Commercial real estate law and rules in Hungary

Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.

There are certain restrictions preventing foreign nationals and foreign companies from owning real estate. Foreigners may acquire ownership title to real property which does not qualify as arable land with the permission of the head of the regional administrative office (except in the case of inheritance when such permission is not required). The head or regional office may reject an application if the acquisition is against the public interest or the interest of the local municipality. In case the applicant wishes to settle for pursuing business activity, the municipal interest should not be considered. The application may also be denied, if the country of the applicant does not have a treaty on this subject with Hungary or does not treat application for land acquisitions by Hungarians the same way.

No licence is required if a foreign individual or company establishes a Hungarian company, which it then uses to acquire property other than arable land. However not even Hungarian companies may acquire title to arable land.

Non-EU Members foreign legal and natural persons may not acquire ownership title to arable land. Hungarian citizens and citizens of a Member State may only acquire arable land if they are registered as farmers in the land registry (which is subject to having certain education in agriculture or pursuing income producing farming activity for more than three years) and the acquisition is approved by the authorities and the local farmers committee. The latter has a nearly discretionary right to approve or refuse a proposed acquisition.

Legal ownership of property in Hungary is classed as freehold. Hungarian law does not acknowledge any other form of ownership in rem. All other rights will only incorporate parts of a freehold title and/or be personal rights. Some rights can be registered at the Land Registry, whilst others, such as leases, cannot be registered. 

Leaseholds are typically for a definite period of time, usually for a short term. Indefinite leaseholds are usually concluded for municipality owned property and for residential properties. The lease agreement must always be in written form.

A person who has had possession of real estate continuously without title for 15 years acquires ownership (and freehold title) through adverse possession. If an adverse possessor fails to register his title in the Land Registry, he will not be entitled to claim acquisition of ownership against any person who acquires a freehold title to the property for payment of a consideration, relying upon the Land Registry.

Under the Civil Code, the types of interests in real estate which are registrable at the Land Registry include the following:

• Ownership right (similar to the common law concept of freehold) – an absolute right which is transferable and which includes the right to possess the property, to use it and collect the proceeds from the property
• Beneficial usage right (or usufruct right) – a limited right for a definite term to occupy and use a property owned by another and to collect the proceeds from the property. In respect of legal entities the maximum term of a usufruct right is 50 years. This right cannot be transferred by the beneficiary although another person may be permitted by the beneficiary to exercise this right
• Right of use – a limited right to use a property owned by another which may be established for a definite period of time. It is similar to beneficiary usage but with certain greater restrictions
• Land use right – the beneficiary of a land use right may construct a building on third party land and become the owner of the superstructure only. Under the new Civil Code the separation of the title to the land the superstructure is now possible for already existing building as well. In this case the current owner of the building has land use rights for the land beneath the building. The owner of the building is entitled to use the land beneath the building and collect the proceeds whilst the building stands and at the same time is obliged to bear the burdens of the land. If the ownership of the building is transferred, the new owner has the same right. This right cannot be established upon public roads, squares and parks, which can be a significant issue for the owners of underground car parks constructed on public land
• Easement – a limited right to use another person’s real property by the possessor of another real property for a specific purpose including a right of passage or building a cellar etc. The regulations of the establishment of beneficial usage right apply to the grant of an easement and if based on a contract the easement should therefore be registered at the Land Registry

Property in Hungary is classified as either freehold or leasehold. Freehold is the best class of title and is as near to absolute ownership as is possible at law.

Freehold is a real right (a right in rem). Technically, leasehold is a personal right (right in personam) and does not have the attributes of freehold.

Property interests which are currently sold in Hungary include:

• Freehold interests – title of ownership (the best type of ownership)
• Leases – these are usually concluded for relatively short terms (three–five years) and are personal rights. Therefore it occurs only relatively rarely that the lease right is sold with the consent of the landlord (if the property is owned by the municipality, the relevant act and the municipality’s decree regulates the conditions upon which the municipality is to consent to the transfer of the lease right; therefore such transfers occur more often )
• Options and pre-emption rights – rights to buy or first refusal (these rights cannot be transferred but where the beneficiary is a Hungarian legal entity, it may appoint a third party to exercise these rights)

The concept of root of title is not relevant in Hungarian law. Title to a property may, as a general rule, only be validly obtained from the current owner. All immovable properties (i.e. real estate such as land and buildings) and their respective owners are registered at the relevant Land Registry.

It should be noted that even if there is some defect in the chain of transfers of ownership in respect of a property (for example, if one of the previous sellers is discovered not to have been the owner of the property), such a defect may be cured by a lapse of time. Subject to certain conditions, a person who possesses a property continuously as his own for fifteen years becomes the owner of the property. If the property was conveyed with a contract that fails to comply with the formal requirements and thereby cannot be registered at the Land Registry, the acquirer who entered into possession and paid the consideration will acquire title with adverse possession after five years Therefore, if the defect occurred more than fifteen years ago, the present owner may claim that irrespective of the previous defective transfer, he has obtained title to the property by continuous adverse possession.

If a buyer obtains a property in good faith for value trusting the correctness of the Land Registry after three years from the date of registration of the seller’s title, the buyer’s title may not be deleted from the Land Registry even if it becomes apparent that the seller’s title had been registered on the basis of an invalid document.

Ownership extends to buildings on or beneath the land and the airspace above it up to the limit it could be utilised by the owner, but does not include “treasures of the earth” or natural resources. The owner may separate the title of the land and the building constructed on it or may grant a land use right to a third party to construct a building on the land. In this case the building and the title to the building will be registered in the Land Registry separately and the current building owner has land use right for the land beneath the building. The terms of contract establishing the land use right are binding on every future owner of the land and the building.

The main employment issues which may arise in connection with the acquisition of real estate include the transfer of undertakings and redundancies, as well as variations to employment contracts due to a change to the conditions of employment.

Employees are entitled to special protection if an undertaking or business (or an independent unit of the material and non-material assets of an employer) is transferred from one party to another. If the property being transferred can be classified as a “core asset” to the business of the company, then the sale of that property may trigger business transfer rules. Business transfer rules may therefore be triggered as a result of the sale of an office building, mall or other type of real estate which has its own management and security or maintenance staff.

The main effects of the business transfer rules regarding the protection of employees are as follows:

• The rights and obligations arising from an employment relationship automatically transfer from the transferor (or legal predecessor) to the transferee (or legal successor). The transferor and the transferee have joint and several liability in respect of those claims which are enforced within one year after the transfer of undertakings and which are in connection with debts and damages incurred prior to the date of the transfer
• If an employee is dismissed (by redundancy based ordinary termination) by the transferee within one year of the date of the transfer, the transferor is liable as a surety for the employee‘s severance payments, if it has a majority control in the transferee
• An employee‘s seniority is deemed to be continuous
• The fact of the transfer of undertakings is not, by itself, an acceptable reason for the ordinary termination of an employment relationship
• The representatives of the works council or the delegation of the employees must be informed in advance regarding the details of the transfer and consulted on other planned measures that may affect the employees covered by the transfer
• The employee may terminate his employment agreement if his working conditions significantly worsen. In this case, the employee is entitled to a severance payment

A business transfer does not necessitate the amendment of the affected employees‘ employment agreements. The employee‘s employment is deemed to be continuous with the same conditions. It is advisable to inform the employees in writing about the succession and specifying at least the following matters:

• The person vested with employer’s rights after the succession
• Clarification as to whether the place of work has changed and general information on work schedules and other modified elements, if any, which can be determined by the employer in its own discretion
• The allowances of the employees
• Confirmation that other conditions of the employment relationship remain unchanged

The business transfer is not, by itself, an acceptable reason for dismissing employees. In reality, this does not offer much protection to employees. Commentaries on the Labour Code suggest that dismissals associated with business transfers may be justified if they are for ‘operational reasons’. An operational reason is one that is related to an economic, technical or organisational issue with regard to an employer.

Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by brokers on behalf of the seller and the buyer or by the parties themselves. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and are not legally binding. They form the basis of the documents to be drafted by the lawyers. Due care needs to be used in signing such heads of terms or memoranda of understanding to avoid them being construed as a preliminary agreement enforceable as a binding commitment to enter into the final agreement.

Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale and purchase agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted. The accompanying finance documents are also drafted at this time.

The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations (see section 6).

Once the sale agreement is in an agreed form, the parties will sign the agreement and the buyer’s lawyer will countersign it and it will then be regarded as legally completed.

If any of the parties is a foreign registered company, generally the other party will require a company extract from the foreign party confirming that the company is properly incorporated, has power to sell and has carried out appropriate authorisation procedures.

Completion may take place at the same time as signing, depending on the acquisition timetable. Where the purchase is made with borrowed finance, a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.

Following completion, the buyer’s lawyers need to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of stamp duty which is assessed on the price paid for the property.

An agreement for the sale and purchase of land must be in writing, must contain or clearly refer to all main terms and conditions and must be in a form which both parties have signed and the buyer’s lawyer has countersigned.

It is common for the sale and purchase agreement to provide for a non-refundable deposit (in Hungarian “foglaló”) of around 10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The seller’s or buyer’s lawyers usually hold the deposit as an escrow agent. In this case the parties enter into a separate escrow agreement in accordance with the terms and conditions set out in the sale and purchase agreement.

Because the buyer has the opportunity of conducting a full title investigation or due diligence before signing the agreement, the buyer is usually prohibited from subsequently making any objection to any matter of title that was disclosed in the due diligence documents.

Where timing is crucial to the agreement, there may be a provision expressly stating the date after which the parties will be in breach and the agreement will be terminated. This means that any breach of the time limits in the agreement will be deemed to be a repudiatory breach, subject to a claim for damages. Normally, time is not of the essence and may only be made so by one party to the agreement serving notice to make time of the essence.

Where there are matters of title affecting the property, such as the pending deletion of a prohibition on transfer and encumbrance, the buyer may require reciprocal obligations from the seller and an indemnity in respect of any liability the seller may still have following completion of the transaction.

Provisions relating to value added tax and transfer duty will usually be included to regulate the parties’ obligations.

Contracts for the sale of property subject to occupational interests, such as leases, will include clauses to cover ongoing management matters, and provide for the apportionment of occupational income and outgoings on completion of the transfer of ownership in the property. It is notable that under the new Civil Code the securities provided by tenants under the lease agreements terminate and should be returned to the tenant upon the transfer of the real estate unless this is excluded in the lease agreement. Another rule of the new Civil Code provides that the seller remains jointly and severally liable with the buyer to the tenants for the buyer complying with its obligations as landlord under the surviving lease agreements.

If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor, and persons such as the architect, in order to safeguard the buyer against defective design or workmanship.

Where there are conditions to be met for the completion of the contract, such as building permits, communal services, transformation of a plot, or the deletion of a restriction against sale and purchase, the parties set out liabilities and timelines for the fulfilment of such conditions.

The Civil Code provides that the seller warrants that the property is free of claims, encumbrances and lawsuits and this is often repeated expressly in the sale and purchase agreement. If a third person has such a right over the property that restrains the buyer from the acquisition of freehold title, the buyer can rescind the agreement and claim damages. If the seller acted in good faith he only has to pay damages arising from concluding the agreement. The buyer cannot claim damages or rescind the sale and purchase agreement, if it has known or should have known that it cannot acquire free title.

The seller also warrants that the property complies with all attributes set out in the sale and purchase agreement and legal regulations at the time of contract. If the purchaser was aware of a defect in the property at the time of contract, the seller is not liable for such a defect. These warranty rights may be exercised by the purchaser within five years, however the lapse of time is suspended until the buyer is hindered in exercising its warranty right (e.g. it could not recognise the defect) and it may still exercise it warranty rights after the hindrance ceased for 12 months, even if the 5-year limitation period has elapsed.

If a pre-emption right (which must be in writing) has been granted then the owner of the property must ordinarily disclose any offer for the property to the owner of the pre-emption right. The pre-emption right can be established by contract or by law. If the owner of the pre-emption right accepts the offer, the agreement for sale becomes effective. If a general period of acceptance passes without any notification of acceptance or rejection from the owner of the pre-emption right, the owner of the property is free to sell the property under the same or better terms. If the pre-emption right is registered at the Land Registry, it takes effect against everybody who acquires any right to the property following the registration. Transfer of a pre-emption right is possible.

Rights of re-purchase can be included in the original sale and purchase agreement. The seller can exercise this right by declaring an intention to re-purchase. The parties may agree on the re-purchase price in the contract, failing that the re-purchase price is the market price prevailing at the time of exercising such right.

If the owner of real property grants a purchase option, then the beneficiary may purchase the property by his unilateral declaration. An option agreement is valid only if in writing and provided that it also specifies the object of the transaction and the selling price. Under the new Civil Code now selling option can also be established.

The prudent buyer will carry out a survey of the building and, if required, soil and geological investigations, plant and machinery tests and environmental investigations. The buyer will also require appropriate information on the following related matters: charges, occupational tenants, lease agreements and licences, insurance, building contracts, disputes and claims, easements and/or covenants.

The buyer’s lawyers will consider the entries on the property sheets, the marginal notes and, where relevant, historic title documents. Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure that they are not contrary to the buyer’s intentions for the property.

The buyer’s lawyers will commence their own due diligence, which will include carrying out various searches to check the position on municipal and zoning consents, environmental matters, utilities serving the property, easements, boundaries of the property, financial encumbrances and valid site licences. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Court of Registration to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.

The buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s lawyers to obtain information regarding a large number of practical matters, which may affect the property and ask any relevant questions in relation to the title to the property. The seller is under the general obligation to inform the buyer about the material features of the property being sold (including but not limited to all rights and encumbrances) and to deliver all relevant documents. In most cases the parties agree that the properties are sold as is, with no expressed or implied guarantee of quality or condition. A seller must not knowingly or negligently mislead a buyer and the seller’s replies to the due diligence questionnaire may be actionable if wrong or misleading.

The Land Registries record the most important data and rights and encumbrances required to be registered relating to each property in Hungary. It is possible to get access to the Land Registry data for all properties in Hungary by an online system to which most of the law firms and public notaries have access.

Local Land Registries operate in every town being the centre of the relevant district (in Hungarian “járás”) (in Budapest there are two district Land Registries) and they cover the properties in the relevant district. County Land Registries operate in each of the nineteen counties of Hungary, and the Metropolitan Land Registry operates in Budapest. The local district registries deal with property issues at first instance and the county Land Registries deal with property matters at second instance.

It is in the interest of a property buyer to lodge the transfer documents with the relevant Land Registry as soon as possible after signature (but in any event within the thirty day mandatory deadline for filing). The filing with the relevant Land Registry results in a so-called marginal note being put on the register of the property within twenty-four hours of filing. This marginal note – the indication of a pending application by its reference file number – establishes a priority date for the application. Subsequent submissions, as a rule, cannot by-pass a previous submission (clearly indicated by a lower figure for its reference file number).

The property-related rights, and the holders of such, which may be recorded in real estate registers are:

• Ownership rights, and, in respect of state-owned or municipality-owned real estate, asset management rights
• Permanent rights of use for members of housing co-operatives
• Land use on the basis of agreement or court decision
• Usufruct and the right of use
• Easement rights
• Permanent geodetic markings, land survey pilot areas, rights of use for the placement of power supply equipment, cable rights, water and mining easement rights, and easement rights and utilisation rights in the public interest as prescribed by law
• Rights of first refusal and rights of re-purchase and option
• Rights of support and life annuity
• Mortgages (independent liens)
• Rights of execution

There is no requirement for notarisation of title in Hungary. Contracts for the disposal and acquisition of interests in real estate are signed by or on behalf of the parties and countersigned by a lawyer. If any of the contracting parties is a citizen of a foreign country and wishes to sign the contract outside Hungary, authentication of the document is required. Hungarian diplomatic or consular agents certify the authenticity of the signature, the capacity in which the person signing the document has acted and, where appropriate, the identity of the seal or stamp which is affixed to the document. Rules of authentication also apply to powers of attorney executed outside Hungary.

In accordance with the Hague Convention (5 October 1961), each signatory state is to exempt from authentication documents to which the Convention applies and which have to be produced (i.e. used) in its territory. The contracting states designate, by reference to their official function, the authorities who are authorised to issue the certificate, called an “Apostille”. The Apostille certificate can be issued at the request of the person who has signed the document or that of the bearer.

There are no planning permissions under Hungarian law, but land and property is regulated by a zoning map and local building code, which are binding decrees of the local government. The national zoning requirements and building rules are regulated by national laws and governmental decrees.

If a developer plans to develop an area for a different use to the one regulated by the relevant decrees, then it can initiate negotiations with the local government for changing the status of the area. The results of the negotiations are then recorded in an urban development agreement. In such agreements, it is common for the developer to grant some benefits to the local government, such as the construction of roads or other necessary infrastructure in consideration of which the municipality undertakes to initiate the procedure for the change of the zoning regulation. However, the local municipality cannot enter into a binding obligation to change the content of the zoning as it would limit the legislative power of the general assembly of the municipality, which would be in breach of the constitution.

Regarding construction works, some require no permit and others require a permit of the building authority. Permits may be preliminary building permits or building permits. A preliminary building permit can be obtained in the first phase of the so called ‘combined building permitting procedure’ in order to clarify certain requirements in connection with cultural heritage or ecological protection, for example, but it does not give a right to actually construct.

The deadline for the issue of building permit is fifteen days for the obtaining of the last of the statements of the specific authorities involved in the procedure.

Developments that are likely to cause significant environmental impact require an environmental permit to be issued on the basis of an environmental impact study. The environmental permit is to be obtained before the application for a building permit or alternatively it is possible to apply for the environmental permit, the building permit and several other permits required to the construction and the start up at the same time of the facility in the combined establishing procedure (in Hungarian “összevont telepítési eljárás”).

Generally, a building permit will be required for the construction of a newly-built property. The refurbishment of an existing building requires notification if the roof or the load bearing structure of the building needs to be changed, whilst in other cases refurbishment usually has no administrative requirements. Stricter rules normally apply when the proposed work relates to historically or architecturally important (listed) buildings.

As for occupancy, the procedure is also divided: in relation to simpler works a notification is sufficient, whilst for others a permit is required. The deadline for the issue of an occupancy permit is later of (i) 15 days from the date of submission or (ii) ten days from the date of obtaining of the last of the statements of the specific authorities involved in the procedure.

The system is a one-stop shop system under which the client (constructor, developer, builder, etc.) is in contact with only one authority (the building authority) which handles all aspects of the procedure including consultation with other specialised authorities.

Only persons who are interested in protecting a property or those who conclude contracts on behalf of an interested person are entitled to conclude property insurance contracts.

Generally it is the building, and not the land, which is insured for the reinstatement cost.

The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the building in the event of damage or destruction (by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage). The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, where available, terrorism.

Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties.

Occupiers of a property (including tenants) usually have separate policies to cover the contents of the property belonging to them, especially if the property includes costly plant and machinery and, in some cases, certain parts of the property for which the occupier is contractually responsible. In case of leases the landlords being the owners of the property have property insurance in respect of the whole building.

Insurance policies are usually not transferred on sale but the buyer concludes a completely new insurance contract. Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement and is generally linked to the transfer of possession.

Real estate may be contaminated as a result of current and/or former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any contamination it causes. Nevertheless, Hungarian law always presumes that the current owner and the user of the property are jointly liable for pollution unless the owner names the responsible polluter. If the company causing environmental damage ceases to exist, its executive officers and voting members are jointly and severally liable without limitation until evidenced that they did not take part in the decision making. If someone took over such responsibility for pollution, that person will be responsible. The same is true if the sale and purchase agreement provides that the property is purchased “as is” and there is no other warranty or valid exclusion of liability for environmental pollution.

During pre-purchase due diligence, the buyer’s lawyers will check the Land Registry as to whether permanent environmental damage is registered and will also check with the competent environmental authority for any ongoing environmental cases. On the basis of Hungarian law, any person acquiring the property affected by contamination is required to clean up the property.

If development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential contamination. If the planned development is of a type considered potentially detrimental to the environment, the application for building permit may need to be supported by an assessment of the development’s likely future environmental impact.

The presence of protected species may impede development by increasing costs, particularly through delay.

Those who have control of places of work have a duty to assess the risk of asbestos being present in the fabric of the building and to manage the human health risks posed by any asbestos found.

Acquisition due diligence may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims, or specialist historic liabilities environment insurance to cover any of these risks.

There is no legal requirement for an accurate appraisal of a property’s value or condition to be undertaken. However, extreme inaccuracies are covered by the Civil Code which prohibits contracts in which (i) at the time of signature, there is an “unreasonable and extensive difference” between the value of the thing sold and the consideration due, without either party having the intention of giving a gift or (ii) one contracting party has stipulated an unreasonably disproportionate advantage by exploiting the other party’s situation.

In the case of (i) above, the injured party is allowed to challenge the contract within one year of its signature.

In the case of (ii) above, the contract is deemed to constitute usury and is potentially null and void. Unless otherwise provided by law, anybody is entitled to apply for the contract to be annulled without a time limit and no special procedure is required.

Finally, the Hungarian tax authority has a right to challenge and reassess the value of a property, if the value set out in a sale and purchase agreement (on the basis of which tax and stamp duty is calculated) appears unreasonably high or low.

Both companies and individuals may only act as appraisers if they have a clean criminal record and have a certificate of professional expertise (for individuals) or they have at least one member/employee who has such a certificate (for companies). An individual may only carry out appraisals if they are entered in the Register of Estate Agents. The entry is automatic if the above two conditions are met.

Currently, three methods of appraisal are used to determine the value and condition of the property, being the cost method, the comparison method and the income method:

• Cost Method – the cost required to replace or reproduce the property at the time of the appraisal, following the deduction of the amortisation costs plus the market value of the plot. This method is used only if there is no other alternative to appraise the property
• Comparison Method – the figure established from data of other properties sold in the recent past. The comparison must always be performed with the property being appraised. This is the most commonly used method
• Income Method – the main focus of this approach is the income-producing capability of the property. It provides an objective estimation of the price that a cautious investor would pay for the property on the basis of the net income producing capability. This method applies to a property which has a measurable income or a relatively high value

The State Supervising Authority of Financial Organisations (PSZÁF) also publishes certain appraisal methods which Hungarian banks in particular may request appraisers to follow.

In Hungary, there are various taxes associated with real estate, including personal income tax (PIT), corporate income tax (CIT), value added tax (VAT), transfer duty, wealth tax and certain local taxes. Whether a tax liability arises depends on a number of factors including the legal standing of the purchaser, the location of the real estate and the nature of the real estate. The most important aspects of these taxes are briefly summarised below.

CIT is normally paid by companies and various other entities on any gains derived from the sale of real estate, at a rate of 10% up to HUF 500m and 19% for the balance. As there is no specific capital gains tax in Hungary, gains from the sale of real estate are included in the general tax base of a company and are taxed as any other income. Foreign corporate shareholders deriving capital gains from a “real estate company” are subject to CIT, provided they are resident in a country for which the relevant double tax treaty allows Hungary to tax the capital gains (or with which Hungary has no treaty). So far, Hungary has concluded double tax treaties with 65 countries, of which approximately one third (e.g. those with Ireland, France) contain the so-called real estate clause allowing the taxation of capital gains from a “real estate company”. These are companies, the assets of which are predominantly comprised of real estate in Hungary. Note that the details of these rules contain a lot of pitfalls.

CIT is not only levied on domestic entities but also on permanent establishments of foreign entities. The utilisation of real estate located in Hungary does in itself constitute a permanent establishment. Furthermore, the possibility to tax foreign companies on any such income is usually also provided for in Hungary’s many treaties on the avoidance of double taxation. Consequently, any income derived from the utilisation of real estate located in Hungary is taxed at the normal rate of CIT (i.e. 19%) regardless of the seller’s residence.

If an individual transfers the ownership of his real estate then he has to pay PIT at a rate of 16% on the gains from the transfer of the property. When calculating the amount of such gains, certain costs and expenses may be deducted from the actual purchase price, most importantly all costs and expenses incurred in relation to the initial acquisition of the real estate. If the transfer of ownership takes place after the sixth year from acquisition, the amount of tax payable is gradually reduced so that no PIT is payable after the fifteenth year from acquisition. In the case of the sale of residential property, no PIT is payable after the fifth year from the date of purchase. Income derived by individuals from the utilisation or the sale of real estate located in Hungary is generally taxable in Hungary, regardless of the residence and/or the nationality of the seller. As for the CIT rules already described, foreign individuals may be obliged to pay PIT on the capital gains derived from the sale of a Hungarian “real estate company”, depending on the provisions of the relevant treaty.

Generally, the sale of property is VAT exempt. However, VAT is payable at 27% on the sale of building plots and of so-called “new buildings”. (Buildings qualify as “new” if their operating permit has not yet been issued or if less than two years have passed since the issue of such permit.) In the case of the sale or letting of all other immovable property it is possible to opt for taxation. Opting for taxation has the benefit that input VAT incurred in respect of otherwise exempt activities could be deductible.

In principle, the reverse charge mechanism is to be used whenever, in connection with the sale of immovable property, the option to tax has been exercised. Similarly, certain services connected to immovable property are listed as giving rise to domestic reverse charge.

Stamp duty (i.e. transfer tax) is payable by the buyer on the purchase of a property. A 4% stamp duty rate is applied up to a market value of HUF 1 billion, and 2% for the excess, with an overall cap of HUF 200m per property (i.e. if the market value of the property exceeds HUF 9bn, the excess value will not be subject to any further transfer tax), and certain exceptions and lower beneficial rates are available (for example, on the purchase of residential property, etc.).

The direct or indirect acquisition of at least 75% of the shares of a company – whether Hungarian or foreign resident – owning real estate located in Hungary will also be subject to transfer tax along the above lines (i.e. the transfer tax is still calculated on a per-property basis).

A two percent preferential rate of transfer duty is applicable to real estate traders, if the newly acquired property is being resold within two years. The two year re-sale period may, subject to certain conditions, be extended to four years upon request.

Local authorities are authorised to impose taxes on the owners of buildings and land located in their territories. Some municipalities have utilised this opportunity whilst others have not. The current regulation only provides a framework of rules for these property-related taxes, with the details to be governed by separate decrees of the local municipalities.

Pursuant to the local taxes act, building tax and land tax are based either on the area of the property or on the value of the property, depending on the decision of the local municipality. Currently, building tax is subject to a maximum of HUF 1,100/sqm or 3.6% of the “calculated value” of the property (such calculated value being equal to 50% of the market value of the property). The land tax is subject to a maximum of HUF 313/sqm or 3% of the calculated value of the property. The maximum amounts of the above taxes (if determined in amounts and not as percentage) are subject to a yearly increase based on past inflation statistics. The amount of the local taxes paid in relation to residential property in the relevant tax year is creditable against the wealth tax, if payable.

The value of the property sold would typically be regarded as part of the net sales revenue, therefore it forms part of local business tax base. Such tax base (i.e. the net sales revenue) may be decreased by the cost of materials, cost of goods sold and the value of intermediated services (including, to a limited extent, the value of subcontractor’s work). The rate of the local business tax is a maximum of 2% but is determined by each municipality.

The above mentioned local taxes are imposed by the local municipalities and are normally borne by the owner of the property in respect of which the taxes are levied.