Many foreign investors in Hungary own shares in other, non-Hungarian companies – which in these cases are referred to as the foreign corporations controlled by the investor. CFC laws in general, alongside double taxation treaties, control how and where income from foreign companies should be taxed.
CFC laws in Hungary
CFC laws, just like double taxation treaties, are in place in order to avoid taxing income twice and at the same time prevent tax evasion by moving income to offshore companies. The Hungarian Corporate Tax Act also defines controlled foreign companies. If a Hungarian company owns a CFC, some restrictions may apply to it.
A Hungarian company is considered as owning a CFC if:
- it owns at least 50% of the shares of that company, or it is eligible for at least 50% of dividend from that company; AND
- the corporate tax paid by the foreign company is less than half of what it would have paid if it had been a Hungarian company; WHILE
- it does not matter whether there is a double taxation treaty in place between Hungary and the foreign country.
The time spent by the owner in Hungary is NOT included in the definition of CFC.
Let’s see an example!
If a Hungarian company has at least 50% (direct or indirect) ownership in a foreign company established in the British Virgin Islands, where corporate tax is only 2% (which is less than half of the current Hungarian corporate tax rate, 9%), then that BVI company is considered a CFC according to the Hungarian Corporate Tax Act.
CFC laws applied
If your Hungarian company has shares in a CFC,
- if it receives dividend income from the CFC, some part of it will increase the Hungarian company’s corporate tax base.
Just like in the case of double taxation treaties, CFC laws greatly depend on the country of the CFC and the share ratio of the Hungarian owner – and of course, on whether the company is an EU or non-EU based CFC.
As a result, it is worth consulting an international tax advisor to make sure all taxes are paid where and when they are due.