Hungary was forced to abolish offshore status for companies last year but those offshore companies already in existence in the nation were allowed to continue operations and many got in ahead of the ruling to ensure that they had a tax efficient structure in place in the region.
However, largely due to the nation’s high budget deficit, the government has since introduced new taxes that have reduced the appeal of continuing to operate offshore from Hungary and as a result offshore company activity in Hungary is decreasing.
Offshore companies in Hungary previously enjoyed a tax rate of just 4% on profits; then following the 2006 abolition of offshore status tax went up to around 8% which still meant that Hungary was a very efficient nation to operate from especially when compared to other countries in the central European region.
Unfortunately certain economic factors that were bluntly highlighted by the Prime Minister Ferenc Gyurcsany in 2006 led to a general realization that Hungary’s economy was not established on such firm ground and the government was forced to take immediate and decisive austerity action in a bid to secure the future of the nation.
As part of this austerity package that was quickly introduced largely to reduce Hungary’s excessive budget deficit, taxation for ‘offshore’ companies went up to 12% meaning that Hungary can no longer compete as a tax efficient country in which to base company operations for many.
The new tax is a solidarity tax which ministers have suggested is only a temporary measure – but when has a new tax ever been abolished? Germany introduced a temporary reunification tax following the fall of the Berlin Wall and that’s still in place. So, offshore company activity in Hungary is decreasing as businesses restructure operations or withdraw from the country altogether.
Countries benefiting from the tax increase in Hungary are Cyprus which has a tax rate of 10% and Ireland which has a tax rate of 12.5% - which is slightly higher than Hungary’s but naturally Ireland is a far more stable country than Hungary, and where once a company would overlook Hungary’s need for development for a lower rate of tax payable, they will now look elsewhere because the benefits are no longer so great in Hungary.
