Should a foreign investor decide to establish a Hungarian subsidiary (either a holding or an SPV) for its Hungarian real estate businesses, Hungary has one of the easiest company formation processes within the EU. The Hungarian Government provides a quick electronic company registration process and via an electronic system remote company formation is also possible without actually traveling to Hungary. Besides, there are various forms of presence in form of which one may conduct business activity in Hungary, such as permanent establishment, branch, or subsidiary. In practice, it means that a company can start operating within a week from the decision of its establishment in the Real Estate sector as well.
In Hungary, the corporate income tax rate is 9%, which is the lowest within the EU. The effective tax rate however may be further reduced if applying certain tax allowances and tax credits, which makes Hungary one of the most favorable target countries from a corporate tax point of view. Hungary is quite unique as it does not levy withholding tax in B2B relations. It means that no Hungarian withholding tax applies on dividends, interest, or royalties paid to foreign corporate taxpayers (any withholding tax in B2C relations or in transactions carried out by foreign look-through entities are to be determined on a case-by-case basis).
The Hungarian tax regime is well harmonized with the international and EU tax rules. Not only the Hungarian VAT system is based on the EU VAT Directive, but Hungarian transfer pricing rules and several corporate taxation rules are also based on international regulations, e.g. the interest deductibility rules as well as the taxation of certain preferential transactions (preferential merger, transfer of assets and exchange of shares). Besides, Hungary has almost 100 effective double tax treaties as well as 20 effective social security conventions.
The calculated CIT obligation may be reduced by different tax credits (if applicable as per the state aid and tax regulations which must always be reviewed in detail). The so-called development tax credit may be applied up to 80% of the calculated corporate income tax obligation, while all the other tax credits may be applied up to 70% of the remaining corporate income tax obligation. The final corporate income tax payment obligation may further be decreased via corporate income tax offering. In case a company offers a part of its final corporate income tax amount, the further tax credit may be claimed up to an effective 2.16% of the corporate income tax offering.
The rental income of individuals is taxed as part of a taxpayer’s annual income. Rental income received by individuals upon the rent of a Hungarian real estate is subject to personal income tax.
Rental income is calculated as (i) 90% of the rental revenues (in this case costs do not have to be documented); or (ii) the actual difference between rental revenues and actually incurred qualifying costs (however, costs should be supported by sufficient documentation). In the latter case, particular rules may apply to the depreciation of fixed assets and costs of refurbishment and maintenance. Private individuals may exercise the above option in their personal income tax return, however, individuals pursuing the rental activity as private entrepreneurs cannot exercise the above option.
Rental income calculated as above will be part of the individual’s consolidated income and taxed together with other income types falling within the consolidated individual income tax base. The applicable tax rate is 15%.
Please note that if a company (qualifies as disburser (payroll agent) under relevant Hungarian legislation) rents a real estate property from a private individual, the lessee company is required to declare and withhold the individual’s tax liability related to its renting activity.
Special regime may apply to the taxation of rental income from short-term rental activities (e.g. Airbnb).
Rental income earned by companies is taxed as part of the business income and is subject to corporate income tax. Similarly, rental costs are deductible expenses for corporate income tax purposes, if incurred by the lessee in connection with its business activity.
In general, the costs and expenses related to the operation of the real estate property are deductible items for corporate income tax purposes. However, the depreciation recognized in accordance with Hungarian Act on Accounting is not a deductible cost, but the amount of depreciation of real estate calculated at the rates dictated by the Hungarian Act on Corporate Income Tax is deductible in the corporate income tax base. As per the Act on Corporate Income Tax, the CIT depreciation rates are the following regarding real estate (not exhaustive list):
Business income is subject to Hungarian corporate income tax at the rate of 9%.
Please note that related party transactions should be carried out at arm’s length prices, and annual TP documentation should be prepared on intra-group transactions (if the amount of the transaction exceeds the level of the documentation requirement).
Capital gains realised by individuals upon the sale of real estates are subject to personal income tax.
Real estate capital gains realized by individuals are taxed separately from consolidated income and are subject to a flat rate of 15%.
The difference between the sales price and the deductible, documented acquisition costs, including certain qualifying maintenance costs will be the basis of the individual’s personal income tax. The tax base should be reduced by a given percentage defined in the Personal Income Tax Act every year counting from the year of the acquisition. In case the real estate is sold after 5 years counting from the acquisition date, a personal income tax obligation does not arise.
Capital gains realized by companies upon the sale of real estate are taxed as business income which is subject to corporate income tax at the rate of 9%.
As regards the deductibility of costs and expenses, the rules are the same as for the activity of rental of real estate property.
In terms of real-estate-related transactions, it needs to be assessed whether the supplier is a taxable person carrying out an economic activity or whether they act as a non-taxable person. In addition, we can differentiate between the rental of real estate, sale of real estate, and the provision of accommodation.
Rental and sale of real estate can be carried out as a non-taxable person, and as a taxable person, as well. The latter case takes place if the sale or rental of real estate activity meets the conditions of economic activity from a VAT perspective. Economic activity is generally carried out frequently or in the long term, with a business perspective, and with the goal of receiving consideration. We note that in the case of the sale of real estate, a private individual can become a taxable person if they sell multiple real estates within a specific timeframe set by the Hungarian VAT Law.
Provision of accommodation is an economic activity and can only be carried out as a taxable person. (E.g.: if a private individual lets out their home on an ad-hoc basis, it is not likely that such short-term rental would result in the private individual becoming a taxable person. However, all circumstances need to be checked in each individual case.)
If the rental of real estate does not qualify as an economic activity, the supplier will act as a non-taxable person. The rental of real estate is exempt from VAT as per the general rule. If the supplier acts as a non-taxable person, no VAT needs to be charged and no invoice-issuing obligation arises.
If the rental of real estate qualifies as an economic activity, the supplier will act as a taxable person. The rental of real estate is exempt from VAT as per the general rule without the right of VAT deduction. However, the taxable person has the right - subject to the prior notification to the Hungarian Tax Authority, - to opt for taxation (with the right of VAT deduction). In that case, the rent of real estate will be subject to 27% Hungarian VAT to be charged by the supplier (this VAT can be deducted by the lessee as per the general VAT deductibility rules).
If the sale of real estate does not qualify as an economic activity (e.g.: it is a one-off sale),the supplier will act as a non-taxable person. The sale of real estate is exempt from VAT as per the general rule. If the supplier acts as a non-taxable person, no VAT needs to be charged and no invoice-issuing obligation arises.
If the sale of real estate qualifies as an economic activity, the supplier will act as a taxable person. The sale of real estate is exempt from VAT (except for newly built properties, and construction/building plots) as per the general rule without the right of VAT deduction. However, the taxable person has the right - subject to the prior notification to the Hungarian Tax Authority - to opt for taxation (with the right of VAT deduction). In that case, the sale of real estate will be subject to 27% Hungarian VAT to be charged by the supplier. A domestic reverse charge may apply if both the seller and customer are VAT registered in Hungary and none has a status where their tax payment obligation cannot be fulfilled). We note that in case of real-estates that qualify as “newly built”, 5% VAT may apply to the sale if specific additional conditions are fulfilled.
The provision of accommodation (generally short-term rental of holiday homes/flats, Airbnb services, or hotel accommodation) is an economic activity carried out by a taxable person. A 5% VAT rate is applicable for the transaction. Also, 4% tourism contribution is due in case of the provision of accommodation, however, payment was suspended due to COVID. From 1 April 2023, tourism contributions will be due again.
Transfer tax obligation arises on the alienation of real estate from one person (private individual or legal entity) to another. Rights connected to immovable properties may also be subject to transfer tax.
Transfer tax has to be paid upon the acquisition of Hungarian real estate, the tax has to be paid by the purchaser. In addition, transfer tax is also payable upon the direct or indirect acquisition of a qualifying interest (at least 75% of the shares) in a so-called ‘domestic real estate holding company’. A company qualifies as a ‘domestic real estate holding company’ if more than 75% of its total assets (excluding cash, claims, loans, and accruals) are real estate property located in Hungary at the time of the transaction.
As a general rule, the tax base is the market value of the real estate, no costs can be deducted from the market value. The general rate of the transfer tax is 4%, for the acquisition of real estate or shares of a domestic real estate holding company up to the value of 1 billion forints of the real estate, and 2% of the portion of the market value above 1 billion forints. The transfer tax in no case can exceed 200 million forints per real estate. A special reduced rate may apply to REITs.
Various exemptions may be available, e.g. in case the real estate is sold between relatives in the direct line or related parties, among spouses, or upon the termination of the marital community, but detailed conditions may apply for mergers as well as for preferential transactions, but detailed conditions may apply.
Besides the above, a special 90% transfer tax is payable by the seller in case of a profitable direct or indirect sale of real estate qualifying as “reclassified to the inland area” (in case such reclassification happened after 31 January 2020).
Municipalities have the right to levy annual local land tax and local building tax on Hungarian real estate. As a general rule, the owner of the real estate, as registered on the first day of the relevant calendar year, could be subject to local land tax or local building tax.
The maximum rate of the local land tax for FY2023 is 3% of the fair market value of the real estate, or 398 forints per square meter. The maximum rate of the local building tax is 3.6% of the fair market value of the real estate, or 2,191 forints per square meter for FY 2023. The applied method for the tax base calculation depends on the local municipalities. In certain cases, exemptions may apply.
Municipalities generally levy local business tax on companies’ business revenues derived from the real estate-related activity. The local business tax base is calculated from the annual net sales revenues of the company (including real estate-related revenues),which could be decreased with certain tax base adjustment items such as material cost, cost of goods sold, mediated services, subcontractor charges, R&D expenses with especially bears importance in case of construction companies. The local business tax is payable to the municipalities where the business activity is carried out or where the official seat or permanent establishment(s) are located, i.e. any permanent or temporary business activity performed at the area of jurisdiction of the given municipality falls under the local business tax obligation. If the business activity is linked to various municipalities (e.g. a company has real estate in the territory of various municipalities),the local business tax base should be divided between the various municipalities, in accordance with the allocation rules of the relevant laws. The maximum tax rate is 2% of the tax base, the actual rate applied is depending on the local municipalities.
Municipalities could also levy a tourist tax on the short-term rental activity. The maximum rate of the tourist tax is 4% of the accommodation fee or 300 forints per night. The applied method for the tax base calculation depends on the local municipalities. In certain cases, exemptions may apply.
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