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The Jurisdictions: Hungary
Hungary’s new position
in the Royalty Planning
Industry
By Dr Willem G. Kuiper, Partner,
Infintax, Hilversum, The Netherlands and
Dr Gabor Szabo, Managing Partner,
Dr Gabor B Szabo & Partners, Budapest, Hungary
lthough times are changing and incentives contained in Hungarian tax law is The US–Hungary tax treaty requires
A more pressure is coming on
Hungary to keep in line with
the mostly high-tax EU
member states, some interesting tax
planning opportunities still remain
a provision according to which 50% of the
pre-tax amount of the royalties received
may be deducted from the tax base, thus
reducing the effective corporate tax rate on
such royalties to 8%.
particular attention.This treaty provides the
possibility of using Hungary to channel US-
source royalties to third parties in other
countries without being hit by US anti-treaty
shopping rules, such as limitation on benefits.
which place Hungary firmly on the However, since 1st September 2006, an The current treaty between Hungary and
map of the international tax planning additional type of corporate tax has been the US dates back to 1974 and does not
industry. One of them is Hungary’s introduced in connection with the contain a limitation on benefits provision.
attractive royalty regime. elimination of the big deficit in the state Although the US initiated the renegotiation
budget.The new tax, called Solidarity Tax process recently, experts do not expect a
New royalty structure (ST), is based also on pre-tax profit, although new or amended treaty before 2010
In the past, the Netherlands royalty the tax base must be adjusted separately (actually no deadline has been set as yet).
regime had a significant role in tax planning from the base of “normal” CIT considering Other treaty partners worth mentioning
and, as a result, there were numerous Dutch the different modifying (increasing and are Japan (0% withholding tax on cultural
licensing (royalty) companies.They had a decreasing) items.The rate of ST is 4%. royalties), Korea (0% withholding tax on all
favourable system for obtaining advance Despite CIT, the provision for a 50% kind of royalties), Malaysia (which also
rulings on the tax treatment of international deduction on pre-tax royalties does not covers Labuan) and Singapore.
flows of interest and royalties. However, as apply to ST. So, the applicable new total
from 1st April 2001, the former Dutch corporate tax rate for a Hungarian royalty Transfer pricing rules – an
regime is no longer available. company is 12% on the profit. However this independent solution
While it is still possible to apply for is still attractive and competitive. The It is clear that the combination of an
advance tax rulings in the Netherlands, the company is permitted to have additional attractive royalty regime and extensive
new system is not attractive for purposes of business activities. No special conditions are treaty-network makes Hungary an
tax planning because of the conditions to be required to be fulfilled. Moreover, there is no interesting environment for tax planning.
met for obtaining a ruling including the withholding tax on royalty paid. Nevertheless, transfer pricing rules can
computation of an arm’s length price for In addition, the royalty (just like dividend create problems for inter-group royalty
royalties payable.Although Dutch tax and interest) income is exempt from the flows in Hungary. One of the few difficulties
practitioners are still very experienced in local business tax (2% of the net income), in current Hungarian tax practice is that it
setting-up tax effective royalty structures, which burdens any other kind of income. might prove difficult (although not
the conditions to obtain a ruling have Finally, royalties paid out by Hungarian impossible) and time-consuming to obtain an
become very time consuming and more licensees or sub-licensors are tax-deductible, advance tax ruling for transfer pricing.
stringent in general.Tax practitioners, just as the self-developed IP’s research and Although Hungarian transfer pricing
therefore, have been forced to look for development costs can be deducted from regulations meet EU standards, tax audit
other solutions. the corporate income tax base. practice (particularly in the field of
Many alternative structures were intangibles) is still behind that of the Dutch
complicated, artificial and/or expensive and Hungarian tax treaty network and some other EU members. However, it is
none were as effective and simple as the Hungary has a dense network of double only a question of time before Hungarian tax
former Dutch system of advance rulings. taxation treaties with 65 countries. Under auditors apply these rules with the same
Since Hungary has a very simple and many of these treaties, the withholding tax efficiency as such other jurisdictions.
straightforward system of inter-corporate on royalties is reduced to 0%, while under The proposed solution (and foreseeable
royalties, it has emerged as a viable some, the rate is reduced to 5 or 10%.This trend) is the independent licensing company.
alternative to the Netherlands’ structure. is only of relevance for royalties received by This vehicle can offer the perfect solution
Taxation of royalties in Hungary a Hungarian sub-licensor, as royalties paid for structuring cross-border flows of
Firstly, the Hungarian corporate income abroad by a Hungarian licensee are not royalties in a tax-effective manner by
tax (CIT) rate is among the lowest in subject to a withholding tax by virtue of developing a contractual basis between the
Europe at 16% of net profits. One of the Hungarian domestic law. owner of the intellectual property and the
OI 169 • September 2006 25
Hollywood goes to Hungary?
Hungary
licensing company on the one hand, and refund from the Hungarian supporter).
between the licensing company and the We should now take a quick glance at b) Films not produced by order (the co-
licensee on the other hand. In this way, the the new incentives introduced by the production model)
licensing company is only a contractual Hungarian Government in 2004 in the form This scheme applies to films made by a
partner to both the owner of the of the Act on Motion Pictures.This initiative Hungarian film production company
intellectual property and the licensee has succeeded in creating a boost for the alone or in co-production with a
without becoming an affiliated party. Hungarian film industry and has already Hungarian investor (investor). In this
Therefore, the problem, if any, of applying for attracted a number of foreign producers. model, the investor should retain rights
and obtaining a ruling from the Hungarian Consequently, the Act on Corporate relating to the film. He obtains a
tax authorities can be avoided. Likewise, the Income and Dividend Tax has being “Certificate of Investment” and, again, he
need for determining an arm’s length spread amended and with the use of two types of can only finance up to a maximum of
between the amount of the royalties incentive, production costs can be reduced 20% of the qualifying expenditure. As
received and the amount of the royalties by up to 20%.The method of support- well as in the first model, the investor, as
paid to the licensor can be avoided. mechanism will determine which kind of a corporate taxpayer, has a tax credit of
Naturally, the contracts to be concluded incentive will apply: three years for the full amount of the
by the licensing company with the owner of a) Films produced by order (the investment. Moreover, he can deduct his
the IP and the licensee will be to a large production model) tax base with 50% of the investment
extent tailor-made, so as to guarantee a This scheme applies to films made in certified.
correct expression of the parties’ intentions, Hungary with the participation of a While the EU Harmful Tax
•
as well as an optimal tax effectiveness of the commissioned Hungarian film production Competition watchdog, the Primarolo
structure as a whole. Indeed, such a tax company (production company) and a Group, remains watchful over member
planning method covers all forms of Hungarian corporate supporter states, Hungary is trying to strike a balance
royalties, including patent, trademark, cultural (supporter).The supporter does not between keeping Brussels happy and
and film royalty (copyright), payments for the hold interest in the production company maintaining an attractive tax planning
use of image rights, etc. and will not participate in the reserves.A environment. The balance to date is not so
Last but not least, the concept of the maximum 20% of the qualifying bad.
independent royalty-flow company is also expenditure can be financed by the willem.kuiper@infintax.com
cost effective and competitive to the “inter- supporter. He can also obtain a gszabo@szabopartners.hu
group” solution, because there is no “Certificate of Support” from a semi-
requirement for one or more dedicated governmental body.The supporter, as a “Staying competitive in the post-
royalty-flow companies to be established corporate taxpayer, has a tax credit of Offshore era - Hungary’s answer to the
within the group and there is no need to pay three years for the full amount of the challenge of the EU” Nov ‘05, Issue 161
the full management costs of such investment (a foreign producer, based on
companies. a contractual relation, can also receive a
26 offshoreinvestment.com
