Your Subscription

We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.





Login
Twitter LinkedIn




Login
  • Home
  • About
  • Updates
  • Awards
  • Contact
  • Directory
  • OnDemand
  • Partners
  • Testimonials
Forward Share Print
Gide Loyrette Nouel

Abolition of Solidarity Surtax: New Opportunities for Holdings

Newsletters

27 June 2008

Corporate Tax Hungary


Hungary has traditionally been a popular jurisdiction for many international licensing and financing holdings for various reasons. The planned abolition of the 4% solidarity surtax is likely to boost this trend, attracting even more foreign investors to Hungary.

Solidarity surtax was introduced with effect from September 1 2006 in order to improve the balance of Hungary’s national budget. As a result, the 16% income tax liability for corporate entities was effectively increased to 20%. Solidarity surtax was always intended as a temporary measure, to be abolished as soon as the central budget had been sufficiently balanced, and was announced as such. Although the measure has not yet been passed by Parliament, the surtax is due to be abolished on January 1 2009, as confirmed by Prime Minister Ferenc Gyurcsány at the Hungarian Embassy in Paris on May 22 2008 and on other occasions.

The abolition of solidarity surtax will have obvious benefits, adding to the advantageous features of Hungary’s tax legislation. It will make Hungary's effective corporate income tax burden the lowest in Central Europe from 2009, as the table below shows.

Country Tax Burden for Corporate Entities
Austria 25%
Czech Republic 20% (from 2009)
Hungary 16% (from 2009)
Poland 19%
Romania 16%
Slovakia 19%
Slovenia 23%

However, a reduction in the corporate income tax burden will not be the only benefit to flow from the abolition of solidarity surtax, which will also lend further momentum to a Hungarian holding regime that already enjoys great popularity among foreign investors. This popularity is based not only on the low corporate income tax rate, but also on the government's consistent, long-term policy of attracting foreign investors by means of tax incentives, including a highly beneficial tax regime for licensing and financing activities.

One such benefit is the preferential corporate income tax regime for royalty and related-party interest income: within certain limits, only 50% of royalty income is taxable. Similarly, only 50% of the interest received from related parties in excess of interest paid to them is included in the corporate income tax base. Thus, the effective corporate income tax rate for these types of income will be 8% from 2009 - the most competitive rate in Central Europe.(1) Moreover, no restrictions apply to the deduction of royalty and interest payments from the corporate income tax base, provided that such deductions serve a business purpose and meet transfer pricing requirements, if applicable.

Royalties and related party interest are not the only types of corporate income to benefit from preferential rules. The introduction of the participation exemption regime in 2007 resulted in the total exemption from corporate income tax of capital gains accrued on reported shares of at least 30% and held for at least one year. This rule is especially advantageous for certain forms of corporate transformation. The benefits of the tax regime are not restricted to income; the abolition of corporate withholding tax was a significant step towards the creation of a tax-friendly environment for international investors in the past few years.

Despite a number of advantages, Hungary is not yet as widely known as it should be for its tax advantages for international investment. However, the forthcoming abolition of solidarity surtax is expected to raise its profile among investors.

For further information on this topic please contact Orsolya Bardosi or Szabolcs Erdős at Gide Loyrette Nouel by telephone (+36 1 411 74 00) or by fax (+36 1 411 74 40) or by email (orsolya.bardosi@gide.com or szabolcs.erdos@gide.com).

Endnotes

(1) At present, solidarity surtax raises this to 12%.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.

Forward Share Print

Authors

Orsolya Bárdosi

Orsolya Bárdosi

Szabolcs Erdős

Szabolcs Erdős

Register now for your free newsletter

View recent newsletter

  • Home
  • About
  • Updates
  • Awards
  • Contact
  • My account
  • Directory
  • OnDemand
  • Partners
  • Testimonials
  • Follow on Twitter
  • Follow on LinkedIn
  • Disclaimer
  • Privacy policy
  • GDPR Compliance
  • Terms
  • Cookie policy
Online Media Partners
Inter-Pacific Bar Association (IPBA) International Bar Association (IBA) European Company Lawyers Association (ECLA) Association of Corporate Counsel (ACC) American Bar Association Section of International Law (ABA)

© 1997-2021 Law Business Research

You need to be logged in to make a comment. Log in here.
Many thanks. Your comment has been sent.

Your details



Your comment or question *