1

Éva Erdős1, Anna Halustyik,

2 Ildikó Szabó

3

Hungary Report

“Corporate Tax Residence and Mobility”

1 Associate professor, University of Miskolc Faculty of Law Head of Department of Financial Law.

2 Associate professor, Pázmány Péter Catholic University Faculty of Law and Political Science, Head of

Department of Financial Law. 3 PhD student, Pázmány Péter Catholic University Faculty of Law and Political Science, Department of Financial

Law.

2

Content

1. Residence in the Hungarian constitutional, private and tax law (domestic context) . 3

1.1. The freedom of enterprise in the Fundamental Law .................................................... 3

1.2. The residence of a company under private law ........................................................... 3

1.2.1. General rules relating to legal persons ................................................................ 3

1.2.1.1. Foundation of legal persons .......................................................................... 3

1.2.1.2. Instrument of Constitution ............................................................................ 4

1.2.1.3. Registration of Legal Persons ....................................................................... 5

1.2.1.4. Nullity of the Establishment of Legal Persons.............................................. 6

1.2.2. Special types of legal persons .............................................................................. 6

1.2.2.1. General partnerships ..................................................................................... 6

1.2.2.2. Limited partnerships ..................................................................................... 6

1.2.2.3. Private limited-liability companies ............................................................... 7

1.2.2.4. Limited companies ........................................................................................ 8

1.2.2.5. Associations .................................................................................................. 8

1.3. The residence of a company under tax law ................................................................. 9

1.3.1. General provisions ............................................................................................... 9

1.3.2. Special taxes ....................................................................................................... 10

1.3.2.1. Corporate tax ............................................................................................... 10

1.3.2.2. Value Added Tax ........................................................................................ 12

1.3.2.3. Personal Income Tax ................................................................................... 13

2. (Tax) residence in an international (cross-border) context ........................................ 16

2.1. Residence in (tax) treaties .......................................................................................... 16

2.1.1. Resident .............................................................................................................. 16

2.1.2. Permanent establishment ................................................................................... 17

2.1.3. Income from immovable property ...................................................................... 18

2.1.4. Business profits .................................................................................................. 19

2.2. Full tax liability ......................................................................................................... 20

2.3. Tax implications of the cross-border change of residence ........................................ 20

2.4. Policy issues .............................................................................................................. 20

2.5. Personal position ........................................................................................................ 21

Bibliography ........................................................................................................................... 22

3

1. Residence in the Hungarian constitutional, private and tax law

(domestic context)

Residence is relevant is private and tax law, but the Hungarian regulation doesn’t apply the

residence in contract law, labour law and insolvency law. The main criteria is

in contract law, what the partners decide,

in labour law, where is the workplace,

in the insolvency law, where is the subject of the insolvency.

1.1. The freedom of enterprise in the Fundamental Law

According to the Fundamental Law of Hungary4 of Article M, the economy of Hungary shall

be based upon work as the very foundation of productivity, and upon the freedom of

enterprise,5 and Hungary shall ensure the conditions of fair economic competition.

According to the Fundamental Law of Hungary of Article XII, everyone shall have the right

to freely choose his or her job or profession, and the freedom to conduct a business. Everyone

shall have a duty to contribute to the enrichment of the community through his or her work,

performed according to his or her abilities and faculties. Hungary shall endeavour to ensure

the possibility of employment to everyone who is able and willing to work.

1.2. The residence of a company under private law

1.2.1. General rules relating to legal persons

1.2.1.1. Foundation of legal persons

Persons shall have freedom of establishment of a legal person by means of a contract, charter

document or articles of association (hereinafter referred to collectively as instrument of

constitution), and shall themselves decide on the legal persons organizational structure and

operational arrangements.

4 Kovács, Balázs Áron (2014): Hungary. In: Habdank-Kolaczkowska, Sylvana – Csaky, Zselyke (eds.): Nations

in Transit 2014: Democratization from Central Europe to Eurasia. Freedom House. London. p. 267-294. 5 Oreskovic, Raoul (2012): Economic Transition in the Czech Republic and Hungary – twenty years later.

January 2012. New York University Seminar. http://econ.as.nyu.edu/docs/IO/28042/EconomicTransition.pdf

[Downloaded: 14.11.2016]

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Legal persons6 shall enter into existence upon registration by the court based on the

instrument of constitution made out for the type of legal person in question. The court of

registry may refuse to register a legal person on grounds specified by the relevant legislation.

Legal persons are established for a definite or indefinite period. If the instrument of

constitution does not provide for the term of the legal person, the legal person enters into

existence for an indefinite duration.

According to these regulations, the main principle of the Hungarian regulation is freedom of

establishment of legal persons.

1.2.1.2. Instrument of Constitution

The instrument of constitution of a legal person shall expressly indicate the founder’s intent to

set up the legal person and shall contain:

a) the legal person’s name;

b) the legal persons registered office;

c) the legal persons purpose or main activity;

d) the names of the founders of the legal person, including their home address or

registered office;

e) the capital contributions prescribed, the value of such contributions, as well as how

and when such assets are to be made available; and

f) the legal persons chief executive officer.

The name of a legal person must differ from the names of other previously registered legal

persons to an extent that they should not be confused. Where the registration of several legal

persons is requested under names which are identical or may be confused, the name in

question may be used by the applicant having submitted the first application. The name of a

legal person may not convey an unrealistic impression. The name of the legal person shall

contain a designation relating to the type or form of the legal person. The type of legal person,

and if the name contains an indication of the legal persons activity as well, the legal persons

activity shall be fixed in Hungarian, in conformance with the rules of Hungarian grammar.7

The registered office of a legal person shall also function as its statutory seat, where the legal

person shall have facilities for receiving legal correspondence addressed to the legal person,

6 Orts, Eric W. (1993): The Complexity And Legitimacy Of Corporate Law. Washington and Lee Law Review.

Volume 50.Issue 4 Article 11. 9-1-1993. 7 Pusztahelyi Réka (2013) : The new Hungarian Civil Code and the International law regulation in the viewpoint

of the suspension of prescription. European Integration Studies, Volume 10, Number 1 (2013), pp. 71–81.

http://www.matarka.hu/koz/ISSN_1588-6735/vol_10_no_1_2013_eng/ISSN_1588-

6735_vol_10_no1_2013_eng_071-081.pdf [Downloaded: 14.11.2016]

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and where the legal person is to provide access to documents specified by the relevant

legislation.

Legal persons8 may engage in the pursuit of any activity that is not expressly prohibited or

restricted by law.

Founders and members of legal persons are required to provide capital contribution to the

legal person at the time of foundation and also in cases where membership rights are

otherwise acquired. Capital contributions made available to legal persons are not recoverable,

and equivalent compensation may not be demanded. If the founders and members of legal

persons are not required to provide capital contribution, liability for the legal person’s debts

shall fall upon its members, or in the case of non-membership legal persons, upon the person

exercising founder’s rights. If the guarantee obligation falls upon several persons, their

liability shall be joint and several.

The capital contribution required from members and founders may be provided to the legal

person in the form of cash or in the form of consideration other than in cash. The founder or

member may provide asset contribution by transferring ownership rights of tangible or

intangible assets to the legal person. If, at the time of transfer, the value of asset contribution

does not reach the value indicated in the instrument of constitution, the legal person may

demand payment of the difference from the person having provided the asset contribution

within five years from the date of transfer.

1.2.1.3. Registration of Legal Persons

An application for the registration of a newly established legal person shall be submitted by

the person appointed to represent the legal person.9 The representative shall be held liable

towards the founders for damages resulting from his failure to submit the application in due

time, also if the notification submitted is incomplete or deficient, in accordance with the

provisions on liability for damages for loss caused by non-performance of an obligation.

The basic principles for the registration of legal persons are the follows:

All entries made to the register of rights, facts or data must be evidenced by a

document, court or administrative decision specified by law.

The register shall be construed as an official public register; the rights, facts and data

(hereinafter referred to as data of record) it contains shall be presumed to exist and to

8 Vékás Lajos (2010): The codification of private law in Hungary in historical perspective.

http://www.ajk.elte.hu/file/annales_2010_04_Vekas.pdf [Downloaded: 14.11.2016] 9 Gárdos, Péter (2007) : Recodification of the Hungarian Civil Law. European Review of Private Law, 5/2007.

page 702-722. http://www.gfmt.hu/upload/5522141684c0cff9b922aeGP-Recodification-of-Private-Law.pdf

[Downloaded: 14.11.2016]

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be authentic. Under no circumstances shall the lack of knowledge of any data of

record constitute an excuse. In respect of parties acting in good faith, a legal person

may not be excused on the grounds that certain data it has reported, and thus

registered, was untrue. Unless proven to the contrary, it shall be presumed that a party

acquiring certain rights for consideration relying upon the register was acting in good

faith.

The general public shall have unlimited access to the register, and notes may be made

and certified true copies or extracts may be requested thereof.

Where any obligation of publication is prescribed for legal persons in this Act, it shall be

satisfied by way of publication in the Company Gazette, unless this Act provides otherwise.

1.2.1.4. Nullity of the Establishment of Legal Persons

The provisions on the nullity of contracts shall apply to the nullity of the instruments of

constitution of legal persons insofar as the resolution on the registration of the legal person

becomes final and enforceable.

After the registration of a legal person10

by binding decision, nullity of the instruments of

constitution of the legal person may not be cited as grounds for removal from the registry.

Where any provision of the instrument of constitution is found unlawful, the means for

ensuring lawful operations may be accessed.

1.2.2. Special types of legal persons

1.2.2.1. General partnerships

By virtue of the memorandum of association for the establishment of a general partnership,

the members of the partnership agree to make available to the partnership the capital

contribution necessary for its activities, and to undertake joint and several liabilities for the

partnerships obligations not covered by the assets of the partnership.11

1.2.2.2. Limited partnerships

By virtue of the memorandum of association for the establishment of a limited partnership,

the members of the partnership agree to make available to the partnership the capital

contribution necessary for its activities, and at least one of the partners (hereinafter referred to

as general partner) undertake joint and several liability together with the other general

10

Vékás Lajos (2010): The codification of private law in Hungary in historical perspective.

http://www.ajk.elte.hu/file/annales_2010_04_Vekas.pdf [Downloaded: 14.11.2016] 11

Krannich, Jess M. (2005) : The Corporate "Person": A New Analytical Approach to a Flawed Method of

Constitutional Interpretation. Loyola University Chicago Law Journal. Volume 37. Issue 1 Fall 2005.

http://lawecommons.luc.edu/cgi/viewcontent.cgi?article=1200&context=luclj [Downloaded: 14.11.2016]

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partners for the partnerships obligations not covered by the assets of the partnership, while at

least one other partner (hereinafter referred to as limited partner) is not liable for the

obligations of the partnership, unless this Act provides otherwise.

1.2.2.3. Private limited-liability companies

Private limited-liability companies are business associations founded with an initial capital

consisting of capital contributions of a predetermined amount,12

in the case of which the

liability of members to the company extends only to the provision of their initial

contributions, and to other contributions set out in the memorandum of association. Unless

otherwise provided for in this Act, members shall not bear liability for the company’s

obligations.13

Members may not be solicited by public invitation.

The capital contribution of members is provided in the form of core deposits. The capital

contributions of members may differ in terms of value, however, the amount of each

contribution may not be less than one hundred thousand forints. Each member shall have one

core deposit. Where several persons have agreed to provide a core deposit collectively, their

liability for providing such core deposit shall be joint and several. The core deposits together

comprise the initial capital, which may not be less than three million forints.

Where according to the memorandum of association a member is required to provide less than

half of their respective cash contribution before the application for registration is submitted,

or if the memorandum of association provides for a time limit of over one year from the time

of registration of the company for making available the part of the cash contribution that was

not paid before the application for registration is submitted, the company shall not be allowed

to pay any dividend insofar as the unpaid profit calculated relative to the members core

deposits according to the provisions on the payment of dividends reaches the initial capital

together with the cash contributions which the members have already paid up. Members shall

bear liability for the company’s debts up to the unpaid part of their cash contribution.

If the value of asset contributions at the time of foundation reaches or exceeds half of the

initial capital, it shall be made available to the company in its entirety before the time of

submission of the application for registration. If the asset contribution was not made available

to the company in its entirety at the time of foundation, the remaining asset contribution shall

be provided by the time specified in the memorandum of association. Where the

12

Gindis, David (2009): From fictions and aggregates to real entities in the theory of the firm. Journal of

Institutional Economics, Volume 5, Issue 1 April 2009, pp. 25-46. 13

Gárdos, Péter (2007): Recodification of the Hungarian Civil Law. European Review of Private Law, 5/2007.

page 702-722. http://www.gfmt.hu/upload/5522141684c0cff9b922aeGP-Recodification-of-Private-Law.pdf

[Downloaded: 14.11.2016]

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memorandum of association provides for a time limit of more than three years from the time

of registration, the part exceeding the three-year period shall be null and void.

1.2.2.4. Limited companies

Limited companies14

are business associations founded with a share capital consisting of

shares of a pre-determined number and nominal value, where the obligation of shareholders to

the limited company extends to the provision of funds covering the nominal value or the

accounting par value of shares. Unless otherwise provided for in this Act, shareholders shall

not be held liable for the limited company’s obligations.

Types of limited companies

Any limited company whose shares are listed on a stock exchange shall be recognized

as a public limited company.

Any limited company whose shares are not listed on any stock exchange shall be

recognized as a private limited company.

1.2.2.5. Associations

Associations are legal persons with registered members, created for the purposes defined in

their statutes in order to achieve their common objectives on a continuous basis. Associations

may not be formed with the objective of performing economic activities. Associations are

authorized to perform economic activities only if they are directly related to the achievement

of the association’s goals. Associations shall use their assets in accordance with their

objective, they shall not be allowed to distribute their assets among their members, and may

not pay dividends to their members. Legal personality may be conferred by the statutes upon a

department of the association.15

An association shall be considered established upon the adoption of its statutes, for which the

unanimous declaration of intent of at least ten people is required.

The members of an association16

shall be entitled to partake in the association’s activities.

Association members shall have equal rights and obligations, except where the statutes

provide for membership of special legal status. Members shall exercise their membership

14

Vékás Lajos (2010): The codification of private law in Hungary in historical perspective.

http://www.ajk.elte.hu/file/annales_2010_04_Vekas.pdf [Downloaded: 14.11.2016] 15

Pusztahelyi Réka (2013): The new Hungarian Civil Code and the International law regulation in the viewpoint

of the suspension of prescription. European Integration Studies, Volume 10, Number 1 (2013), pp. 71–81.

http://www.matarka.hu/koz/ISSN_1588-6735/vol_10_no_1_2013_eng/ISSN_1588-

6735_vol_10_no1_2013_eng_071-081.pdf [Downloaded: 14.11.2016] 16

Vékás Lajos (2010): The codification of private law in Hungary in historical perspective.

http://www.ajk.elte.hu/file/annales_2010_04_Vekas.pdf [Downloaded: 14.11.2016]

9

rights in person. Members may exercise their membership rights by way of proxy if so

permitted by the statutes. Membership rights are non-tradable, and cannot be inherited. The

members, apart from the payment of membership dues, shall not be responsible for the

liabilities of the association with their own assets.

Members of the association shall fulfil the obligations prescribed for members in the statutes.

Members of the association shall not jeopardize the objectives of the association and the

activities of the association.

Membership in the association shall commence at the time of foundation upon the registration

of the association, after the application for admission are accepted by the general meeting.

The personal data of members are not considered public information.

Membership shall terminate:

a) upon the member’s withdrawal;

b) if membership is cancelled by the association;

c) upon the member’s exclusion;

d) upon death or dissolution of the member without succession.

Members shall be able to terminate their membership at any time, by means of written notice

addressed to the association’s representative, without giving any reason.

1.3. The residence of a company under tax law

1.3.1. General provisions

The resident taxpayer, who

a) legal persons registered or having business premises Hungary or otherwise engaged in

economic (production, service, manufacturing, business) operations in Hungary;

b) private individuals having a permanent residence or place of abode, or residing in

Hungary on any other grounds;

c) private individuals, legal persons and other organizations holding assets or engaged in

any gainful activity in Hungary producing any income (profit), and

d) persons participating in administrative or court proceedings.17

These provisions shall apply to any taxable person whose registered office or place of

business, or permanent residence or place of abode is situated outside the Community, and

who is engaged in supplying telecommunications services, radio and audiovisual media

services, and electronically supplied services (hereinafter referred to as services to be supplied

17

National Tax and Customs Administration (2016): Taxpayer registration.

https://en.nav.gov.hu/taxation/registration/general_info.html [Downloaded: 14.11.2016]

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at a distance), as defined in the Act on Value Added Tax, to a non-taxable person whose

registered office or place of business, or permanent residence or place of abode is situated in a

Member State of the Community, provided that this taxable person has notified the state tax

and customs authority accordingly by way of electronic means.

All rights in tax-related matters shall be exercised within their meaning and intent. In the

application of tax laws, contracts and other transactions contrived with the intent to evade the

provisions of tax laws shall not be construed as exercised within their specific intent.

In the case of relationships affected by international treaties promulgated by an act or

government decree, where in consequence of differences in the interpretation of the facts on

hand or the provisions of the relevant international agreement between the States affected,

having regard to incomes from such relationships, neither of those States considers such

income taxable in its territory, Hungary shall not exempt such income from taxation. (GAAR

provision)

The tax authority shall establish the tax taking into consideration all circumstances, in

particular, the tax liability prevailing when rights are observed within their meaning and intent

or, if the tax base cannot be established in this fashion, by estimation.

The tax payer may be fined for late performance of compulsory notification (registration,

reporting changes).18

1.3.2. Special taxes

1.3.2.1. Corporate tax

The following resident persons shall be deemed resident taxpayers:

a) business associations (including nonprofit business associations, regulated real estate

investment pre-companies, regulated real estate investment companies and regulated

real estate investment special purpose companies), groupings and European public

limited-liability companies (including European holding companies), and European

cooperative societies;

b) cooperative societies;

c) public companies, trusts, other state-controlled economic organizations, special

purpose entities, and subsidiaries;

18

Erdős Éva, Halustyik Anna, Szabó Ildikó (2016): Surcharges and Penalties in Tax Law, Hungarian National

Report. In: Roman Seer, Anna Lena Wilms (eds): EATLP Annual Congress Milan: EATLP International Tax

Series. Konferencia helye, ideje: Milan, Olaszország, 2015.05.28-2015.05.30. Amsterdam: IBFD, 2016. pp.

407-425.

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d) law offices, court bailiffs offices, patent agencies, notarys offices, and forest

management associations;

e) Employee Stock Ownership Plans (hereinafter referred to as ESOP);

f) water management associations;

g) foundations, public foundations, associations, public bodies (including any

organizational units of such organizations vested with legal personality in the bylaws

or charter document), as well as ecclesiastical legal entities, housing cooperatives, and

voluntary mutual insurance funds;

h) institutions of higher learning (including the institutions they have established), and

student hostels;

i) European groupings of territorial cooperation;

j) sole proprietorships;

k) the European Research Infrastructure Consortium (ERIC).19

Any non-resident person whose principal place of business management is in Hungary shall

be treated as resident taxpayer. A trust fund managed under a fiduciary asset management

contract shall be treated as resident taxpayer. Foreign nationals shall be deemed taxpayers, as

well as non-resident entities whose head office is located abroad:

a) if they carry out business operations at their branches in Hungary, provided that they

are not considered resident taxpayers due to the location of their head office

(hereinafter referred to as non-resident entrepreneurs);

b) if they obtain any income through the transfer or withdrawal of participating interest in

a company with real estate holdings (hereinafter referred to as member of a company

with real estate holdings).

Organizations which are Exempt from Corporate Tax20

1. the Hungarian Central Bank;

2. economic operators created for the statutory employment of prisoners under the

supervision of the minister in charge of penal administration;

3. public-benefit organizations established exclusively for the sole purpose of the

employment of prisoners, and public-benefit non-profit business associations

carrying on their operations;

4. the Reserve Management Public-Benefit Organization, and non-profit business

associations carrying on their operations;

19

Halustyik Anna (2014): Financial Law III. Pázmány Press, Budapest. 20

National Tax and Customs Administration (2016): Taxpayer registration.

https://en.nav.gov.hu/taxation/registration/general_info.html [Downloaded: 14.11.2016]

12

5. the Transportation, Communications and Water Reserve Management Public-Benefit

Organization, and non-profit business associations carrying on their operations;

6. the Hungarian National Asset Management Zrt.;

7. public media service provider as specified by law;

8. parties subject to liquidation proceedings, as of the initial date of liquidation, parties

undergoing involuntary de-registration, as of the initial date of the involuntary de-

registration procedure;

9. political parties;

10. the Hungarian News Agency;

11. limited companies engaged exclusively in providing surety insurance services under

the conditions laid down in another act and in other legislation adopted under the

authorization of such act;

12. legal persons taxed under the simplified entrepreneurial taxation system during the

tax year;

13. institutions of higher learning (including the institutions they have established)

operating in the form of budgetary agencies, and student hostels;

14. the National Asset Management Company;

15. persons eligible for the fixed-rate tax of low tax-bracket enterprises and taxpayers

taxed under the small business tax scheme;

16. the National Deposit Insurance Fund, the Resolution Fund provided for in the Act on

the Development of the Institutional Framework Intended to Enhance the Security of

Members of the Financial Intermediary System, the Investor Protection Fund and the

Indemnification Fund provided for in Act CCXIV of 2015 on Indemnification

Measures Introduced for the Purpose of Enhancing the Stability of the Capital

Markets;

17. national home building societies.

1.3.2.2. Value Added Tax

Taxable person shall mean any person or organization having the capacity to perform legal

acts who (that), in its own name, carries out in any place any economic activity, whatever the

purpose or results of that activity.21

Matters relating to the capacity of the person or

organization affected to perform legal acts are governed by national law,22

however, where a

person or organization is lacking legal capacity according to the relevant national law, while

21

IBFD (2005): Hungary.

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/ir_dir_hu_en.pdf [Downloaded: 14.11.2016] 22

Halustyik Anna (2014): Financial Law III. Pázmány Press, Budapest.

13

they are recognized as having the capacity to perform legal acts under Hungarian law, the

Hungarian law shall apply.

In the event where economic activity is performed pertaining directly to the exploitation of a

jointly owned movable tangible property or immovable property for consideration, the group

of owners shall be treated as the taxable person. The group of owners shall exercise the

obligations and rights stemming from their taxable status through their appointed

representative. If no representative has been appointed, the owner holding the largest share

shall be considered the representative, or the owner designated by the tax authority if all

owners hold equal shares.

1.3.2.3. Personal Income Tax

Resident private individual shall mean:

a) any citizen of Hungary (with the exception of dual citizens without a permanent or

habitual residence - that fits the definition set out in the Act on Keeping Records on

the Personal Data and Address of Citizens - in Hungary);23

b) any natural person who exercises - in accordance with the Act on Admission and

Residence of Persons with the Right of Free Movement and Residence - his/her right

of free movement and the right of residence for a period of longer than three months in

the territory of Hungary in the calendar year in question for at least 183 days,

including the day of entry and the day of exit;

c) who falls under the scope of the Act on the Admission and Residence of Third-

Country Nationals and has permanent residence status, or is a stateless person;

furthermore

d) any natural person:

da) whose only permanent residence is in Hungary;

db) whose centre of vital interests is in Hungary if there is no permanent residence in

Hungary or if Hungary is not the only country where they have a permanent

residence;

dc) whose habitual residence is in the domestic territory if there is no permanent

residence in Hungary or if Hungary is not the only country where they have a

permanent residence, and if their centre of vital interests is unknown;

where centre of vital interests means the country to which the private individual is primarily

tied by bonds of family and business relations.24

23

National Tax and Customs Administration (2016): Taxpayer registration.

https://en.nav.gov.hu/taxation/registration/general_info.html [Downloaded: 14.11.2016]

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Non-resident private individual shall mean any natural person other than a resident private

individual, and any person who has been granted permanent resident status under the

Admission and Right of Residence of Third-Country Nationals, provided that the private

individual in question spends less than 183 days in the territory of Hungary in an twelve-

month period, including the day of entry and the day of exit.

The main criteria is the place of gainful activity' shall mean

a) in respect of income from self-employment activities, the state in which the private

individual is a resident; if, however, the private individual performs such self-

employment activities via his place of business (permanent establishment), it is the

state where such place of business (permanent establishment) is located;

b) in respect of income earned through the operation of means of water, air or road

transport, the state where the operator is established or the state where the means of

transport are registered, the provisions of Paragraph a) notwithstanding;

c) in respect of income earned in connection with real estate, including ownership,

utilization, management, and the exercise of the right of disposition over the real estate

(in particular, the transfer of title or leasing or renting out the property), the state

where the real estate is located, the provisions of Paragraph a) notwithstanding;

d) in respect of income from activities other than self-employment, the State where the

activities are normally performed; if the place where the activities are normally

performed cannot be determined, including, in particular, if the place where the

activities are performed can be identified by means of several different addresses or

the denomination of a major geographical area:

da) if the private individual performs the gainful activity under an employment

relationship with a domestic place of business (permanent establishment),

branch or commercial representation of the employer (principal), the place of

gainful activity shall be Hungary;

db) in connection with any income calculated in proportion of the activities

performed in Hungary, the place of gainful activity shall be Hungary;

dc) in connection with income from services provided (also) outside of Hungary

by means of transport used for reward on international routes, the place of

gainful activity shall be the state where the activity is taxable by virtue of

international agreement or reciprocity, in other cases it is the state in which

the private individual is a resident;

24

IBFD (2005): Hungary.

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/ir_dir_hu_en.pdf [Downloaded: 14.11.2016]

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e) in respect of income from employment in the government sector (government service,

public service, State service or civil service relationship, judges service relationship,

judicial and public prosecutors service relationship, professional service relationship

of professional staff members of the law enforcement agencies provided for in Act on

the Service Relation of the Professional Staff Members of Law Enforcement Bodies

and Organizations and any income earned by way of an equivalent relationship under

foreign law, the state where the employer (principal) is established, the provisions of

Subparagraph ad) notwithstanding;

f) in respect of income earned by the executive officers and supervisory board members

of legal persons and other organizations, the state where the legal person or other

organization is established; 'executive officer' shall mean a natural person vested with

the power to represent a legal person or other organization (i.e. member-director,

managing director, company director);

g) in respect of income obtained through performing and other artistic activities, sports

activities, exhibitions and fairs, the state where such activities are carried out;

h) in respect of income (royalties) obtained in connection with a protected intellectual

property (for example, patents, industrial designs, trademarks, know-how, copyright),

the state in which the person liable to pay the royalty is established; if, however, the

royalty is payable via a domestic place of business (permanent establishment), branch

or commercial representation of the above-mentioned person and if the right of the

private individual to which the royalty pertains is in fact tied to his domestic place of

business, the place of gainful activity shall be Hungary;

i) in respect of interest income and income from securities lending, the state in which the

person liable to pay the interest or the borrowing fees is established; if, however, the

interest or fee is payable via a domestic place of business (permanent establishment),

branch or commercial representation of the above-mentioned person and if the right of

the private individual to which the interest or fee pertains is in fact tied to his domestic

place of business, the place of gainful activity shall be Hungary;

j) in respect of dividend income, the state in which the person liable to pay the dividend

fees is established; if, however, the security (right) on the basis of which the dividend

is paid is in fact tied to the domestic place of business of the recipient private

individual, the place of gainful activity shall be Hungary;

k) in respect of income withdrawn from the business account, the state in which the

business is established; if, however, the security (right) on the basis of which the

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income is received is in fact tied to the domestic place of business of the recipient

private individual, the place of gainful activity shall be Hungary;

l) in respect of income obtained by gaming, the state in which the gaming operator is

established; if, however, the gaming operation is conducted, with or without

authorization, via a place of business (permanent establishment), branch or

commercial representation, it is the state in which the place of business (permanent

establishment), branch or commercial representation is located;

m) in connection with any income earned by way of the transfer or withdrawal of

participating interest held in a company falling under the scope of the Act on

Corporate Tax and Dividend Tax, with real estate holdings, for consideration,

including the conveyance of such participating interest by way of lending

arrangements, the place of gainful activity shall be Hungary;

n) the place of gainful activity shall be the state in which the private individual is a

resident.

2. (Tax) residence in an international (cross-border) context

2.1. Residence in (tax) treaties

The main criteria, which used in Hungary, are the resident, the permanent establishment, the

income from immovable property and business profit.

2.1.1. Resident

For the purposes of this Convention, the term resident of a Contracting State means any

person who, under the laws of that State, is liable to tax therein by reason of his domicile,

residence, place of management, place of incorporation or any other criterion of a similar

nature, and also includes that State and any administrative subdivision or local authority

thereof. This term, however, does not include any person who is liable to tax in that State in

respect only of income from sources in that State or capital situated therein.

An individual is a resident of both Contracting States, then his status shall be determined as

follows:

a) he shall be deemed to be a resident only of the State in which he has a permanent

home available to him; if he has a permanent home available to him in both

States, he shall be deemed to be a resident only of the State with which his

personal and economic relations are closer (centre of vital interests);

17

b) if the State in which he has his centre of vital interests cannot be determined, or if

he has not a permanent home available to him in either State, he shall be deemed

to be a resident only of the State in which he has an habitual abode;

c) if he has an habitual abode in both States or in neither of them, he shall be deemed

to be a resident only of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authorities of

the Contracting States shall settle the question by mutual agreement.

A person other than an individual is a resident of both Contracting States, then it shall be

deemed to be a resident only of the State in which its place of effective management is

situated.

2.1.2. Permanent establishment

For the purposes of this Convention, the term permanent establishment25

means a fixed place

of business through which the business of an enterprise26

is wholly or partly carried on.

The term permanent establishment includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a factory;

e) a workshop, and

f) a mine, an oil or gas well, a quarry or any other place of exploration, exploitation

and extraction of natural resources.

A building site, a construction, assembly or installation project constitutes a permanent

establishment only if it lasts more than twelve months.

The term permanent establishment shall be deemed not to include:

a) the use of facilities solely for the purpose of storage, display or delivery of goods

or merchandise belonging to the enterprise;

b) the maintenance of a stock of goods or merchandise belonging to the enterprise

solely for the purpose of storage, display or delivery;

c) the maintenance of a stock of goods or merchandise belonging to the enterprise

solely for the purpose of processing by another enterprise;

25

IBFD (2005): Hungary.

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/ir_dir_hu_en.pdf [Downloaded: 14.11.2016] 26 National Tax and Customs Administration (2016): Taxpayer registration. https://en.nav.gov.hu/taxation/registration/general_info.html [Downloaded: 14.11.2016]

18

d) the maintenance of a fixed place of business solely for the purpose of purchasing

goods or merchandise or of collecting information, for the enterprise;

e) the maintenance of a fixed place of business solely for the purpose of carrying on,

for the enterprise, any other activity of a preparatory or auxiliary character;

f) the maintenance of a fixed place of business solely for any combination of

activities mentioned, provided that the overall activity of the fixed place of

business resulting from this combination is of a preparatory or auxiliary character.

Where a person is acting on behalf of an enterprise and has, and habitually exercises, in a

Contracting State an authority to conclude contracts in the name of the enterprise, that

enterprise shall be deemed to have a permanent establishment in that State in respect of any

activities which that person undertakes for the enterprise, unless the activities of such person

are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of

business, would not make this fixed place of business a permanent establishment under the

provisions of that paragraph.

An enterprise shall not be deemed to have a permanent establishment in a Contracting State

merely because it carries on business in that State through a broker, general commission agent

or any other agent of an independent status, provided that such persons are acting in the

ordinary course of their business.

The fact that a company which is a resident of a Contracting State controls or is controlled by

a company which is a resident of the other Contracting State, or which carries on business in

that other State (whether through a permanent establishment or otherwise), shall not of itself

constitute either company a permanent establishment of the other.

2.1.3. Income from immovable property

Income derived by a resident of a Contracting State from immovable property (including

income from agriculture or forestry) situated in the other Contracting State may be taxed in

that other State.

The term immovable property shall have the meaning which it has under the law of the

Contracting State in which the property in question is situated. The term shall in any case

include property accessory to immovable property, livestock and equipment used in

agriculture and forestry, rights to which the provisions of general law respecting landed

property apply, usufruct of immovable property and rights to variable or fixed payments as

consideration for the working of, or the right to work, mineral deposits, sources and other

natural resources; ships, boats and aircraft shall not be regarded as immovable property.

19

2.1.4. Business profits

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the

enterprise carries on business in the other Contracting State through a permanent

establishment situated therein. If the enterprise carries on business as aforesaid, the profits of

the enterprise may be taxed in the other State but only so much of them as is attributable to

that permanent establishment.

Where an enterprise of a Contracting State carries on business in the other Contracting State

through a permanent establishment situated therein, there shall in each Contracting State be

attributed to that permanent establishment the profits which it might be expected to make if it

were a distinct and separate enterprise engaged in the same or similar activities under the

same or similar conditions and dealing wholly independently with the enterprise of which it is

a permanent establishment.

In determining the profits of a permanent establishment, there shall be allowed as deductions

expenses which are incurred for the purposes of the permanent establishment, including

executive and general administrative expenses so incurred, whether in the State in which the

permanent establishment is situated or elsewhere.

Insofar as it has been customary in a Contracting State to determine the profits to be attributed

to a permanent establishment on the basis of an apportionment of the total profits of the

enterprise to its various parts, shall preclude that Contracting State from determining the

profits to be taxed by such an apportionment as may be customary; the method of

apportionment adopted shall, however, be such that the result shall be in accordance with the

principles contained in this Article.

No profits shall be attributed to a permanent establishment by reason of the mere purchase by

that permanent establishment of goods or merchandise for the enterprise.

For the purposes of the preceding paragraphs, the profits to be attributed to the permanent

establishment shall be determined by the same method year by year unless there is good and

sufficient reason to the contrary.

Where profits include items of income which are dealt with separately in other Articles of this

Convention, then the provisions of those Articles shall not be affected by the provisions of

this Article.

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2.2. Full tax liability

According to the corporate tax, the tax liability of resident taxpayers shall apply to their

income from Hungary and from abroad, both (total tax liability).27

According to the personal income tax, resident private individuals shall be subject to tax

liability in respect of all their income (all-inclusive tax liability). The tax liability of non-

resident private individuals shall apply to income that originates in Hungary as the place of

gainful activity or is taxable in Hungary by virtue of international agreement or reciprocity

(limited tax liability).28

2.3. Tax implications of the cross-border change of residence

Taxpayers shall file an interim tax return, pertaining to the period not yet covered by a

declaration, on all their taxes, with the exception of the personal income tax of private

individuals, which are to be declared annually if: the taxpayers place of management is

relocated from Hungary to another State, in consequence of which his resident status in terms

of tax obligation no longer exists in accordance with the Act on Corporate Tax and Dividend

Tax or another legislation.

2.4. Policy issues

The Government is committed to retaining the current rules regarding the advertisement tax,

and will do everything in order to protect this innovative Hungarian initiative which allows

the state budget to collect the taxes that are due from global businesses engaged in advertising

activities.

The European Commission declared the progressive rates of the advertisement tax

incompatible with EU law today, and additionally ordered the elimination of the selective

business advantages that are presumed to stem from the system. The Brussels body objected

to the fact that businesses whose net sales revenue derived from the publishing of

advertisements does not reach HUF 100 million are not required to pay any advertisement tax

due to the minimisation of the administrative costs related to taxation.

The Commission’s decision is contrary to EU law. The progressive rates of the advertisement

tax are not in violation of the state aid rules because businesses in the same position, or in

other words, businesses with the same sales revenues are required to pay the same amount of

27 National Tax and Customs Administration (2016): Taxpayer registration. https://en.nav.gov.hu/taxation/registration/general_info.html [Downloaded: 14.11.2016] 28 Halustyik Anna (2014): Financial Law III. Pázmány Press, Budapest. p. 114.

21

tax. Consequently, the rules in question cannot be selective as a matter of course, and cannot

result in state aid. Several relevant rulings of the European Court, too, confirm this.

The Commission’s decision does not only stand in violation of the Member States’ tax

sovereignty and EU law, but is also discriminatory against Hungary, given that the Brussels

body does not find objectionable advertising tax regulations in other Member States which

differentiate on account of the different advertisement publishing methods.

Hungary will not retroactively impose taxes of any kind on small businesses which enjoy

exemption from the payment of the advertisement tax even at Brussels’ request. The

Hungarian Government will not allow global digital businesses which obtain significant

revenues from advertising activities to avoid the obligation of paying taxes, thereby wronging

the Hungarian state budget

Summing, Hungary presented a proposal to levy a withholding tax on internet companies –

such as Google, Facebook and Amazon – at an informal meeting of European Union finance

ministers in Bratislava at the weekend. The commonly cited “Google tax” has been mentioned

several times by the Hungarian government lately. The initiative, similar to the American

solution, involves levying a kind of withholding tax on payments that are obviously

transferred to a foreign service provider for economic activity that takes place within the

borders of another country. The international digital companies with operations in Hungary

must share the public burden “like everybody else.” The idea has not only been embraced by

Hungary, but has recently also stirred the interest of other European countries. The Visegrád

Four countries – the Czech Republic, Slovakia, Poland and Hungary – were reported to be

supportive of the measure at the meeting.

If the European Union is looking to its future, then it must strengthen cooperation in the

economic form. It must return to its origins, to the strengthening of the economic community.

2.5. Personal position

My view is on your country’s rule on tax residence that it is appropriate to the international

expectation. According my opinion, the Hungarian regulation is adequate to ensure a balance

between safeguarding the fiscal interest of the State (and the fairness of the tax system) and

ensuring legal certainty for the taxpayers.

I agree that the legislator have to rule efficiency the Corporate Tax Residence and Mobility

because nowadays some corporate apply the regulation to avoid the tax liabilities. So, we

have

22

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