As many other EU Member States, Hungary has also, as of 2019, implemented certain provisions set out in the ATAD.
As a consequence of the implementation of the ATAD, the general anti-avoidance rule (GAAR), the rules on controlled foreign companies (CFC) and the thin capitalization rules have undergone a major overhaul.
The general anti-abuse rule has been extended to cover arrangements which are contrary to the object or purpose of the applicable tax law and which are not substantiated by a genuine business or commercial reason. Costs and expenses incurred may not be deducted for tax purposes and tax benefits cannot be claimed with respect to such arrangements. Tax benefits may be claimed insofar as the underlying arrangement or series of arrangements is in line with the object or purpose of the applicable tax law and is also substantiated by a genuine business or commercial reason.
The rules on CFCs have been amended significantly. Under the new regime, a foreign entity may avoid qualifying as a CFC if it draws income only from genuine arrangements in the applicable tax year. An arrangement is regarded as non-genuine if its principal purpose is to obtain a tax advantage and the entity does not own the assets and undertake the risks related to earning its income without a domestic taxpayer performing substantial decision-making functions. CFC status can also be avoided if the foreign entity's pre-tax profits do not exceed HUF 244 million (whereof passive income does not exceed HUF 24 million) or its pre-tax profits do not exceed 10% of its operating costs, provided, in both cases, that additional conditions are met. In case of a double tax convention between Hungary and a non-EEA country that exempts income attributable to a permanent establishment located in the non-EEA country from taxation in Hungary, such permanent establishment will not qualify as a controlled foreign company.
The thin capitalization rules have also been put on a new footing. The bottom line of the provisions in force as of the date of this newsletter is that the interest paid on debts in excess of the debt to equity ratio of 3:1 cannot be deducted for tax purposes. This rule is not applicable to liabilities towards financial institutions, i.e., the amount of such liabilities should not be taken into consideration when calculating the amount of debt for thin capitalization purposes. However, the new rules follow a different logic when imposing the following limitation on the deductibility of interest expenses. The exceeding financing costs, i.e., the amount by which the taxpayer's financing expenses incurred for business purposes – including payments on liabilities towards financial institutions – exceed its taxable interest income may be deducted from the tax base up to the higher of the following amounts: 30% of the EBITDA or HUF 940 million (approximately EUR 3 million). The difference between 30% of the EBITDA and the exceeding financing costs which may not be deducted in the applicable tax year can be carried forward, i.e., the amount can be used to decrease the taxable amount of the excess financing costs in subsequent tax years. If the taxpayer is a member of a group preparing consolidated financial statements, then it would not be subjected to the interest barrier rules if it can demonstrate that the ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group (the taxpayer's ratio is also considered to be equal to that of the group if the ratio of the taxpayer's equity over its total assets is lower by up to 2%). Upon applying the interest barrier rules, a taxpayer – as a member of a group preparing consolidated financial statements – may deduct exceeding financing costs in the amount calculated as follows: the exceeding financing costs of the group towards third-parties is divided by the EBITDA of the group and this, in turn, is multiplied by the EBITDA of the taxpayer.
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.
