In our previous article, we outlined the key personal income tax and transfer tax issues relating to trusts in Hungary. We will now move on to examine what other tax considerations are worth bearing in mind – with particular regard to corporate income tax, local taxes, and VAT.
- Corporate income tax
One of the most interesting features of the legislation is that assets under management are treated as a separate taxable entity. This means that assets placed in trust ‘live a life of their own’ from a tax perspective, represented by the trustee – subject to the flat 9% corporate income tax rate.
Obligations commence upon the contract coming into force; however, in certain cases, administration can be simplified: if the managed assets do not generate income, or only have tax-exempt income, a declaration may suffice instead of a tax return.
A particularly favourable situation may arise if:
- both the settlor and the beneficiary are private individuals, and
- the managed assets generate income in the tax year solely through the acquisition, holding, realization of returns from, or the exercise of rights of disposal over, invested financial instruments, receivables, securities or cash.
In such cases, there may not even be a corporate income tax liability – which could present a significant tax planning opportunity.
- Local taxes
As with corporate income tax, the managed assets are the taxable entity for local tax purposes. Jurisdiction is determined by the trustee’s place of residence or registered office, but in the case of assets placed in trust, the utilized property forming part of the managed assets is deemed to be the business premises.
Local business tax is payable if business activities are carried out, so the mere fact of holding assets under trust does not in itself give rise to a tax liability.
However, if real estate is involved, one may account for, for example, building tax or land tax.
This is why it is particularly important to plan the composition of the assets in advance.
- VAT
VAT regulations add another twist to the system: the managed assets themselves are not subject to VAT (they cannot carry out economic activities in their own name), but the asset manager is.
This may seem like a technical detail at first glance, but it has significant practical implications – particularly during the allocation and disbursement of assets. Whether a VAT liability arises depends on several factors:
- whether the parties to the transaction are VAT-registered,
- and exactly what assets are involved.
The good news, however, is that in certain cases – for example, where the settlor and the beneficiary are the same person, or in the case of a transfer of assets by a VAT-registered settlor – these transactions may be exempt from VAT.
Should you require personalized advice, please do not hesitate to contact the team at PETERKA & PARTNERS Hungary.
