Hungary has emerged as a prime destination for businesses and individuals seeking a favorable tax environment.
Hungary offers exclusive opportunities for minimizing tax burdens with competitive tax rates, extensive tax treaties, and incentives for freelancers and companies. However, dealing with Hungary’s tax landscape requires expertise to maximize these benefits while ensuring compliance.
At TaxMove, we specialize in helping businesses and individuals establish themselves in Hungary and utilize its tax advantages.
Why Hungary? A Haven for Low Taxation
Hungary’s tax system is designed to attract businesses, freelancers, and expatriates. Its low corporate income tax rate, personal income tax incentives, and well-established double tax treaties make it a hub for global entrepreneurs.
Hungary’s Tax System
- Corporate Tax Rate: Just 9%, the lowest in the European Union.
- Flat Personal Income Tax: A flat rate of 15% simplifies individual compliance.
- Withholding Tax (WHT): There is no WHT on dividends, interests and royalties distributions.
- Wealth Tax: There is now Wealth Tax in Hungary.
- Inheritance Tax: An 18% tax applies, with a reduced preferential rate of 9% for residential properties. However, children, siblings, and spouses are exempt from inheritance tax.
- VAT: Standard rate of 27%, with reduced rates for specific goods and services.
Tax Benefits for Companies in Hungary
Corporate Taxation at 9%
Corporate Income Tax rate in Hungary is 9%, making it one of the most attractive destinations for companies. This low tax rate applies to both local and international companies, motivating businesses to establish operations in Hungary.
Withholding Tax Rates
Dividends, interest, and royalty distributions are exempt from WHT, making this an appealing location for company incorporation.
Participation exemption regime
Hungary’s participation exemption regime offers a compelling framework for businesses seeking tax efficiency. Dividends received from qualifying investments are entirely exempt from taxation, with no holding period requirements, allowing businesses to optimize their profits without additional tax burdens.
For capital gains, the exemption applies to income derived from the sale of an investment, provided the acquisition is reported to the Hungarian tax authorities within 75 days. To qualify, the taxpayer must hold the shares in the subsidiary for at least one year, and the subsidiary must not be classified as a Controlled Foreign Corporation (CFC).
The same favorable rules extend to qualifying intellectual property (IP). However, for IP-related capital gains, the acquisition must be reported within 60 days to benefit from the exemption.
These exemptions, combined with Hungary’s low corporate tax rate of 9%, make the country a prime destination for corporations aiming to enhance their tax efficiency while maximizing returns on investments and intellectual property.
Double Tax Treaties (DTTs)
Hungary has signed over 80 DTTs, reducing or eliminating double taxation for companies operating internationally. This network facilitates smoother cross-border trade and investment while minimizing tax leakage.
Tax Advantages for Individuals
Here are the tax advantages for individuals in Hungary:
Flat Personal Income Tax
Hungary offers a 15% flat personal income tax rate, making it a preferred choice for expatriates and freelancers. This straightforward system simplifies tax compliance while minimizing liabilities.
How to Get Tax Residency in Hungary?
Hungarian citizens are considered tax residents. Furthermore, the following individuals are considered tax residents in Hungary:
• European Economic Area nationals who spend at least 183 days per calendar year in Hungary.
• Third-country nationals with permanent residence status or stateless persons holding a permanent residence permit.
• Foreign individuals who have a permanent home only in Hungary.
• Individuals with permanent homes in both Hungary and another jurisdiction or no permanent home at all are considered residents if their center of vital interest is located in Hungary.
• If residency cannot be determined through the “permanent home” or “center of vital interests” tests, an individual is deemed a Hungarian tax resident if they spend at least 183 days in Hungary within the calendar year.
Freelancers
Hungary offers an attractive environment for freelancers and small businesses with its low tax rates and streamlined compliance processes. However, high Social Security contributions (reaching up to 31.5% in some cases) make Bulgaria a more appealing choice for freelancers seeking lower overall tax burdens.
Anti-Avoidance Measures
Hungary implements robust anti-avoidance rules to ensure compliance and prevent tax evasion.
Controlled Foreign Corporation (CFC) Rules
Income earned through a foreign subsidiary may be taxed in Hungary if:
• The Hungarian entity holds a majority interest in foreign entities.
• The foreign tax rate is less than 50% of Hungary’s corporate tax rate.
Exit Tax
Hungary imposes an exit tax on unrealized capital gains when assets or tax residency are transferred out of the country. This ensures that Hungary retains tax revenue from businesses relocating their operations.
How Can TaxMove Help You?
Undoubtedly, either company formation or relocation to Hungary is a transformative step for your entrepreneurs and individuals since this country together with Malta, Cyprus, Romania and Bulgaria offers the lowest Corporate and Income tax rates in Europe.
However, expert guidance is required to realize its full potential if you want to benefit from Hungary’s favorable tax system. At TaxMove, we are dedicated to making the company formation process smooth and straightforward for businesses and individuals alike.
TaxMove simplifies this process by assisting with legal documentation, bank account setup, and compliance with anti-avoidance measures like Controlled Foreign Corporation (CFC) rules and exit tax regulations. Our team also ensures you stay informed about EU directives, helping you benefit from reduced or exempt withholding taxes on dividends, interest, and royalties.
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What are the tax rates in Hungary?
Hungary offers one of the lowest corporate tax rates in the European Union at just 9%. It also has a flat 15% personal income tax rate, no wealth tax, and exemptions on dividends, interest, and royalties. These features, combined with over 80 double tax treaties, make it an attractive location for businesses and individuals.
What are the corporate tax rates in Hungary?
• Low Corporate Income Tax: 9%, applicable to all companies.
• Withholding Tax Exemption: Dividends, interest, and royalties are exempt from withholding tax.
• Participation Exemption: Exemption for dividends and capital gains under specific conditions, like a one-year holding period and reporting requirements.
What is the Personal Income Tax rate in Hungary?
Hungary offers a 15% flat personal income tax rate.
How can someone gain tax residency in Hungary?
Hungarian tax residency applies to European Economic Area nationals who spend at least 183 days annually in Hungary, third-country nationals with permanent residence or stateless individuals holding a permanent residence permit, and foreign individuals with a permanent home solely in Hungary.
Those with permanent homes in both Hungary and another country, or no permanent home at all, are considered residents if their center of vital interests is in Hungary.
If residency cannot be determined by either the “permanent home” or “center of vital interests” criteria, individuals who stay in Hungary for at least 183 days in a calendar year are deemed tax residents.
