5,000,000.
For a public company limited by shares (nyilvánosan működő részvénytársaság or nyrt.):
HUF 20,000,000.
Nevertheless, for certain businesses a higher minimum capital is required (for example in the case of banks the minimum capital required is HUF 2 billion).
Set-up costs
For a private company limited by shares:
Stamp duty: HUF 100,000;
Publication fee: HUF 25,000;
Cost of land registry title deed;
Notary fees;
Legal fees.
For a public company limited by shares:
Stamp duty: HUF 600,000;
Publication fee: HUF 25,000;
Cost of land registry title deed;
Notary fees;
Legal counsel fees.
Time required to become operative
As above, section B1. Please note, however, that the simplified registration procedure may not apply in the case of public companies limited by shares.
Costs per annum for corporate and accounting compliance
This varies depending on the size of the company, its business activities and the number of employees.
Corporate governance
The Companies Act sets out mandatory regulations.
For a private company limited by shares
The main governing body of the company is the shareholders' general meeting. The company is managed by a board of directors comprising a minimum of three and a maximum of 11 individuals. Members of the board are appointed by the shareholders' general meeting and may have either sole or joint authority to sign on the company's behalf. The articles of association may allow for the appointment of a sole general manager instead of board of directors. It is possible to create different categories of shares with different rights. Voting and profit rights can be freely allocated.
Private companies limited by shares do not need to have a supervisory board unless shareholders holding 5% of the voting rights request it. A board of statutory auditors is mandatory.
For a public company limited by shares
The main governing body of the company is the shareholders' general meeting. The company can operate either a one- or two-tier system.
One-tier system:
The company is managed by a single board which fulfils the functions of both a board of directors and a supervisory board. It comprises a minimum of five and a maximum of 11 individuals. Members of the board are appointed by the shareholders' general meeting and may have either sole or joint authority to sign on the company's behalf. A sole general manager cannot be appointed.
Two-tier system:
The company is managed by a board of directors comprising a minimum of three and a maximum of 11 individuals. A supervisory board comprising a minimum of three and a maximum of 15 individuals is mandatory and is appointed by the shareholders' general meeting. An audit committee is also mandatory and is appointed by the shareholders' general meeting from members of the board of directors or the supervisory board. Its duties include assisting the board of directors and the supervisory board in relation to financial reporting.
It is possible to create different categories of shares with different rights. Voting and profit rights can be freely allocated.
Regulatory control
Court of Registration.
Taxation of current income in Hungary
As for limited liability companies.
Taxation of distribution of current income to investors
As for limited liability companies.
Taxation of capital gains
As for limited liability companies.
C. INDIRECT INVESTMENT THROUGH PARTNERSHIPS
1. Limited Partnership (LP) (betéti társaság or bt.)
This is a partnership which has at least one partner (owner) with unlimited liability and at least one partner (owner) with limited liability.
Minimum capital
No minimum capital requirement applies. Nevertheless, each partner is required to provide at least a token contribution.
Set-up costs
Stamp duty: HUF 50,000;
Publication fee: HUF 14,000;
Cost of land registry title deed;
Notary fees;
Legal fees.
Time required to become operative
As above, section B1.
Costs per annum for corporate and accounting compliance
This varies depending on the size of the company, its business activities and the number of employees.
Corporate governance
There is considerable flexibility to agree on corporate governance in the articles of association.
Unless the articles of association state otherwise, the limited liability partner is not entitled to be involved in the management of the partnership, nor to represent the company.
Voting and profit rights may be freely allocated.
The unlimited liability partner is entitled to represent the company. Limited partners can take part in and vote at the members' meeting.
Regulatory control
Court of Registration.
Taxation of current income in Hungary
As for limited liability companies.
Taxation of distribution of current income to investors
As for limited liability companies.
Taxation of capital gains
As for limited liability companies.
2. Unlimited Partnership (UP) (közkereseti társaság or kkt.)
This is a partnership which has at least two partners (owners) with unlimited liability.
Minimum capital
No minimum capital requirement applies. Nevertheless, each partner is required to provide at least a token contribution.
Set-up costs
Stamp duty: HUF 50,000;
Publication fee: HUF 14,000;
Cost of land registry title deed;
Notary fees;
Legal fees.
Time required to become operative
As above, section B1.
Costs per annum for corporate and accounting compliance
This varies depending on the size of the company, its business activities and the number of employees.
Corporate governance
There is considerable flexibility to agree on corporate governance in the articles of association.
Voting and profit participation rights can be freely allocated.
The company is managed by all its shareholders unless the articles of association state otherwise.
Regulatory control
Court of Registration.
Taxation of current income in Hungary
As for limited liability companies.
Taxation of distribution of current income to investors
As for limited liability companies.
Taxation of capital gains
As for limited liability companies.
D. REAL ESTATE INVESTMENT FUND ("Fund")
Management company
A real estate fund can only be set up and managed by a company limited by shares or a Hungarian branch office of a non-residential company.
Minimum capital
For the investment fund manager which is a company limited by shares or a branch office: HUF 100 million as a rule but can be higher in some cases;
For the investment fund:
Public real estate investment funds: HUF 1,000 million;
Private real estate investment funds: HUF 500 million.
If the investment fund manager operates as a branch office, the minimum capital is understood to mean endowment capital.
The endowment capital requirement does not apply to the branch office of an investment fund manager established in another EU member state.
Set-up costs
Investment fund manager company limited by shares: as for companies limited by shares;
Branch office:
Stamp duty: HUF 50,000;
Publication fee: HUF 14,000;
Cost of land registry title deed;
Notary fees;
Legal fees.
Additional costs for companies limited by shares and branch offices include the issue of a licence by the Hungarian Financial Supervisory Authority (PSZÁF) for a public or private investment fund: HUF 100,000.
For public investment funds: approval of the bulletin by the PSZAF for the public issue of investment certificates: HUF 500,000.
For private investment funds: approval of the private investment fund by the PSZAF: HUF 20,000.
Time required to become operative
Incorporation of the investment fund manager: as for companies limited by shares.
The time for registration of the investment fund is 30 days, unless additional missing documents need to be submitted.
Costs per annum for corporate and accounting compliance
This varies depending on the size of the company, its business activities and the number of employees.
Corporate governance
The investment fund itself does not have any organisation, it consists of assets and liabilities only and is managed and represented by the investment fund manager.
Regulatory control
Hungarian Financial Supervisory Authority.
Taxation of current income in Hungary
There is no taxation of income at the level of the Fund.
Taxation of distribution of current income to investors
Under current domestic tax laws, proceeds (distributions) of publicly traded investment certificates are treated as interest and taxed at a rate of 20%. However, it is still unclear whether or not such proceeds are taxed in Hungary if the holder of the investment certificates is a non-resident private individual who is entitled to the benefits of a double taxation treaty.
Distributions to Hungarian companies are taxed at a rate of 16%+4%, while distributions to foreign corporate entities are not taxed at source in Hungary.
Taxation of capital gains
Under Hungarian tax laws, capital gains realised on the sale of publicly traded investment certificates by private individuals are treated as interest and taxed at a rate of 20%. If the holder of the investment certificates is a non-resident private individual who is entitled to the benefits of a double taxation treaty, then, in general, capital gains realised on the sale of investment certificates are not taxed in Hungary.
In the case of Hungarian corporations, capital gains are taxable at a rate of 16%+4% (corporate income tax and solidarity surcharge). If the investment certificates are traded on accepted markets (stock exchanges), a more favourable treatment (e.g. taxation at a rate of 8%+4%) is also available. Capital gains realised by foreign corporate entities are, however, not taxed at source in Hungary.
E. RULES ON LEVERAGE
Are there any rules which limit the deductibility of interest for third party (bank) financing?
Interest on loans (and other similar obligations) of more than three times a company's equity is partly not deductible, namely for that part of the loan which exceeds the accepted debt-to-equity ratio of 3:1 (thin capitalisation). Interest from bank loans is always deductible.
1. Thin capitalisation rules
See above.
2. Withholding tax on interest
There is no withholding tax on interest payments if the interest is paid to foreign banks or other entities (other than private individuals).
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