Sale of shares of foreign-registered companies in Hungarian entities may trigger local tax liabilities if the real estate possessions are significant. Such transactions may generate Hungarian local duty and corporate income tax (“CIT”) payment obligations.
1. Duty on sale of shares of companies with real estate holdings
The definition of real estate holdings is different according to the act on duty and CIT law. According to the act on duties (1990. XCIII law) real estate holding is a company owning more than 75% real assets in its total assets. Liquid assets, receivables, deferred incomes, and loans should be excluded of the definition of total assets, therefore the formula might include inventory and long-term assets mainly. Additionally, those companies are also classified as real estate holding which has at least 75% shareholding (directly or indirectly) in a real estate holding entity.
Unlike the CIT (corporate income tax), the law on duties defines as a further condition that the buyer should purchase the 75% share at least, or with the new share purchase the ownership should reach 75%.
The amount of the duty is 4% up to 1 bn forints and 2% above up to 2 bn forints. Real estate traders could enjoy a decreased rate of 2% if certain conditions met.
According to the general rules of the act of duty, the duty payer is the buyer.
Related party transaction is released from duty payment and special beneficial share or asset transaction can also be exempted.
2. CIT (corporate income tax) on sale of shares of companies with real estate holdings
Unlike the Act on duties, the CIT law definition of the real estate holding companies are relatively simple since there is no need for correction of the total assets. A company classified as real estate holding if the real estate share in its total assets is more than 75%.
The 75% threshold must be calculated on the asset owning company level individually and on group level aggregated as well. The law states exact administration liability and the deadline for this calculation. Companies must gather balance sheet information from related parties until 31 July each year and if they are classified as real estate holdings, it should be reported until 31 August.
An additional difference comparing to the rules of duties, that there is no limitation of the size of share transfer in the CIT law, either on the Seller or on the Buyer’s side.
Likewise many cross border transactions, the system of regulations try to avoid double taxation, therefore further criteria for the taxation that any member (shareholder) of the taxpayer or any member (shareholder) of either company of the group held resident status on at least one day of the tax year in a State with which Hungary has no agreement on double taxation or the agreement provides for the taxation of capital gains in Hungary.
A foreign person who is a member of a real estate company becomes subject to the corporate income tax law when the share is sold or withdrawn.
It is also important to know that in case the foreign person is a private person than according to the law this person won’t become subject to the CIT even if the share is sold.
The tax base is the difference of the market price and purchase value, which is taxed at the general rate of 9%.
Contrary to the act on duties, the taxpayer should be the seller.