Hungary Tax & Business Guide - Deloitte

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Basic facts
Population 10m Inflation 4.0% (2006)*
Main languages Hungarian GDP per head US$11,220*
Currency Forint (HUF) GDP growth 3.9% (2006)*
Economic communities European Economic Area, EU, OECD, WTO
GDP sources 3.3% agriculture, 31.5% industry, 65.2% services
*Economist Intelligence Unit estimates.
Political environment

Hungary is a parliamentary democracy.

A centre-left coalition government, comprising the Hungarian Socialist Party (MSZP) and the SZDSZ-Hungarian Liberal Party (SZDSZ), is led by the prime minister, currently Ferenc Gyurcsany of the MSZP. The government was re-elected in 2006. The next elections are scheduled for 2010 (parliamentary, presidential and municipal).
Foreign trade and investment
Exports US$71.4bn (2006)* Imports US$72.7bn (2006)*
*Economist Intelligence Unit estimates.

Leading exports: Machinery and industrial products, other manufacturing.

Major export markets: Germany, Austria, France and Italy.

Most foreign direct investment (FDI) inflows are in high-technology production industries, and nearly all are greenfield investments. Multinationals are increasingly locating research facilities in Hungary.
Business and financing
Business forms Company limited by shares (Rt), limited liability company (Kft)

Because of less-stringent registration and operating procedures and lower minimum capital requirements, most new private firms incorporating in Hungary choose the limited liability company form (Kft) form, which can be set up by a single owner. Other forms include the limited partnership and general partnership, both of which require unlimited legal liability.

Budapest, the capital, is the countryÌs financial centre.
Labour environment
Unemployment rate 7.5% (2006)* Minimum wage HUF 65,500 (monthly)
*Economist Intelligence Unit estimate.

The minimum monthly wage is HUF 65,500; it will increase to HUF 69,000 in 2008.

Social security contributions payable by both the employer and the employee generally cover pension and healthcare insurance. Based on employeesÌ gross wages, firms must contribute 29% (18% for pension insurance and 11% for health insurance) and a fixed healthcare contribution of HUF 1,950 per employee per month. Employees must contribute 8.5% for pension insurance up to a prescribed maximum and 4% for healthcare, which is uncapped.

To employ a foreign citizen, the Hungary-based employer or Hungary-based firm for whose benefit the foreigner works (including work on a consultancy or secondment basis) must apply for a work permit, although procedures are eased for some EU citizens.
Taxation
Corporate tax
Main rate 16%

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Hungarian-source income. Taxpayers are treated as resident for tax purposes if they are created under Hungarian law or if they are managed or controlled in Hungary. Tax is charged at a flat rate of 16%, with a surtax of 4%, which was introduced in 2006, giving rise to an effective rate of 20%.
Individual tax
Progressive rates to 38%

Resident individuals pay tax on worldwide income; non-resident individuals pay tax only on Hungarian-source income. A Hungarian national (and a foreign national with a Hungarian settlement permit) is regarded as resident for tax purposes. Other persons may be regarded as resident if their permanent home, centre of vital interests or habitual abode is in Hungary. The personal income tax system consists of two brackets of 18% and 36%; the higher rate applies at an annual income level of HUF 1.7m. Individuals are also subject to the 4% solidarity surtax from January 1st 2007.
Capital gains
Generally taxed as income

Gains from the sale of business assets are treated as ordinary business income. Under a participation exemption introduced from January 1st 2007, capital gains realised on the sale of Hungarian and foreign participations are exempt from corporate income tax and the solidarity surtax, provided certain conditions are satisfied.

Capital gains of individuals from the sale of immovable property are taxed at 25%. Tax exemptions exist for gains used to finance the purchase of a new home and for gains derived after the property has been held for 15 years. Gains from the sale of securities are taxed at 20% where the securities are listed on certain stock exchanges.
Indirect tax
Standard rate 20% Lower rates 5%

Value-added tax (VAT) applies to most transactions at a rate of 20%. The 5% rate applies to textbooks and certain medical materials and supplies. Financial services, health and education services and leases of dwellings are exempt.

Registration for VAT is compulsory for businesses.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Although the tax year is the calendar year, companies may elect to use a tax year that corresponds to their accounting year. Companies make monthly or quarterly advance payments of tax. Annual corporate tax returns must be filed by May 31st following the tax year (or within 150 days of the end of the companyÌs tax year if this is different from the calendar year). Quarterly prepayments (monthly for large taxpayers) are due based on the liability for the previous year. The final tax liability is payable with the tax return.

Employment income of individuals employed by a Hungarian company is taxed by withholding. If the individualÌs compensation is paid by a foreign (non-Hungarian) entity and the compensation is not paid through a Hungarian entity, tax withholding is operated in the form of quarterly advance tax payments due from the individual.
Additional tax information
Withholding taxes Dividends, Interest and Royalties 0%.
Tax treaties Hungary has concluded more than 60 double tax treaties.
Dividends Dividends are taxable, with a participation exemption.
Revenue protection There is transfer-pricing, thin-capitalisation and CFC legislation.
Groups There is no group taxation, except VAT group taxation.
Incentives Certain investment incentives.
Other taxes Gift tax, Import duties, Inheritance tax, Local business profit taxes, Tax on transfer of property, Tax on buildings, Tax on undeveloped plots, Tourism tax, Innovation contribution, Environmental tax, Cultural tax, Registration tax on motor vehicles.