Offshore Jurisdiction Review: Hungary as a Tax Haven

Hungary has often been in the spotlight for its distinctive economic policies, especially concerning taxation. While not officially classified as a tax haven, Hungary boasts some of the most favorable corporate tax rates in the European Union. These low rates, paired with straightforward incorporation laws, provide an appealing prospect for foreign investors looking to enter the European market. The allure is significantly pronounced for non-EU investors who see Hungary as a gateway to the broad and varied EU marketplace.

The country's taxation landscape, however, is more nuanced than merely offering low corporate taxes. Hungary's approach to taxation and its regulatory environment are shaped by its EU membership and commitments. As such, Hungary has had to navigate between fostering a business-friendly atmosphere and aligning with European directives and global consensus on tax regulations, such as the global minimum tax initiative to curb profit shifting and tax avoidance.

Key Takeaways

• Hungary offers favorable corporate tax rates that attract foreign investors.
• Taxation and regulatory practices in Hungary balance national economic interests with EU commitments.
• Recent developments reflect Hungary's efforts to comply with international tax standards.

Is Hungary a Tax Haven?

Hungary is not officially seen as a tax haven, but its low corporate tax rates, easy incorporation laws, and prime location as a European Union nation make the Hungarian company an advantageous corporate vehicle for foreign investors.

Hungary is particularly attractive to non-EU investors who want to gain access to the European market through a cost-effective and tax-friendly EU jurisdiction. It has the lowest corporate tax rates in the EU which apply to both trading and investment income. It also offers quick, affordable and easy incorporation for foreigners. 

See more>> Hungary Offshore Corporation

Benefits

• Hungary is ideally located in the center of Europe and is a member of the European Union which opens up many trade and business opportunities throughout the EU. 
• Corporate tax rate is a flat 9%, which is the lowest in the European Union.
• Hungary has a strong economy and good infrastructure, along with a highly trained workforce.
• Stable government and political system, which makes it a safe jurisdiction for offshore investors.
• Foreign incorporation in Hungary is fast, affordable, and easy.
  • Shelf corporations are available for even quicker incorporation.
• The country offers easy visa and residency options for most foreign nationals.
• Variety of tax advantages; such as zero dividend tax, zero withholding tax (if correctly structured), many double taxation treaties etc. 
• Only one shareholder and director are required for incorporation and can be the same person who need not be a citizen or resident of Hungary.

Principal Corporate Legislation

The Hungarian Companies Act is the primary legislation that governs and regulates corporations in Hungary. It sets out the regulations regarding incorporation, activity, termination and taxation. 

The most common corporate structures for companies in Hungary are that of the Limited Liability Company (Kft) and the Company Limited by Shares (Rt, Zrt, or Nyrt). Of the two, Kft’s are the preferred investment vehicle for foreign investors who wish to set up an offshore business in Hungary. 

The Hungarian Kft offers a high degree of flexibility. It requires only a single shareholder and director, who can be the same person. The company can also be founded by any non-resident or resident natural person, legal person or business association.

While the corporation must have a registered local agent and office, the primary business address can be anywhere in the world. It is important to note that the location and type of shareholders does have differing tax implications. A Kft must have a minimum authorised share capital of HUF 3 million (a little under 10,000 USD). The entire incorporation process usually takes about 2 - 3 weeks.

Taxation Framework in Hungary 

The taxation system in Hungary is known for its competitive rates, particularly in the corporate sector, which makes it an attractive locale for international business within the European Union.

Corporate Tax System

As mentioned, Hungary has the lowest corporate tax rate in the European Union of only 9%. In addition, there are very favourable laws regarding tax deductions, and losses can be carried forward for five years for deduction, at a limit of 50% of the current year’s taxable income.

Hungarian companies incur zero withholding tax for dividends, interest and royalties which are paid to foreign corporate owners. However, there is a withholding tax of 15% on these distributions to individuals. For this reason, it is advisable for foreigners to invest in Hungarian corporations via holding companies (i.e. those wishing to incorporate in Hungary should do so through a corporate entity, and not as an individual). 

Hungary has over 70 double taxation treaties with many of the world’s most important jurisdictions (such as the EU, Canada, China, Hong Kong, Singapore, Switzerland and the USA). This helps to prevent losses from double taxation.

Income Tax Rates and Structure

For private individuals, the income tax rate is progressive with the tax year aligning with the calendar year. Residents are taxed on their worldwide income, while non-residents are taxed only on their Hungarian-sourced income. The general personal income tax rate is set at 15%, which is relatively low compared to other EU states.

Comparative Analysis with Other EU States

Comparing Hungary to other EU members known for favorable tax conditions like Ireland, Cyprus, and Malta, Hungary's corporate tax rate is decisively competitive. Where Ireland maintains a 12.5% corporate tax rate, and Cyprus and Malta offer rates of 12.5% and 35% respectively, Hungary's striking 9% positions it as an exceptionally attractive environment for businesses seeking tax efficiency within the European Union.

Regulatory Environment

1. Anti-Money Laundering Policies

Hungary has implemented comprehensive anti-money laundering (AML) policies that align with the European Union (EU) directives. The nation has established mechanisms to detect and prevent money laundering activities, involving the European Parliament's regulations and the recommendations of the Organization for Economic Co-operation and Development (OECD). To enhance the effectiveness of AML initiatives, Hungary works closely with the EU Financial Intelligence Unit.

2. Aggressive Tax Planning and Tax Evasion

Addressing tax evasion and aggressive tax planning, Hungary adheres to the guidelines set by the EU and OECD to ensure tax compliance and transparency. The country has taken measures to close loopholes that facilitated tax avoidance and has engaged in information exchange frameworks to bolster these efforts. A clear stance against tax avoidance is supported by the work of the EU's Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3).

3. International Cooperation Against Financial Crimes

To combat financial crimes globally, Hungary participates in international cooperation and information exchange. The country's commitment to this cause is evident through its alignment with the European Green Deal and its cooperation with EU anti-money laundering watchdogs. The international legal framework and Hungary's cooperation with bodies such as the OECD and the EU play a crucial role in the prevention of financial crimes across borders.

European Union's Response to Tax Havens

The European Union has undertaken a multifaceted approach to addressing the issue of tax havens within its member states, including the implementation of legislative measures and the investigation of states with tax haven characteristics. These steps aim to harmonize tax policies and combat tax avoidance.

Special Committee Investigations and Hearings

The European Parliament's Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) has been instrumental in investigating member states with tax haven traits. The committee conducts fact-finding missions to analyze the situation within member states and holds hearings to gather information. Their findings have resulted in several member states, including Hungary, being scrutinized for their tax practices which may encourage tax avoidance.

Legislative Measures and Directives

The European Union has implemented various legislative measures to combat harmful tax practices. The Code of Conduct Group (CoCG) works alongside European Commissioners to identify non-cooperative jurisdictions and propose reforms. A notable outcome has been the creation of an EU list of non-cooperative tax jurisdictions, which serves to dissuade harmful tax competition among member states.

• Legislative Tools:
  • Anti-Tax Avoidance Directive (ATAD)
  • Administrative Cooperation Directive (DAC)

Recommendations issued by MEPs and the CoCG have been pivotal for updating the criteria for the designation of tax havens and ensuring compliance with EU tax legislation.

European Financial Police Force Proposal

Following the recommendations of the TAX3 committee, there has been a proposition for the establishment of a European financial police force. This force would operate under the aegis of EUROPOL. There is also a push for the creation of an EU financial intelligence unit to support the fight against financial crimes. These proposals aim to enhance cooperation among EU member states and NATO allies, providing a unified front against financial crimes associated with tax havens.

Background Information

Location

Hungary’s ideal geographical location in Central Europe is part of what makes it an attractive jurisdiction. It is also a part of the European Union, and well-connected to the surrounding European nations. It has a land area of 93,000 square kilometers and shares its borders with Romania, Slovakia, Croatia, Serbia, Slovenia, Ukraine and Austria. Budapest is its capital and largest city. 

Political Structure

Hungary is a unitary, parliamentary, representative democratic republic. Hungary’s main constitutional document is the “Fundamental Law of Hungary” which was reformed in 2012. The Hungarian political system operates with both a President of the Republic and a Prime Minister. Every five years, the National Assembly elects the President who then serves as the official head of state.

The Prime Minister is also elected by the National Assembly and is traditionally the leader of the largest party in parliament. The PM acts as the head of government and exercises executive power. Hungary has been a part of the European Union since 2004 and part of the Schengen Area since 2007.

It is an established member of many international organisations such as the United Nations, NATO, WTO, the World Bank, the Council of Europe etc. This adds to its political stability and reputability. 

Economy and Infrastructure

Hungary is an OECD “high-income mixed economy”. It has the 54th largest economy by nominal GDP and ranks 49th in the world according to GDP per capita (measured by PPP). It is primarily an export-oriented market economy with much emphasis on foreign trade.

Hungary has experienced some economic difficulties in the past: in 2009 they had to seek help from the IMF with a loan of about 9 billion EUR. As a result, the debt-to-GDP ratio of Hungary reached 83% in 2011, but it has since decreased. 

Hungary has a high human development index, which is partly due to its established social security system, universal health care, and free secondary education. It also has a skilled labour force with very low-income inequality. The cost of living is low compared to other European nations. Additionally, it has a very good and fast-growing infrastructure for business. 

Population, Language and Culture

Hungary has a population of about 10 million inhabitants. The native language is Hungarian, and it is the first language of about 99% of the population. The most widely spoken foreign languages are English (spoken by 16% of the population) and German (spoken by about 11%).

English has become more widely used since Hungary joined the EU. According to the 2011 census, Hungarians made up more than 90% of people who declared their ethnicity, with the rest being made up mostly of ethnicities from surrounding European nations. According to the same census, the primary religion in Hungary is Christianity with more than half the population declaring themselves to be Christian. Jewish, Buddhist and Muslim inhabitants made up less than 0.5% of the population in total. 27.2% of the population did not declare a religion while 16.7% declared themselves explicitly irreligious, and 1.5% atheist.

Hungary has a rich cultural history with many significant contributions to arts, music, literature, sports, science and technology. It attracts many international tourists and has a growing expat community due to the fact that it is very livable and affordable.

Exchange Control

As of 2019, there were no foreign exchange controls in Hungary.

Type of Law

Hungary has a civil law system which is primarily based on German Law. The judicial system is divided between regular courts with civil and criminal jurisdiction and administrative courts which handle litigation between individuals and public administration. Budapest is home to Hungary’s highest courts.

Frequently Asked Questions

What taxes are foreign nationals subject to in Hungary?

Foreign nationals in Hungary are typically subject to a flat rate of personal income tax at 15% on their worldwide income if they qualify as residents for taxation purposes. They are also required to pay social security contributions, which include health insurance and pension contributions, amounting to 18.5% of their gross salary or business profit.

How does the Hungarian tax system compare to other EU countries?

Hungary's tax system is characterized by its flat tax rate for personal income, which distinguishes it from several other European countries that use progressive tax rates based on income levels. For instance, in contrast to Hungary’s flat 15% rate, Portugal applies income tax rates ranging from 14.5% to 48%.

What employment opportunities exist in Hungary's financial sector for expatriates?

Expatriates may find varied career opportunities within Hungary's financial sector due to its competitive tax rates and stable economic environment. Multinational corporations often seek knowledgeable finance professionals, tax advisors, and accountants to navigate the country's tax environment.

How does Hungary's tax policy impact international businesses?

The flat corporate tax rate of 9% in Hungary is an attractive feature for international businesses, offering a competitive edge within the EU. This can lead to tax-efficient structures for businesses operating in or through Hungary, impacting decisions related to investment, business location, and expansion strategies.

Which European country is considered the most favorable for tax purposes?

While Hungary boasts one of the lowest corporate tax rates in the EU, various factors contribute to tax favorability, including ease of compliance, incentives, and bilateral treaties. Each country has its merits, but the title for the most favorable tax environment depends on the specific needs and circumstances of the business or individual in question.

Unlock the potential of your business in Europe with Hungary's unbeatable corporate tax rates and streamlined incorporation process. With Offshore Protection, you can seamlessly navigate Hungary's business-friendly environment and take advantage of the myriad benefits it offers. Ready to establish your presence in the EU? Contact us today to get started on your Hungary offshore company formation and secure your competitive edge.

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