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Helga Kiss, tax director, RSM Hungary
Helga Kiss
Tax

What should a foreign company pay attention to when buying real estate in Hungary?

It is not new that foreign companies buy commercial property in Hungary for investment purposes. However, they are not always fully aware of tax consequences when concluding the sale and purchase contract. We now show you what you should pay attention to and what the most frequent hurdles are.

Do you need a permit to acquire real estate?

Good news is that according to Government Decree 7/1996 (I. 18),companies with legal personality registered in any member state of the European Union and any state that is a party to the Agreement on the European Economic Area (“EEA”: Norway, Liechtenstein, Iceland) may acquire title to real estate not classified as agricultural land without a permit. In addition, no permit is required either for the acquisition of title to a real estate for the purpose of carrying out business activity by the Hungarian branch office of a foreign enterprise registered in a non-EEA state in the cases specified by international treaties or if there is reciprocity between Hungary and the state of the seat of the foreign enterprise in this regard. 

However, in all cases other than the ones listed above (e.g. in the case of other third country legal persons) title to real estate not qualifying as agricultural and forestry land may only be acquired with a permit from the government office. 

Is the acquisition of real estate exempt from VAT or subject to tax?

One frequent issue is the correct VAT classification of real estate transactions which usually requires the involvement of advisors due to the complexity of regulation. The stakes are high as we are talking about more than a quarter of the purchase price and you can avoid VAT financing of several million forints with a good decision. 

Remaining with the example of buying an existing commercial property, according to the main rule, the sale of built-in "old" property (i.e. property older than two years) and the relating section of land as well as the sale of unimproved property not qualifying as a building plot are exempted from VAT as per the VAT Act. However, as the seller taxable person may opt for the taxation of the sale of these properties, attention is to be paid to the so-called domestic reverse charge mechanism when paying VAT. This means VAT is not payable by the seller but by the party acquiring the real estate if all of the following conditions are fulfilled: 

  • all parties concerned in the fulfilment of the transaction are taxable persons registered in Hungary, and
  • none of them has a legal status specified in the VAT Act based on which tax payment could not be claimed from them (e.g. personal tax exemption, taxable persons performing agricultural activities, foreign taxpayers not having a Hungarian tax number, private individuals etc.). 

Due to the above, determining the VAT-ability of the transaction and the person liable to pay the VAT is also a critical question. On one hand, it is important in which category the real property falls from a VAT perspective and, on the other hand, that domestic reverse charge mechanism only applies if both the seller and the buyer are taxable persons having a Hungarian tax number fulfilling their VAT obligations according to the general rules. The latter condition may also trigger a VAT registration obligation in case of foreign company buyers but issuing the tax number by the respective authorities typically requires two weeks even if all necessary documents are available, which should also be taken into account for timing purposes. 

Real estate transfer tax

The real estate transfer tax (RETT) payable on the acquisition of real estate applies to both Hungarian and foreign buyers. It should be considered carefully on how many topographical lot numbers the property is registered as RETT is imposed per topographical lot number (TLN) (at a rate of 4% up to 1 billion forints and 2% on the part of the market value exceeding this limit but maximum 200 million forints). 

Value of Real estate

(HUF)

RE transfer tax,

1 TLN (HUF)

RE transfer tax,

2 TLN (HUF)

RE transfer tax,

5 TLN (HUF)

1 0000 000 000040 000 00040 000 00040 000 000
2 0000 000 000060 000 00080 000 00080 000 000
5 0000 000 0000120 000 000140 000 000200 000 000

Table: Real estate transfer tax according to the number of  TLN, equal distribution of real estate value.

Several local taxes may also arise

While the obligation to pay RETT is almost evident, in our experience, foreign buyers are much less informed about local taxes. Foreign buyers have to expect different tax liabilities, which may include building tax and land tax as well as local business tax in case of the utilization (e.g. leasing out) of real estate. 

In respect of local business tax, it may be difficult to determine the exact starting date of the economic activity (e.g. leasing out real estate),for example, if the property is handed over but the lease contract only enters into force from the next month, which defines the date from which the entity has to register for local business tax purpose. Proper timing may also be important in case of building and land tax including, among others, the data on which the contract on the transfer of ownership is submitted to the real estate authority (land office),as the tax will be imposed on the taxable person registered in the land register on the first day of the calendar year as the owner of the land. For example, if the sale and purchase contract is concluded in December but, because of the holidays, it is only filed with the land office in the first week of January within the 30 day deadline set for this purpose, the building and/or land tax would still be payable by the seller despite the transfer of legal title. If the parties would like to see the new owner as the person liable to pay building/land tax, this can be arranged based on a proper reconciliation with the competent authority! 

Other frequent obligations regarding real estates 

If the foreign investor leases the acquired property out for a long term or utilizes it otherwise, the foreign lessor may also have to pay corporate income tax due to having a permanent establishment created for corporate income tax purposes. (You can read more about the special rules of operation as a permanent establishment for corporate income tax purposes here.) 

However, the depreciation considered for corporate income tax purposes may be applied against the revenue if there are other buildings, structures and tangible assets on the property acquired but no residual value can be considered for tax purposes (no depreciation can be applied if only land is purchased). The rate of depreciation is defined by the nature of the building but it is 2 percent in case of long-life buildings, while an accelerated, 5 percent depreciation rate can be applied for leased out buildings. 

If the sale and purchase does not take place between independent parties but between members of a group qualifying related parties, there is a high chance that the transaction will be subject to transfer pricing documentation liability, which is another potential issue to be reviewed. 

For example, if the valuation report prepared on the property determines the market price in one sum and the separate values of land and building cannot be determined from other sources either (e.g. these amounts are not included separately in the sale and purchase contract either),the value of the land within the total property value will have to be defined subsequently. This may require a new property valuation report or the application of another reliable economic method. It is beyond doubt that it is best to think about these valuation issues in advance, during preparation for the future transaction. 

Practical experience and thorough knowledge of the statutory background can help in the tax optimization of the envisaged transaction, in the development of contractual conditions in line with the parties' intentions as well as in the prevention of the above-presented risks and potential hurdles. 

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