The introduction of global minimum corporate tax would be a major update to international tax rules. While the idea has been gaining momentum, some countries are against it. But how would this global minimum tax work? Where does Hungary stand? And most importantly: will your Hungarian business be affected?
Income from intangible sources has migrated to tax havens
Before explaining the concept of global minimum tax, we must understand why it is being proposed. For a while, multinational companies selling intangible goods have been setting up subsidiaries in tax havens. Since there is no transportation cost or customs duty associated with intangible goods such as software, the main expenses related to the sale of these are corporate tax and VAT (although development costs, license fees and royalties are also important). Shifting such activities to subsidiaries registered in tax havens allows multinational companies to make use of lower corporate tax, and although this practice is completely legal, it results in lost tax revenue at the registered seat of the parent company.
The global minimum tax would make corporate tax rates even
The global minimum tax is aimed at ending the migration of business to tax havens by bringing the corporate tax to the same level worldwide. The OECD, in cooperation with the G20, has been working on this goal for years. Just a few days ago, the G7 countries agreed to a 15% global minimum tax, which is expected to move the OECD and G20 talks towards this corporate tax rate. Please note that the worldwide harmonization of corporate tax would require common tax bases and common accounting principles. The IFRS Standards work similarly but are far from global implementation.
The proposed scheme would not require countries to set their corporate tax at the global minimum tax rate: instead, the difference between the corporate tax applicable to the subsidiary and the global minimum tax would need to be paid at the registered seat of the parent company. This would allow countries to set lower corporate tax rates for local businesses. However, they could also raise their local corporate tax to match the global minimum tax.
Example: currently, an American business pays the US corporate tax (21%) after its profits in the US, but the profits of its Hungarian subsidiary are subject to the Hungarian corporate tax (9%). If introduced at 15%, the global minimum tax would mean that the Hungarian subsidiary needs to pay 6% corporate tax in the US.
Hungarian corporate tax will remain unchanged at 9%
Hungary offers the lowest corporate tax rates in the EU, making company formation in Hungary an attractive option to third-country entrepreneurs who want to establish their business in the EU market. Therefore, introducing the global minimum tax would raise concerns for multinational companies in Hungary because their Hungarian subsidiaries could be subject to higher corporate tax. (Click here for more information about the taxation of different forms of business in Hungary.)
However, the government announced that it would reject the introduction of the global minimum tax and that it opposed tax increases in general. It is too early to tell how the introduction of the global minimum tax would affect Hungarian subsidiaries. However, even if approved by the government, the scheme would not apply to Hungarian businesses owned by private individuals, which would remain subject to the 9% Hungarian corporate tax.
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For now, Hungary’s rejection of the proposed global minimum tax means that the country will continue to offer a low corporate tax (currently at 9%), alongside other conditions favorable for company formation. Since there are still many decisions to make about the global minimum tax, we will revisit this topic once the situation becomes clearer.
If you would like to know more about taxes in Hungary, contact your English-speaking accountant at Helpers Finance. You can learn about our tax advisory services here. You can ask for a consultation by calling our office on +36 1 215 0712, by e-mailing info@helpersfinance.hu, or by filling in our contact form.
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