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2011 Tax Bill

Content: I. Record low corporate tax rate of 10% from 2011 II. Reduction of personal income tax rate III. Capital gains IV. In-kind-benefits V. Social insurance charges VI. Value Added Tax VII. Bank tax VIII. Crisis surtax I. Record low corporate tax rate of 10% from 2011

1. 2011 Tax Bill. On November 16, 2010, the Hungarian Parliament passed the 2011 Tax Bill that lowers the corporate tax rate to 10% from 19% for companies with annual revenues of up to 500 million forints from January 1, 2011. Any further profits will continue to be taxed at the general rate of 19%. Also, it cuts the corporate tax to 10% for all companies regardless of revenue starting January. 1, 2013. As a result of the cut in tax rates, Hungary will provide the most optimal tax environment in the Central-European region, regaining its reputation with it and increasing its potential to attract more capital and to create many more jobs. 2. Amended CFC definition. Currently, a company qualifies as a CFC if certain conditions are met, including that the corporate income tax payable by the company is lower than two-thirds of the effective Hungarian corporate income tax rate. In line with the decrease of the corporate income tax base, this rule is amended to set the threshold of qualification at 10%. 3. Withholding tax abolished. As of 1 January 2010, 30% withholding tax was introduced on interest payments, royalty payments and certain services fee payments made to foreign persons which have their registered seat or residency in a country with which Hungary does not have a double taxation treaty. This withholding tax is abolished as of 1 January 2011.

II. Reduction of personal income tax rate

As of 1 January 2011, the general personal income rate will be reduced to a general flat rate of 16%, applicable upon the super-gross tax base of 127% (resulting in an effective tax rate of 20.32%). The effective personal income tax burden of individuals with children may significantly decrease due to a family tax allowance available based on the number of children raised by the taxpayer. The amount of family tax allowance may reach HUF 206,250 (EUR 750) per month per child.

III. Capital gains

Capital gains, dividends and other income earlier taxed separately (typically at a rate of 20/25%) will be uniformly taxed at a flat rate of 16%. This will result in a tax burden reduction for most such income types. However, personal income tax payable on dividends earned from shares listed on an EEA stock exchange, earlier taxed at a rate of 10%, will increase.

IV. In-kind-benefits

As of 2011, the taxation of in-kind-benefits will materially change. From a taxation point of view, in-kind-benefits will fall within three categories: (i) Certain in-kind-benefits will be taxable at a personal income tax rate of 16% (calculated at a tax base of 119% of the income earned in the form of cafeteria benefits, resulting in an effective personal income tax rate of 19.04%), where personal income tax and a social insurance charge of 27% (calculated at a tax base of 119%, resulting in an effective tax rate of 32.13%) will be payable by the employer.

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(ii)

Certain preferential in-kind-benefits will be taxable at a personal income tax rate of 16% (calculated at a tax base of 119% of the income earned in the form of cafeteria benefits, resulting in an effective personal income tax rate of 19.04%), where personal income tax will be payable by the employer, but no other charges will be payable either by the employee or the employer.

V. Social insurance charges

1. Social insurance charges of employees seconded to Hungary by a non-Hungarian employer Under the currently applicable rules, citizens of third countries are not subject to social insurance charges in Hungary, if they are assigned or leased to Hungary by an employer that is not registered in Hungary. As of 2011, this rule will only be applicable if the duration of assignment does not exceed 2 years and more than 3 years have passed since the last Hungarian assignment. 2. Increase of employee's pension contribution As of 2011, the pension contribution payable by employees will be increased from 9.5% to 10%. 3. Social insurance charges payable by foreign employer Under the currently applicable rules, if a Hungarian employee earns income from a foreign employer, as a main rule, social insurance charges must be paid and reported by the employee. As of 2011, as a main rule, social insurance charges will have to be paid and reported by the foreign employer. The foreign employer will have to perform these reporting obligations through a Hungarian representative or - in lack of such representative- it will have to register in Hungary and perform these obligations directly itself. In case the foreign entity fails to appoint a Hungarian representative or to register directly in Hungary, social insurance obligations will have to be performed by the employee (as under the currently applicable rules).

VI. Value Added Tax

1. Tax exemption under cost sharing group

As of 2011, services provided by members of a cost-sharing group to a group member will be VAT exempt, provided that certain conditions are met. These conditions include that the member uses the services in relation to an activity that is exempt from VAT (with no right of deduction) or the member is not a taxable person in relation to the receipt of the services. A further condition is that the compensation claimed by the cost sharing group from its member does not exceed the certified costs incurred in relation to the supply of services and in total, the group merely claims an amount not exceeding the member's contribution to the joint expenses of the cost sharing group. The introduction of the cost sharing group is a potential saving vehicle for financial services companies and other companies providing VAT exempt services to reduce irrecoverable VAT they incur. However, in practice, the conditions of a cost sharing group will not always be easy to meet and thus it is uncertain how widely used it will be in practice. 2. Place of supply rules

The place of supply of cultural, artistic, scientific, educational, entertainment, sporting and similar services will change. As of next year, as a general rule, the place of supply of cultural and similar services provided to taxable persons will be determined according to the general rules, i.e. the place of supply will be where the taxable person is established. As a specific rule, the place of supply of services that entail the entrance to cultural, artistic, scientific, educational, entertainment, sporting and similar events, will be the place where those services are physically carried out. The place of supply of cultural, artistic, scientific, educational, entertainment, sporting and similar services provided to non-taxable persons will remain the place where those services are physically carried out. 3. Extension of domestic reverse charge mechanism

As of next year, goods or services provided by taxable persons under liquidation or other form of insolvency proceeding, exceeding a value of HUF100,000, will be subject to the domestic reverse charge mechanism. Further, the domestic reverse charge mechanism will apply to the trade of emission units of greenhouse gases.

VII. Bank tax

The tax bill amends the rules of bank tax. In Hungary, bank tax was introduced in 2010 as a tax levied on financial institutions at various rates for the different categories of financial institutions. The tax law amendments slightly increase the rate of bank tax payable by credit institutions (currently, the tax rate is 0.15% for the part of the tax base below HUF 50 billion and 0.5% above HUF 50 billion; this higher tax rate has now been increased from 0.5% to 0.53%). In addition, the tax rate of insurance companies will become progressive, which will result in a tax easement for the smaller insurance companies.

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(Currently, insurance companies are taxed at a flat rate of 6.2%; the new progressive rates will be 1.5% for the part of the tax base below HUF 1 billion, 3% above HUF 1 billion up to HUF 8 billion and 6.4% above HUF 8 billion.) Further, the tax base of bank tax payable by credit institutions is also amended; as a result of the amendment, among others, loans and other instruments provided not only to Hungarian financial enterprises but also to financial enterprises established within the EU will be deductible. In addition to the above bank tax, financial institutions will be obliged to pay a profit based surtax as well. The rate of this "financial institutions surtax" will be 30% but maximum the amount of bank tax and will be deductible from the amount of payable bank tax.

VIII. Crisis surtax

In addition to the above tax law changes, in a separate bill, the Hungarian Parliament adopted an act imposing a crisis surtax on companies active in certain sectors of the economy ("Crisis Surtax Act"). The three affected sectors are: i) retail; ii) telecommunications; and iii) energy. The aim of the crisis surtax is to consolidate the budget and according to the Crisis Surtax Act, it will be payable for the tax years 2010-2012.

Contact information

Ferenc B.Nagy, MBA Managing Director Stay in Hungary Kft. Real Estate Investments & Design H-1055, Budapest, Szemere u. 8. Tel: +36 30 590 9113 Fax: +36 1 335-0568 [email protected] [email protected] www.stayinhungary.com

Disclaimer

Stay In Hungary Kft reserves the right not to be responsible for the topicality, correctness, completeness, or quality of the information provided. Liability claims regarding damage caused by the use of any information provided, including any kind of information that is incomplete or incorrect, will therefore be rejected.

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