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PART II. — TAXATION OF FOREIGN AND NATIONAL ENTERPRISES

A. FOREIGN ENTERPRISES

1. DEFINITION AND GENERAL PRINCIPLES

In Hungary, a foreign enterprise, for fiscal purposes, is any enterprise which belongs to individuals or companies having their domicile or head office abroad. These enterprises are accordingly liable only in respect of income and profits they derive from Hungary. They are taxed on the whole of those profits, by means either of the income and profits taxes or of company tax (see remarks on these two taxes in Part I). They may also be liable to the land and buildings tax, the taxes on interest and dividends and to other direct taxes, if they are in receipt of income which is by its nature subject to one or other of these taxes.

2. TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

Dividends paid by Hungarian companies or other legal entities to foreign enterprises are liable to deduction of dividends tax at source in the same way as are dividends paid to national enterprises. Further, the enterprise to which these dividends are paid must declare them and itself pay either income and profits tax or company tax, to whichever it is itself liable.

(b) INTEREST

1. On Bonds

In principle, the interest and coupons of bonds, mortgage loans and other fixed income securities issued by the State, public corporations and companies having their head office in Hungary, are liable to deduction at source of interest tax at 10 per cent. All such income, however, if accruing to persons domiciled or having their head office abroad, is exempt from this tax by a decree of the Minister of Finance. It continues, however, to be liable to other taxes, and foreign enterprises will further be subject in respect of this interest to either income tax or company tax.

2. On Secured Loans

Loans secured on real estate situated in Hungary are also liable to the tax on interest. The rate is reduced to 5 per cent for coupons of mortgage bonds. The Minister of Finance may further grant temporary exemption to this interest, and in the exercise of this right he issued Decree No. 30000 of 1927.

3. On Unsecured Loans

Interest on sums lent to individuals is subject to the tax on interest and also liable to income and profits tax or to company tax.

(c) DIRECTORS’ PERCENTAGES

Directors’ percentages distributed by Hungarian companies to persons domiciled or resident abroad are liable to the tax on directors’ percentages in the same way as those distributed to persons living or having their head office in Hungary. These percentages will also be liable to income tax.

(d) ROYALTIES FOR USE OF PATENTS, COPYRIGHTS, TRADE-MARKS, SECRET PROCESSES AND FORMULÆ AND SIMILAR INCOME

Royalties and income from the sale or lease of patents registered in Hungary, artistic, literary copyrights, or industrial property rights are liable to the tax on profits and income tax or to company tax, according to the status of the person or enterprise in receipt of such income.

(e) RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

Income from real estate in Hungary is liable, whatever the owner’s status, to land tax or to the tax on buildings; it is also liable to company tax or income tax if the owner or the usufructuary is personally liable to one of these taxes. Further, in the case of land or buildings belonging to an enterprise liable either to profits tax or company tax, the portion of income from such property that has not been imposed by one of these two property taxes is included among the total taxable profits liable either to profits tax or to company tax.

Income derived from the lease of a business, or industrial establishment or from the lease of mining or other concessions is liable either to the tax on profits or to company tax.

(f) GAIN DERIVED FROM THE PURCHASE AND SALE OF REAL ESTATE, SECURITIES AND PERSONAL PROPERTY

If an industrial or commercial enterprise derives profit from the purchase or sale of personal or real property, such gains, even if occasional, must be included among profits liable either to company tax or to the tax on profits. If the operations are conducted by individuals who have no industrial or commercial organisation and do not habitually engage in these transactions, only the profits from the sale of real estate are taxable. Moreover, such purchase and sale must have been made for a purpose of gain, which intention is assumed when sale followed purchase within less than five years. In this case, however, the taxpayer is allowed to show proof that the property sold was not acquired with a view to its resale.

(g) SALARIES, WAGES, COMMISSIONS AND OTHER REMUNERATION FOR SERVICES

If the remuneration is for the work of an employee — that is, work done on behalf and under the direction of another — it is liable to the tax on salaries and wages. This tax is deducted at source and is imposed on all salaries and wages paid in return for services rendered in Hungary, whatever the domicile or residence of the beneficiaries. The emoluments of the liberal and other independently exercised professions are liable to the tax on profits, which is payable if the profession or occupation from which the income is derived is carried on in Hungary.

(h) INCOME FROM A TRUST

Trusts, as understood in Anglo-Saxon law, do not exist in Hungary.

(i) INCOME FROM CARRYING ON BUSINESS OR INDUSTRY

1. Through Local Commission Agent or Broker

Foreign enterprises which have no place of business in Hungary, but only buy or sell there through commission agents or brokers, are not taxed.

2. Through a Local Dealer or Distributor

The same is the case when the foreign enterprise delivers its products to retail dealers and tradesmen who buy and resell them, even if these dealers have an exclusive right to retail the goods bought, or some other privilege.

3. Through a Travelling Salesman, whether or not having Power to conclude a Contract

When a foreign enterprise employs a commercial traveller to visit Hungary and to solicit and take orders there, there is, in principle, no fiscal liability. But if the commercial traveller is the exclusive representative of the enterprise and operates permanently in Hungary or on any part of Hungarian territory, the foreign enterprise is regarded as being represented in Hungary and is on that account liable to tax.

4. Through a Local Agent with a Power of Attorney

If a foreign enterprise has entrusted its representation to an agent established in Hungary, who is empowered to conclude operations in its name, the foreign enterprise is held to be liable.

5. Through an Agent selling out of a Stock belonging to the Foreign Enterprise.

Again the foreign enterprise is liable.

6. Through a Permanent Establishment of Any Kind

The term “establishment” includes factories, workshops, agencies, depôts, offices, shops and representatives used to further the activities which the enterprise pursues. The term also includes premises which the enterprise may own, even if it does not use or exploit them directly, but lets them to third parties.

If a foreign enterprise is regarded as possessing an establishment in Hungary, it is liable either to income tax and tax on profits, or to company tax, in the same way and to the same extent as was explained with reference to each of these taxes in Part I.

B. NATIONAL ENTERPRISES

Hungarian fiscal law regards as national all enterprises which belong to individuals domiciled in Hungary or to companies having their centre of management there. These enterprises are, according to their nature, liable in respect of all their income, derived from both foreign (unless a convention granting reciprocity in fiscal matters has been concluded between Hungary and the respective foreign country) and Hungarian sources, to income and profits taxes or to company tax. They are not, however, liable to the taxes on land and buildings, or the taxes on dividends, directors’ fees and interest, in respect of income they derive from real or personal property, tangible and intangible, situated abroad. In the case, moreover, of enterprises with real property or establishments abroad, the income from such property or establishments is exempt from the taxes on income, profits and companies, if it is liable to a special tax abroad and if the country whence the income is derived grants reciprocal exemption to income from Hungarian sources, either in virtue of its own municipal legislation or under treaties.

If foreign income is taxable, the tax is assessed and computed under the same conditions and at the same time as the tax on the whole taxable income.

C. DOUBLE-TAXATION AGREEMENTS

The Kingdom of Hungary has concluded double-taxation agreements with Czechoslovakia, Germany, Austria, Italy, Yugoslavia and Roumania.1

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These agreements introduce certain exceptions to the rules of domestic law set forth in the two preceding chapters of this part of the study.

Before explaining the scope of these exceptions as regards the taxation of the chief kinds of income dealt with above, a few general remarks must be made concerning the effects of these agreements upon income tax and property tax.

Under the agreements, the right to levy income tax on the rents, interest, profits, etc., from real estate, secured and unsecured loans, industrial and commercial enterprises, and services (including remuneration from the public funds) is subject to the same rules as are applied to the various real or personal taxes upon each of these kinds of income, referred to above. Income tax on all other income — viz., dividends, directors’ percentages, annuities, interest on bonds, interest on bank deposits, etc. — is imposed only in the country where the recipient of the income is domiciled.

The right to levy property tax is subject to the same rules that govern the collection of income tax.

DIVIDENDS

Dividends are liable to the real taxes in the State in which the company that pays them is domiciled; but the right to impose these dividends under income tax belongs to the State in which the creditor is domiciled.

INTEREST

Bond interest is taxed according to the same rules as dividends.

As regards interest on bank deposits, current accounts and savings bank deposits, the position is as follows:

Impersonal tax is imposed in the State in which the debtor is domiciled, personal tax in that of the creditor’s domicile. The Conventions, however, prescribe that, if an enterprise which receives sums on deposit or for current account has establishments in several States, impersonal tax is collected by the State in which is situated the establishment directly in receipt of these deposits or sums.

The Conventions with Poland, Yugoslavia and Roumania stipulate that interest on unsecured loans between individuals shall be liable to impersonal tax in the State where the debtor is domiciled and to income tax in the State where the creditor is domiciled. The Conventions with Austria, Germany, Czechoslovakia and Italy, however, decide that this interest shall be taxable only in the State in which the recipient of the interest resides.

Income from loans secured by mortgage and similar loans is liable to impersonal taxes in the State where the real property is situated and to income tax in the State where the creditor is domiciled.

DIRECTORS’ PERCENTAGES.

Under the Conventions concluded with Czechoslovakia and Austria, the right to impose impersonal tax on directors’ percentages belongs to the State in which the company distributing them has its head office.

In the Convention with Germany, this right is ascribed to the State in which the enterprise has its real centre of management.

The Conventions with Italy and Yugoslavia lay down that, if the company distributing directors’ percentages has its head office in one State and its centre of management in the other, the supreme financial authorities of the two States shall agree in each particular case upon an equitable basis for the allocation of tax.

The Convention with Poland has decided that the right to impose impersonal tax belongs to the State in which the company has its head office, unless the enterprise’s real centre of management is in the other State.

The right to collect income tax is reserved in any case to the State in which the recipient of the directors’ percentage is domiciled.

ROYALTIES FOR USE OF PATENTS, COPYRIGHTS, TRADE-MARKS, ETC., AND ANNUITY INTEREST

Royalties for use of patents and other income from incorporeal property rights, also life annuities, are taxable only in the State in which the beneficiary is domiciled.

RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

Income from real estate is liable to land and buildings tax in the State in which the property is situated. Income tax, too, is levied in this State and not in the State in which the beneficiary is domiciled. Further, if taxpayers are liable in the State of their domicile to company tax, this tax is not imposed upon that part of taxable profits which represents the yield of property situated in another State.

SALARIES, WAGES, COMMISSIONS AND OTHER REMUNERATION FOR SERVICES

All the agreements, except that with Roumania, stipulate that wages and salaries are taxable in the country in which the work they correspond to was accomplished.

Pensions paid by private enterprises are taxed in the State where the beneficiary is domiciled.

The Convention with Roumania decides that taxation rests with the State in which salaries, wages and pensions are paid. Income from personal services — i.e., from the liberal professions — is liable to tax in the country in which the services are performed.

There are, however, special provisions to meet the case of foreign artists and savants who work abroad in a temporary capacity: under Conventions concluded with Czechoslovakia, Germany, Austria and Poland, such persons are not liable to tax in the country where they are staying merely temporarily. The Conventions with Yugoslavia and Roumania contain no such provision, with the result that the fees paid to artists and savants for temporary work abroad are liable in the country where the work is done, both to the special taxes and to income tax.

INCOME FROM A BUSINESS OR INDUSTRY

All the agreements concluded by Hungary stipulate that the profits from industrial or commercial activities of any kind whatever are liable to the special taxes on these profits and to income tax only in the State in whose territory the enterprise has an establishment, even if the operations of the enterprise extend to another country. The Conventions add that the profits taxable in the State where there is an establishment are the profits ascribable to that establishment.

Nevertheless, the provisions relating to Danube shipping enterprises are based on a different principle: the right to impose tax belongs exclusively to the State in which the enterprise has its head office.

The agreements with Italy and Poland define what is to be understood by “establishment”. This term includes all permanent installations in which an enterprise conducts all or some of its operations. In particular, the following are establishments of an enterprise: its head office, its real centre of management, its branches, factories, workshops, offices of purchase or sale, shops, warehouses and any other industrial and commercial installation in which the owner of the enterprise, his responsible agents or other representatives can carry on the activities for which the enterprise exists. Further, any permanent representation of an enterprise in a particular country is to be regarded as an establishment.

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