Hungary: controversial new tax package

A radical tax package was adopted by Parliament on 16 November 2010 and will become law once officially promulgated.

The most controversial feature is the curtailing of the Constitutional Court’s powers to annul tax laws (following the adoption of retroactive and thus probably unconstitutional special taxes).

Businesses, especially in the high-profit service sectors, now face the risk that additional taxes will be levied retroactively and should consider mitigating this risk through measures such as changing their business model to cross-border provision of services.

Other key changes effective from 2011 include:

• abolishing the favourable corporate tax exemption on 75% of foreign-sourced interest income
• turning the bank levy into a combination of a tax on profits and a tax on balance sheet total (which may further complicate double taxation issues arising during 2011)
• increasing the top rate of the bank levy from 0.50 to 0.53%
• introducing 1.5%, 3% and 6.4% brackets to make the tax on insurance companies progressive
• slightly extending the tax base of the special tax on the retail sector
• abolishing the 30% withholding tax on interest, royalty and certain service fee payments to non-treaty countries
• implementing some of the changes introduced by the 2010 OECD Transfer Pricing Guidelines, in particular the introduction of the profit split and the transactional net margin methods as “preferred” methods;
• introducing a flat, 16% nominal personal income tax rate. Effective rates will vary between 16% and 20.32% in 2011, depending on the kind of income received. The flat-rate scheme will be accompanied by a generous tax incentive for families, depending on the number of children.