The Use of Hungarian Companies in Cosmetic, Low-profile, EU-based Tax Planning

They say there are two things that are almost sure in your life: death and taxes

. It is likely that none of these problems will ever be completely "solved", however as medical professionals are continuously working on expanding life expectancy, we, tax professionals are always trying to offer cosmetic solutions for lowering the overall tax burden of businesses.

On the field of international tax planning there have been schemes for years which have become by now quite everyday solutions. Looking at everyday taxation schemes from the perspective of high-tax resident businesses, it is common sense that direct offshore solutions are becoming more and more risky. We experience that businesses with direct connections to offshore trading or holding structures are facing increased scrutiny during a tax inspection. Even the reputable holding jurisdictions as Cyprus or Malta might bring increased attention from the tax inspector in the life of a company nowadays. The reason is simple; authorities of high-tax jurisdictions deem these "usual" jurisdictions as a way to tax evasion. If it looks like a duck and quacks like a duck, then it should be a duck.

We are positive although that in the coming years international tax planning will not disappear. It will rather transform. The future will always be there for diverse, complex solutions, which do not resemble tax-optimization for the first glance.

In this article we would like to draw your attention to a jurisdiction which both has the experience, and the solid financial and legal infrastructure for international tax planning, but which seems to have been forgotten during the previous years. We would like to draw your attention to Hungary.

Hungary has been a member of the European Union now for 6 years. It maintains excellent banking infrastructure and reasonable tax rates. Its capital Budapest is filled with experienced tax professionals. Few people are aware of the fact that Hungary has had its own experience in the offshore world: before the accession to the EU it was possible to incorporate nonresident offshore companies in Hungary. The offshore legislation had to be abolished in 2004, but the infrastructure and experienced professionals remained in their place.

As to company taxation we believe that Hungary today maintains one of the most beneficial taxation systems in the EU. Company income tax (CIT) has two rates: 10% on up to 1,8 Million Euros of profits, and 19% on profits above. Being a full member of the EU, dividends received from EU companies are not subject to CIT, and there is absolutely no withholding tax imposed on dividends paid by Hungarian companies to their overseas parent company. And most importantly, from the authorities' perspective Hungary is not connected with tax-optimization therefore we do not experience increased scrutiny which would be there in case of "traditional" jurisdictions.

Further to the above it is important to mention that Hungary currently maintains one of the most sophisticated and investor friendly incorporation process within the EU. Incorporation is completely electronic, and the administrative time-frame is 1 hour. EU VAT number is given automatically upon incorporation which is quite unique in Europe.

There are two kinds of basic schemes to consider in using Hungary as a tax-friendly group vehicle.

1. Passive Dividend Channel

In case you want to channel your taxed profits from your home jurisdiction to your offshore vehicle, but do not want to maintain a direct link with offshore or low-tax jurisdictions, you shall include a Hungarian dividend channel company between your ultimate holding company and your domestic company. As the Hungarian CIT system maintains full dividend exemption on dividends received from EU subsidiaries (or from other subsidiaries covered by the extensional double tax treaties) and there is no dividend withholding tax imposed on outgoing dividends, in this structure you are able to channel out your profits to the jurisdiction of your preference with no additional tax burden.

2. Active SPV

Should you intend to profit from the 10% CIT rate, then there is a possibility to setup a Hungarian service company for a special purpose. Such purpose can range from "virtual" services as owning and licensing trademark, franchise or know-how to active services. In our experience however the more active service is charged from the company, the more focus shall be put on the economic substance (infrastructure and employees) in order to be able to defend the structure later on.

Should you feel that you could profit from including a Hungarian company into your business structure, please do not hesitate to contact us on our availibilities.

The Use of Hungarian Companies in Cosmetic, Low-profile, EU-based Tax Planning

By: Dr. Zoltan K. Toth

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