Hungarian fiscal law lays down no special rule as to how industrial and commercial enterprises shall keep their books and accounts, and enterprises, both foreign and national, have only to keep the books prescribed by commercial legislation. These are:

All traders are required to keep copies of outgoing, and originals of incoming, correspondence for ten years.

Further, share companies, partnerships with share capital, mining and assimilated companies have to publish an annual balance-sheet in the form of a classified list of assets and liabilities as they stand at the close of the fiscal year.

But although fiscal law does not, strictly speaking, prescribe the keeping of books and accounts in any special manner, it does impose certain requirements as to what shall constitute the profits to be shown in the balance-sheet and the liabilities to be deducted therefrom. These provisions were indicated under the heading “Assessment of Tax” in the passage on profits and company taxes in Part I.


The problem of allocating income only arises in connection with income tax proper and the company and profits taxes. The land and buildings taxes, the tax on salaries and wages and those on directors’ fees, dividends and interest are levied only on income from property situated in Hungary or from operations conducted exclusively in that country. Hungarian law does not expressly regulate the allocation of profits, and the only legal provisions governing the matter are contained in conventions for the avoidance of double taxation which Hungary has concluded with her neighbours. Apart, however, from the cases covered by international conventions, administrative practice adopts the following rules and methods of procedure.

1. Method of Separate Accounting

Since enterprises and companies liable to profits and income taxes or to company tax are taxed on the basis of their accounts as shown in the balance-sheet attached to their declaration, it follows that foreign enterprises are only taxable in respect of their profits. As regards foreign enterprises which are liable only in respect of their Hungarian establishments, assessment will be based on the accounts of those establishments, but the law prescribes that these enterprises shall attach, to their statement of the results of their establishments, the general balance-sheet of the whole enterprise. A comparison of these two balance-sheets very often leads to corrections being made on the balance-sheet of the Hungarian establishment. Comparison of the two documents and examination of the accounts of the Hungarian establishment very often show that taxation based on the balance-sheet or accounts leaves certain profits of the Hungarian establishment out of the reckoning. In this case, the method of separate accounting is discarded, and recourse is had to one of the methods described below.

The same applies when the accounts of the establishment are found to be incomplete or even not to exist.

2. Method of Fractional Apportionment

If the tax cannot be assessed with reasonable accuracy on the basis of the separate accounts, the fiscal authorities employ the method of fractional apportionment. In the case of commercial establishments the profits assessable against the Hungarian establishment are determined by ascribing to that establishment that share of the enterprise’s total net profits which corresponds to the ratio between the gross receipts of the establishment and the gross receipts of the enterprise as a whole.

In the case of insurance companies, allocation will be based, not on the ratio between gross receipts, but on the relation between premiums paid in Hungary and premiums paid abroad.

As regards other enterprises, the apportionment fraction is the ratio between salaries and wages paid in Hungary and those paid abroad.

Frequently, however, this method, like that of separate accounting, is inapplicable. The reason for this, as a rule, is that it is impossible to secure exact data showing the gross receipts of the enterprise’s foreign establishments.

3. Empirical Methods

If it is impossible to determine the income of Hungarian establishments either on the basis of their own accounts or by comparison with the total results of the whole enterprise, the Treasury has recourse to estimates, based either on a comparison with Hungarian enterprises of a similar kind or on certain external evidence.

The factors used for purposes of comparison are as a rule the amount of capital, fixed, working and floating.

The external evidence is found in the rental value of the premises used by the enterprise, the size of the plant, the number of employees and the size of the pay-roll.

4. Requirements for Selection of Methods and Value of the Various Methods

As already mentioned, the Administration is under no legal obligation to observe any special order of preference in its choice between the different methods of allocation. In practice, however, the method first tried is that of separate accounting, and only if the results appear unconvincing is recourse had to methods of fractional apportionment.

An empirical method is only used in the last resort, when other methods have failed.


1. Apportionment of Gross Profit of Local Branch to Real Centre of Management abroad

Under Hungarian fiscal law, by which all the profits realised in Hungary are taxable, it is the rule that no part of the profits of the Hungarian branch may be ascribed to the real centre of management abroad. Nevertheless, under fractional apportionment, and if profits are assessed with reference to the total profits of the whole enterprise, they may be indirectly so ascribed.

2. Apportionment of Expenses of Real Centre of Management to Branch

The fiscal law of Hungary has no definite rules for allocating the interest charges and general overhead of foreign enterprises.

The tendency in practice, however, is to admit that, when a debt has been incurred in the general interest of the enterprise — i.e., when the Hungarian establishment has profited from borrowed capital along with other parts of the enterprise, part of the interest on this debt may be deducted from the profits of the Hungarian establishment. The same is true of general overhead corresponding to expenditure which has been useful, not only to the foreign establishments, but to the establishment in Hungary.

This portion of debt interest and general overhead is ascribed to the Hungarian establishment whether the latter is assessed by the method of separate accounting or by the method of fractional apportionment. If, however, the taxable profits are assessed empirically, this apportionment is not allowed.

3. Apportionment of Net Profit of Branch to Deficitary Enterprise and vice versa

Tax being assessed exclusively on the results of the Hungarian establishment, the fact that the whole enterprise operates at a loss is of no account for fiscal purposes.

This rule can be applied without any difficulty if the Hungarian establishment can be taxed on the basis of its separate accounts. But if, in such case, this method cannot be employed, recourse will be had, not to fractional apportionment, under which losses of the whole enterprise would reduce the taxable profits of the Hungarian establishment, but rather to empirical methods.

If the accounts of the Hungarian branch show a loss, while the whole enterprise operates at a profit, the Hungarian establishment will still be liable. In such case, empirical methods or the method of fractional apportionment will be used, and not the method of separate accounting.


In some circumstances, the Treasury may consider that an enterprise, although constituted as a Hungarian company with its head office in Hungary, is under the dominant control of a foreign enterprise, and that all the activities of the company in Hungary are directed towards furthering the interests of the enterprise on which it is dependent. In such case, the Administration assimilates the subsidiary company to a mere branch or to an establishment having no independent legal entity, and the methods and rules of allocation applying to branches proper are extended to these subsidiary companies.



1. Selling Establishments

Local Establishments selling in National Markets

Establishments which enterprises maintain in Hungary for the sale of goods or products they have manufactured abroad are liable to Hungarian tax. The profits of these establishments are usually assessed on the basis of separate accounting, but administrative practice has established no definite rules for the apportionment of profits as between the sales branch and the purchase and manufacturing branches.

Nevertheless, the balance-sheet of a Hungarian branch of the foreign enterprise is always checked to see how raw materials and goods have been invoiced by the foreign enterprise to its establishment in Hungary. It is the duty of the Administration to examine the books of the Hungarian establishment, if necessary with expert aid, in order to determine the cause of losses or insufficient profits. If these are due to the invoiced prices, the Administration corrects the latter on the basis of cost prices or the actual purchase prices of the foreign enterprise.

Local Establishments of Foreign Enterprises selling abroad

If a foreign enterprise has a branch in Hungary which sells in a foreign country, where the enterprise has no establishment, the income taxable in Hungary will include the profits from these sales.

2 and 3. Manufacturing and Processing Establishments

If a foreign enterprise has workshops, factories or other installations in Hungary, where it manufactures or processes goods for expert and sale abroad, it will be held taxable in respect of the industrial and manufacturing operations it conducts in Hungary. If, as very often happens, the accounts of the Hungarian establishment do not show these industrial profits, the Administration, assisted if necessary by an expert, checks the invoiced prices and makes any necessary corrections. Otherwise, and especially for the assessment of profits tax (not therefore company tax), they are determined either empirically or by the method of fractional apportionment, account being taken of the ratio between salaries and wages paid in Hungary and those paid abroad.

4. Buying Establishments

If a foreign enterprise buys goods in Hungary for sale abroad, it is not taxable unless it has a permanent establishment or agency within the country. If it is so taxable, the profits are assessed by the method best suited to the particular case.

5. Research or Statistical Establishments, Display Rooms, etc

As a rule, the existence of an establishment justifies liability to tax in Hungary. But as Hungarian fiscal law aims at taxing the commercial profit only, the authorities do not, in practice, tax establishments such as research or statistical offices which earn no direct profits. The same applies to display rooms where no contract is concluded. If contracts are concluded, the establishment will of course be taxable, and tax will be assessed by the methods ordinarily used for establishments of foreign enterprises.


No special allocation problems normally arise for enterprises other than industrial or commercial. It may be mentioned, however, that the profits of banks and credit institutions are usually determined on the basis of separate accounts. So are those of insurance companies, unless their balance-sheets are inexact or ambiguous, in which case profits are taxed on the basis of the ratio between premiums received in Hungary and total premiums received in all countries.

The few railways not owned by the State are also taxed on the basis of their balance-sheets.

Similarly, in the case of other transport enterprises, power, light and gas, and mining enterprises, the method of separate accounting is preferred. If recourse is had to fractional apportionment, allocation is based on the ratio between salaries and wages paid in Hungary and those paid abroad.

No question of allocation arises in connection with telephone and telegraph enterprises, which are a Government monopoly.


The profits of national enterprises are allocated according to their origin, when there is occasion to claim an exemption in respect of the profits of their foreign establishments or from property situated abroad.

These profits are exempt from profits and company taxes when the foreign country imposes upon them a direct tax similar to the Hungarian tax on the same profits and when the foreign country does not tax the profits of the Hungarian establishments of its own national enterprises.

If profits are allocated according to their origin, the same methods are employed, mutatis mutandis, as are used for foreign enterprises with establishments in Hungary.



Even if a Hungarian company holds part of the capital of a foreign company, so that the latter is controlled and governed by the Hungarian company, there is no departure from ordinary law: the profits of the branch will not be taxable in themselves, and the dividends and advantages accruing to the holding company will be liable to company tax in the same way as its other profits.


When a foreign holding company holds shares in a Hungarian company, but without thereby acquiring control over the latter, the fiscal position will be the same as that of all other companies whose capital is divided among the shareholders — i.e., the Hungarian company will be liable to company tax and will withhold from the dividends and directors’ fees it pays to the foreign company the tax on these two classes of income.

The case is different when the foreign company holds such a large part of the Hungarian company’s capital that the latter becomes economically subject to the foreign enterprise. In this event, the remarks made under the heading “Apportionment between Parent Enterprise and Subsidiaries” will apply.


According to the different double-taxation conventions, if an enterprise has establishments in both contracting States, tax may only be levied in each State on the income from business transacted by an establishment situated in that State.

Further, the Conventions with Italy and Poland formally emphasise that, with a view to allocating the income between the two contracting States, the financial authorities of each State may request taxpayers to submit statements of their general and special accounts and any other documents provided for by the law of the respective States. Should it be impossible to employ such documents, the supreme financial authorities of the two contracting States shall agree upon the measures to be taken to secure a fair and equitable apportionment of income.

The Convention with Czechoslovakia does not classify the head office of an enterprise among establishments; in the other Conventions, the head office or real centre of management is so included.

The detailed rules for allocating the income of profit-seeking enterprises between the two States have been fixed in relations with Austria, through a special agreement concluded on November 8th, 1924, which contains the following clauses:

The Conventions which Hungary has concluded with States concerned in river traffic on the Danube (Germany, Austria, Czechoslovakia, Yugoslavia and Roumania) lay down as a fundamental principle that shipping enterprises on the Danube shall be liable to taxes on their business income only in the State in which they have their head office.

Under the special agreement concluded with Austria, a railway company whose head office is in one of the two States and whose operations extend into the territory of the other State is liable to industrial and commercial profits tax only in the State where it has its head office, unless it operates a section of line in the other State which is longer than fifteen kilometres; if it is, the enterprise will be taxed in the two States in proportion to its operations in each (paragraph 3, Article 3, of the Treaty). The agreement also provides that, at the request of either of the two Administrations, the items on which assessment is to be based shall be apportioned in any particular case by special agreement.