Holding Hungarian Real Estate

This section discusses the most important tax implications of the direct and indirect holding of real estate.

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Helga Kiss, tax director, RSM Hungary

Helga Kiss

Director, Tax services

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DIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the direct holding of real estate. Firstly, the impacts for resident individuals and non-resident individuals are discussed. Then, the impacts for resident companies and non-resident companies are discussed.

Resident individuals

Personal income tax

Income derived from the rental of real estate is subject to personal income tax. As a general rule, the income will be taxed at the rate of 15%.

Special tax regime applies to the income from short-term rental activities (e.g. Airbnb). Personal income tax at 9% would apply for business income of private entrepreneurs; small taxpayers' could opt for itemised lump sum tax ("KATA") – 50,000.-HUF/month – if the activity is carried out either as a private enterprise or a partnership under KATA taxation system; Personal income tax at the fixed amount of 38,400.-HUF/room/year can be chosen, if one rents out his flat as private person.

Deductibility of costs, interest and depreciation

Rental income is calculated as (i) 90% of the rental revenues (costs do not have to be documented); or (ii) the actual difference between rental revenues and actually incurred qualifying costs (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 the personal income tax return which is due until 20 May of the year following the subject calendar year.

Losses – carry back/forward

No loss-carry forward would be available for the rental income of individuals.

Non-resident individuals

Personal income tax

Non-resident individuals are treated in the same way as resident individuals, provided that the real estate is located in Hungary.

Resident companies

Corporate income tax

Business income such as rental income and capital gains are subject to corporate income tax. The applicable corporate income tax rate is 9%. All income gains and expenses of companies are considered on an accrual basis.

Deductibility of costs, interest and depreciation

As a main rule, depreciation costs, interest costs, maintenance and operating costs are deductible from rental income for corporate income tax purposes. 

In the case of buildings, generally an annual rate of 2% depreciation is acceptable for corporate income tax purposes. A real estate used for rental activities can be depreciated at an annual rate of 5% as a general rule. No depreciation is available to lands.

Interest deduction could be limited based on the thin capitalisation rules. According to these rules, only net financing costs not exceeding 30% of tax EBITDA or a nominal value of 3 million EUR / 939,810,000 forints will qualify as acknowledged expenses for corporate income tax purposes. 

Anti-tax avoidance directive 

The anti-avoidance directive (ATAD) is a directive published by the OECD and implemented by the European Union. Hungary has also implemented ATAD, which contains certain interest restrictions which may affect investors in real estate. Specialised advice is advisable.

Losses – carry back/forward

Rental losses of Hungarian corporations can be offset against other income and carried forward, upon certain conditions. Losses can reduce the corporate income tax base up to the 50% of the positive corporate income tax base in the relevant tax year, using the FIFO method (losses incurred in prior years should be used first). Limitations would apply depending on when the losses were incurred (e.g. losses accumulated before 2015 can be used till FY30; losses incurred in 2015 and subsequent years can only be carried forward for 5 years). In the case of a company acquisition, the carry-forward of losses at the acquiring entity is subject to restrictions (e.g. the legal successor should continue the previous entity’s principal activity in two subsequent years as a minimum and generate certain income from such activity).

Non-resident companies

Non-resident companies are treated in the same way as resident companies, as income generated from real estate located in Hungary is taxable in Hungary via the permanent establishment of the non-resident company. The non-resident company is, therefore, limited taxable in Hungary based on the income generated in Hungary.

INDIRECT HOLDING OF REAL ESTATE

This paragraph discusses the most important tax implications of the indirect (share) holding of real estate. First of all is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies. 

Resident individuals

Personal income tax

Individuals who hold shares in a Hungarian company mainly generate income in the form of dividends, that is subject to personal income tax in Hungary at the rate of 15%. Profits of the company are subject to corporate income tax and taxed at the rate of 9%.

Dividend withholding tax

Dividends paid to individuals by a Hungarian company are subject to dividend withholding tax at the rate of 15% (i.e. the personal income tax of the individual is withheld by the distributing Hungarian company). 

Deductibility of costs, interest payments and depreciation

As the distribution of dividends qualifies as capital income, no costs are deductible.

Non-resident individuals

Non-resident individuals are treated in the same way as resident individuals. However, for dividend tax allocation, the relevant tax treaty (if any) must be considered.

Resident companies

Corporate income tax

Dividends received by a Hungarian company from shareholdings in a Hungarian company holding real estate will be generally exempt from corporate income tax in Hungary. Capital gains realised from the sale of shares in a Hungarian company are taxed as business income and subject to corporate income tax at 9%. However, a participation exemption may apply to capital gains from the sale of shares if the acquisition had been reported within 75 days after a one year holding period.  

Deductibility of costs, interest payments and depreciation

As a main rule, depreciation costs, interest costs, maintenance and operating costs are deductible from rental income for corporate income tax purposes. 

In the case of buildings, generally an annual rate of 2% depreciation is acceptable for corporate income tax purposes. A real estate used for rental activities can be depreciated at an annual rate of 5% as a general rule. No depreciation is available to lands.

Interest deduction could be limited based on the thin capitalisation rules. According to these rules, only net financing costs not exceeding 30% of tax EBITDA or a nominal value of 3 million EUR / 939,810,000 forints will qualify as acknowledged expenses for corporate income tax purposes. 

Anti-tax avoidance directive 

The anti-avoidance directive (ATAD) is a directive published by the OECD and implemented by the European Union. Hungary has also implemented ATAD, which contains certain interest restrictions which may affect investors in real estate. Specialised advice is advisable.

Losses – carry back/forward

Losses of Hungarian corporations can be carried forward, upon certain conditions. Losses can reduce the corporate income tax base up to the 50% of the positive CIT base in the relevant tax year, using the FIFO method (losses incurred in prior years should be used first). Limitations would apply depending on when the losses were incurred (e.g. losses accumulated before 2015 can be used till FY30; losses incurred in 2015 and subsequent years can only be carried forward for 5 years). 

Fiscal unity

As of 2019, group taxation for corporate income tax purposes is available in Hungary. Business organisations qualifying as resident taxpayers, if linked on the basis of voting rights of at least 75%, and having the same rules of accounting, may form a tax group. In the case of a tax group, losses of a group member can be offset against profits of other group members. Group members will not be obliged to determine the arms-length price for corporate income tax purposes for transactions between group members, and to modify the tax base in case of a deviation therefrom, and to document intra-group transactions. 

Non-resident companies

Non-resident companies are treated in the same way as resident companies. Dividends received by a non-resident company from shares held in a Hungarian company are not subject to dividend-withholding tax. Capital gains derived by non-resident companies on the sale of shares in a Hungarian ‘real estate holding company’ may be subject to corporate income tax in Hungary. A Hungarian company qualifies as a ‘real estate holding company’ if (i) more than 75% of its total assets (at book value) on a consolidated and/or stand-alone basis are real estate units located in Hungary and (ii) at least one of the shareholders is resident in a state with which Hungary has not concluded a double tax treaty, or in a state where the double tax treaty allows the gains being taxed in Hungary. The tax base is the difference between the sales revenue and the acquisition costs including the expenses related to the shares during the shareholding period. The applicable corporate income tax rate is 9%. Additional administrative requirements would also apply.


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