Important Note about Company formation and Investment in Hungary
As per the act of Determination on Prices defined by the government of Hungary, the prices of several goods and services are regulated. Although private companies define the rates as per the market but the fees and charges for various services like postal, retail margin subsidized pharmaceutical products, few electronic services, etc. are regulated.
The amount of fees and charges for certain services managed by the local municipal authorities is regulated by separate laws. Some of the services are public transport, taxi, public water, wastewater utilities, district heating, etc.
The local municipal authorities and the government has the authority to define the prices for such products & services ensuring the interest of the public and suppliers. The defined prices are at the upper limit.
In order to perform business with foreign companies or in foreign companies, there is no special permission required from the National Bank of Hungary. The amount can be sent and received seamlessly inside and outside of Hungary. There are no major restrictions for the Hungarian company of transacting in foreign currency or offshore companies holding HUF currencies.
The government of Hungary is planning to be further lenient with the forex markets as per recent development of Hungary’s access to the EU exchange rate mechanism II as well as adoption Euro currency (date/timeline yet not defined).
The transfer pricing rules defined in Hungary are specified based on the guidelines listed in OECD, especially the details of the transactions of same kind of entities should be focused for taxation purposes with the same amount that has transactions between the unrelated parties. Directly/indirectly if any company or individual has more than 50% of the ownership/voting rights/management control in another company then both the companies are known as related parties. As per law private individuals and their family members are also considered.
There are different types of methods used in order to manage the transfer price. Below are the list which are implemented:
- comparable uncontrolled price
- resale minus
- transactional net margin
- profit split
In case the above methods are not of use in getting an appropriate result then the taxpayer can any defensible method as required. If the amount defined by the related companies differ from the market price then either the taxpayer or the tax authorities will adjust the base tax to reflect the market price.
In some of the cases, self-initiated downward pricing adjustment method may also be applied. In case the adjustments are made by the tax authorities then 50% of additional tax and late payment interest may be applied.
As per the legislation passed on 15th of May, 2017 by the Hungarian parliament for CbC (Country-by-Country) reports, implemented based on the EU directives for exchanging information. The reports and notifications of the CbC in a fiscal year should be submitted since before or 1st January, 2016.
As per the minimal capitalization conditions defined by Hungarian government for the taxpayers, the interest payed on loan or other obligations is non-deductible until the total amount of debts exceeds 3 times the equity of the taxpayer. The ratio will be 3:1 of the debt to equity ratio. As per the standard rule, any interest paid on the liabilities, except bank loans, should be taken under consideration. The amount of long term cash receivables can be removed from the total liabilities amount if it considered for long standing financial asset (receivables or secured asset) in the company balance sheet. If the transfer price adjustment has been made then it is important to consider the loans without interest and non-market interest rate loans.
Controlled Foreign Companies
Modifications have been made in the Hungary’s CFC provisions as on 1st of January 2017 to comply with the 3 of the OECD BEPS project. If a Hungarian taxpayer has more than 50% of the direct/in-direct ownership/rights of voting in a foreign company/foreign PE, then it is known as a CFC. If the amount of tax paid by the PE is lesser than the actual tax then the payable amount has to be paid in Hungary, as per the income in Hungary. As foreign company or PE, it shall not be treated as the CFC because it has sufficient assets, equipment, premises and employees using which it is able to perform substantial business.