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Country - Hungary
Taxes
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A. AVAILABLE INVESTMENT STRUCTURES
Which legal structures are available for an investment in real estate in Hungary?
- Direct acquisition of the real estate asset;
- Indirect acquisition through a local company.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
The acquisition of real estate in Hungary as part of a purchase, exchange or similar transaction is subject to real estate transfer tax at 10% (subject to certain exceptions) of the market value of the real property. The tax authority normally accepts the consideration (gross purchase price) stated in the transfer agreement unless it is obviously below the market value.
The main exceptions to the 10% transfer tax rate are as follows:
- 2% transfer tax is payable on the purchase of property by a property dealer for trading purposes provided the property is sold within two years;
- The 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.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
No.
How is the purchase of shares in an SPV holding real estate taxed?
There is no transfer tax, and the transfer of shares is exempt from VAT.
Who normally pays the transfer taxes, the buyer or the seller?
Transfer tax is paid by the buyer.
Are there any other costs related to the purchase of real estate assets or SPVs?
In the case of the direct purchase of real estate assets, service fee is payable to the Land Registry office. In the case of a share purchase, stamp duty and a publication fee are payable to the Court of Registration. These procedural costs are not significant. Legal and notarial fees may also be incurred.
C. TAXATION OF CURRENT INCOME
How is income generated from the letting of real estate taxed in Hungary?
(a) Direct investment
In general, the letting of Hungarian real estate by a non-resident company creates a permanent establishment in Hungary. Income generated by a permanent establishment is subject to tax at a rate of 16% plus the solidarity surcharge at a rate of 4%.
Corporate taxpayers are also subject to the local business tax of up to 2%, which is based on the net sales revenues, with exclusions for the material costs, the costs of sold goods and the costs of third party services.
Letting of real estate situated in Hungary by a non-resident individual is subject to taxation in Hungary. As a general rule, the tax rate is 25%.
(b) Indirect investment through a partnership (a transparent entity)
In Hungary, there is no differentiation between the taxation of a "partnership" and a "corporation", and so under Hungarian tax laws there is no "transparency".
Income generated from the letting of real estate by Hungarian companies is taxed as other corporate income, at a rate of 16% plus solidarity surcharge at a rate of 4%. In addition, a local business tax of up to 2% applies.
(c) Indirect investment through a corporate entity (a non-transparent entity)
See above.
How can income generated by investment be transferred to a foreign investor?
(a) Direct investment
Once the income has been taxed under the applicable income tax regime, no further taxation applies when it is transferred to foreign investors.
(b) Indirect investment through a partnership
Taxation of "partnerships" is identical to taxation of "corporations" as to which see below.
(c) Indirect investment through a corporation
Dividend distributions to shareholders
Dividends paid to any shareholder who is not a private individual are not subject to withholding tax.
Dividends paid to non-resident private individuals are taxed according to the tax rate applied under the relevant double taxation treaty. If there is no applicable double taxation treaty, withholding tax is payable. The tax rate is 25% for that part of the dividends not exceeding 30% of the equity attributable to the private individual and 35% for the remaining amount (if any).
No further taxation is applied to dividends distributed to private individuals. Dividends distributed to Hungarian business associations (companies) are exempt from taxation at the source and in the hands of the shareholders.
Are there local taxes on the possession of real estate assets?
Building tax is payable on the ownership of buildings. The taxpayer is the person who owns the building on 1 January of each tax year. Local authorities determine the level of taxation.
The maximum rate of building tax per annum is:
- HUF 900 per square metre or
- 3% of the adjusted market value of the building.
Vacant plots of land situated in inner-city areas can also be subject to taxation, depending on the local authority.
The maximum rate of tax per annum is:
- HUF 200 per square metre or
- 3% of the adjusted market value of the plot.
The adjusted market value with respect to buildings and vacant plots equals 50% of the value serving as the basis for the transfer tax. As of January 1, 2009, municipalities may apply an alternative tax calculation method and introduce a value-based building and land tax at the yearly rate of up to 1.5% of the calculated value of the property.
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
With the exception of land, most tangible assets are depreciable. The original acquisition cost is generally the basis for depreciation, and the depreciation rate is usually based on the normal useful life of the asset. For buildings, the accepted depreciation rates for the purposes of corporate income tax are 2%, 3% or 6%, depending on the type and structure of the building. A depreciation rate of 5% applies to buildings let to tenants.
Can land be depreciated?
No. Land is considered to have a continuous useful life and thus no depreciation is allowed.
Can a participation in an SPV holding real estate be depreciated?
No. A participation can, however, be subject to a write-down to fair value, provided it has permanently and significantly reduced in value.
E. VAT
Is the purchase of real estate assets subject to VAT?
As a general rule, the transfer of real estate is exempt from VAT, unless the seller opted for applying VAT at a rate of 20%. If the transfer is vatable, then the reverse charging mechanism applies, i.e. the purchaser is liable for VAT. The transfer of new buildings and building plots is always subject to VAT, and the seller is liable for VAT at a rate of 20%, i.e. no reverse charging applies.).
F. LEVERAGE, THIN CAPITALISATION RULES
Are there rules which limit the deductibility of interest for third party (bank) financing?
Interests paid by a Hungarian company on a loan are in a thin capitalisation situation partly not tax deductible from a corporate income tax point of view, namely for that part of the loan which exceeds the accepted debt-to-equity ratio of 3:1. However, bank financing does not have to be considered while calculating the debt-to-equity ratio (i.e. interest on bank loans can always be deducted).
Are there thin capitalisation rules in Hungary and if so, how do they work?
See previous answer.
Does Hungary apply withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
No.
G. TAXATION OF CAPITAL GAINS
How are capital gains deriving from the sale of real estate assets taxed in Hungary?
(a) Real estate assets held directly by foreign investors (individual)
Personal income tax is payable on profits from the sale of property. Profits are calculated by deducting from the sale price the purchase price, capital expenditure which has increased value, and certain other costs. The rate of tax on profits is currently 25%. After two years following the originals acquisition, the tax base can be progressively reduced. In the fifth tax year following the year of the original acquisition and thereafter no personal income tax is payable anymore.
(b) Real estate assets held directly by a foreign investor (corporation)
Capital gains from the sale of real estate by a non-resident company are subject to tax at a rate of 16% and to the solidarity surcharge at a rate of 4% if the income is generated by business activities carried out through a permanent establishment in Hungary. Under certain circumstances local business tax (see above) may also apply.
How are capital gains deriving from the sale of shares/interests in a corporate entity taxed in Hungary?
Capital gains deriving from the sale of shares or a holding in a corporate entity by a non-resident shareholder are not subject to taxation in Hungary.
Capital gains by a Hungarian company selling shares or a holding in another Hungarian company are subject to corporate tax at the normal rate of 16% plus a 4% solidarity surcharge unless the participation exemption applies.
Are there any rules regarding participation exemptions in Hungary?
Under the Hungarian participation exemption regime, capital gains realised upon sale of shares are exempt from tax, provided that the shareholding exceeds 30% for an uninterrupted period of at least one year.
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