The Hungarian 1996 Corporation and Dividend Withholding Tax Act (the "CDWTA") introduced more rigid regulations in relation to the withholding tax on certain payments (including interest and royalties) and on dividends payable to non-Hungarian entities.
The essence of the CDWTA regulations was that, in the case of such payments being made abroad, the Hungarian tax had to first be withheld at applicable domestic rate and paid to the Tax Authority. If the provisions of a relevant double taxation treaty stipulated different rates than those set out in the CDWTA, then the tax which was paid (or the difference) could only be reclaimed at a later date.
The Tax Authority has, however, recently published guidelines on the matter. These guidelines are set out in the 21 January 1997 issue of the Tax Authority's official newsletter and state that:-
if certain conditions are met, it is possible to apply the regulations (rates) of the relevant double tax treaty directly, that is the 18% or 20% Hungarian tax may not need to be paid.
The above is a significant relaxation, and applies if, according to the relevant double taxation treaty, the income is not taxable in Hungary. In addition, if the appropriate administrative procedures are followed, it is also possible to withhold and pay the reduced rates stipulated in the treaty if the income is taxable up to a maximum level in Hungary.
Set out below is an unofficial English translation of the Tax Authority's guidelines
INFORMATION ON THE INCOME TAX LIABILITY OF FOREIGN RESIDENTS IN HUNGARY
The following information is provided on the basis of Section 1(5) of the Act on Taxation Procedures, with the aim of assisting the execution of Act LXXXI of 1996 on Corporation and Dividend Withholding Tax ("CDWTA"), Act CXVII of 1995 on Personal Income Tax ("PITA") and Act XCI of 1990 on Taxation Procedures ("TPA").
1. The performance of the tax liability of the foreign organisation
Pursuant to Sections 15 and 25 of the CDWTA and the provisions of Schedule 5 of the TPA, the "payer" must withhold Corporation Tax from the taxable income of the foreign organisation at the rate specified in Section 19 of the CDWTA. In order to fulfil the requirement, the payer must establish whether the foreign organisation's income is taxable on the basis of Section 1(4), Section 3(2) Section 4(22) and Section 15 of the CDWTA.
a) No tax need be withheld if the foreigner's income (interest, royalties, fees for cultural, artistic or sports activities, shows, exhibitions) is not taxable in Hungary.
On the basis of the above-mentioned Sections, the income is not taxable in Hungary if it cannot be taxed here pursuant to the provisions of an international treaty.
If the international treaty rules out the taxation of the income on the grounds that the entity earning the income is a foreign resident, on the basis of point n) of Section 45(4) of the TPA and point J) of Schedule 3 of the TPA, the payer must provide information to the Tax Authority on such payments by 31 January of the year following the tax year.
To prove its foreign residence status, pursuant to the provisions of Section 1(2) of the CDWTA, the foreigner must obtain a certificate issued by the tax authority of the country of its residence certifying its residence in that country.
b) As a general rule, Corporation Tax must be withheld by the payer in accordance with Section 25 of the CDWTA if the income due to the foreigner is taxable in Hungary. If the international treaty allows for withholding at a lower rate than the rate stipulated in the CDWTA the foreigner can then reclaim the difference on the basis of Point 8 of Schedule 5 of the TPA.
c) Taking into account the international treaties, the special possibility exists whereby the payer withholds the tax at the rate specified by the treaty, if, as stipulated by Sections 26 (2) and (3) of the TPA, the payer undertakes to pay the difference between the rate stipulated by the CDWTA and the treaty. The undertaking must be guaranteed by the foreign entity. The payer need only pay the tax which it actually withheld if the Tax Authority has granted, at the request of, and to, the payer, a late interest-free postponement of the payment for this difference. The late interest-free postponement of the payment is valid until it is withdrawn, but not later than until the end of the tax year, if the payer:
- submits its request prior to making the payment;
- declares that it will withhold tax from entities resident in countries designated by it in accordance with the rates stipulated by specific international treaties and attaches a copy of the agreement between the payer and the foreign entity in accordance with Sections 26(2) and (3) of the TPA;
- undertakes to submit, together with its annual tax returns, an official Hungarian translation of the certificate which was issued by the tax authority where the foreigner is resident, certifying its residency in that country. If is unable to submit such a certificate, it undertakes to pay the difference between the tax which was withheld and tax payable until the due date of the return.
If the payer submits the certificate which is necessary for the tax refund otherwise due to the foreigner by the due date of the tax return, the tax payment shall be considered to have been performed. The Tax Authority will grant the postponement if the payer registered at the Court of Registration is considered a reliable taxpayer, that is, it has no unpaid taxes and the last tax audit did not reveal any material deficiencies which were due to the taxpayer's mistake.
The payer shall be liable if, during an audit, the Tax Authority finds that the withholding was carried out at the wrong rate.
2. The dividend withholding tax payments of foreign residents receiving dividends.
Unless the provisions of Sections 27(4), (5) and (9) of the CDWTA are applicable to the dividend payable to a foreign resident, the payer must withhold dividend tax from such dividend at a rate of 20%, as such is stipulated by Section 27 of the CDWTA and Point 7 of Schedule 5 of the TPA. Where a treaty is in effect, allowing for a lower rate to be withheld in Hungary, the foreigner may reclaim the difference in accordance with Point 8 of Schedule 5 of the TPA. The procedure as described in Section 1 c) above is applicable if the conditions of that Section are met.
3. Payment of personal income tax by foreign resident individuals
Individuals who are foreign residents must pay personal income tax in accordance with Section 2 (5) of the PITA. The provisions of the treaty must be followed in respect of all matters (the existence of the liability to pay tax, the type of income, the tax rate) which are governed by the treaty, while the provisions of the Hungarian Act must be followed where the treaty contains no relevant provisions. Accordingly, if the income of the foreign resident individual is not taxable in Hungary, the payer or employer shall not withhold any tax. If the income is not taxable on the basis of the treaty provisions because the individual is a foreign resident, the individual must prove to this to the payer or the employer with a certificate of the type described in Section 4 below, while the payer must provide data in accordance with Section 1 a) above.
The payer, or employer, shall be liable if, during an audit, the Tax Authority finds that the withholding was carried out at the wrong rate.
4. Certifying the residence of the foreigner
Foreign residence must be certified by an official Hungarian translation of a document issued by the foreign tax authority not more than 30 days prior to the date of the first payment of the particular tax year. The payer must retain a copy of this document until the expiration of the statute of limitations and must submit a copy to its tax return. The foreigner must provide a new certificate to the payer during the course of the tax year if its/his or her residency has changed.
5. List of the countries where, according to the treaty on the avoidance of double taxation;
a) foreigners' interest earnings from Hungarian sources are not taxable in Hungary:
Albania Italy Austria Korean Republic Czech Republic Luxembourg Denmark Norway Finland Slovakia France Spain Germany Sweden Great Britain and Northern Ireland United States of America Holland States of the former Yugoslavia Israel
b) foreigners' earnings from royalties from Hungarian sources are not taxable in Hungary:
Albania Italy Austria Korean Republic Belgium Luxembourg Cyprus Norway Denmark Spain France Sweden Germany Switzerland Great Britain and Northern Ireland United States of America Holland Israel
ca) foreign individuals' artistic and sports activities performed in Hungary are not taxable in Hungary:
Austria Great Britain and Northern Ireland Belgium Norway Denmark United States of America
cb) This income is not taxable on the basis of the other treaties either if the artistic or sports activities are supported by public funds or the central budget of the contracting state(s) or if the activities are performed under the auspices of an inter-state treaty, a cultural treaty or a cultural exchange program.
Where no such treaty or budgetary support exists, cultural and sports activities are not taxable if the artists or the players do not receive any of the profits of or do not control, directly or indirectly, the foreign organisation which acts as their "agent".
Albania Korean Republic Bulgaria Luxembourg Canada Malta Cyprus Pakistan Finland Poland France Romania Germany Sweden Israel Switzerland Italy
Tax and Financial Supervisory Authority
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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