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30 January 2009
As part of the tax law changes enacted by Parliament in December 2008, a tax amnesty has been offered for the tax years 2008 and 2009 which may allow for a significantly discounted corporate tax exposure of dividends and certain capital gains received from controlled foreign corporations (CFC). The amnesty is primarily intended to attract funds that are trapped in tax havens into Hungary and ultimately foster their investment in Hungarian state bonds. However, the amnesty could also present an interesting tax opportunity for some investors.
The general rules in force prior to the introduction of the amnesty sanctioned income streams derived from CFCs, which comprise affiliates seated in non-treaty states(1) outside the European Union and the Organization for Economic Cooperation and Development (OECD) that are exposed to a corporate tax of less than 10.67% in their own country. Among other things, these rules affect CFC dividends and capital gains (from the termination of the CFC or a decrease in its registered capital), which would otherwise be tax exempt.
Under the amnesty, 75% of these dividends and capital gains are also exempt from corporate income tax even if derived from a CFC,(2) provided that 50% is invested in Hungarian state bonds by June 30 2009 and held there for a period of two years.
For dividends, the 75% tax exemption is available only on dividends that are distributed from the CFC’s profit obtained by June 30 2008 in order to mitigate an undesired boost to CFC investments at the end of 2008, as this would achieve the opposite of the legislature's intention (it remains to be seen how tax inspectors will cope with auditing compliance with this requirement). Nevertheless, such CFC dividends will also enjoy the same exemption from the 4% solidarity surtax.
The general 20% tax exposure of CFC income streams will be decreased to 5% or 8% under the tax amnesty as outlined in the table below:
Type of Income |
General Tax Rates |
Tax Amnesty Rates Due to 75% Exemption |
||||
Corporate income tax |
Solidarity surtax |
Total tax Burden |
Corporate income tax |
Solidarity surtax |
Total tax burden |
|
Dividends |
16 % |
4% |
20% |
4% |
1% |
5% |
Capital gains from termination or decrease in capital |
16 % |
4% |
20% |
4% |
4% |
8% |
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Author
Szabolcs Erdős