Temporary Tax Amnesty Offered for Repatriation of Offshore Profits

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:

The above 75% tax exemption and the consequent 5% and 8% decreased tax burdens are final – that is, they do not simply constitute a deferral of taxation to a later period. Only after two years have elapsed will proceeds on state bonds become taxable.

The amnesty is available only to special capital gains and to the distribution of profits generated by early 2008, and is thus far from being usable for all types of income routed from a CFC. Moreover, the narrow definition of 'CFC' means that the amnesty is limited to income channelled from only a few locations.

Nevertheless, the amnesty could prove to be highly favourable to taxpayers that hold extensive investments in CFCs and are considering retrieving profits in a tax-efficient manner. The potential tax advantages of the amnesty are further increased by the law expressly prohibiting any retroactive tax assessment and criminal procedures relating to the income in question. The fact that Hungarian bonds are generally regarded as a safe form of investment may contribute to the sound preservation of these low-taxed profits once the two-year holding period is over.

Taxpayers interested in benefiting from the tax amnesty should note its temporary nature – it will be in place only until the end of the 2009 tax year.

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

Endnotes

(1) Hungary currently has 65 double tax treaties in force, including with the EU member states and most other European countries, and a number of other states around the world.

(2) Income from CFCs located in Andorra, Liechtenstein and Monaco are excluded from the amnesty, since these states are classified by the OECD Committee on Fiscal Affairs as uncooperative tax havens.