The amendments to the controlled foreign company (CFC) of Hungary were included in a draft bill which was approved by Parliament on 13 December 2016 and published on 19 December 2016.
The new CFC regime is broadly in line with the provisions of the EU Directive on the prevention of taxation, which provides rules for tax avoidance practices which directly affect the functioning of the internal market.
From 18 January 2017 a foreign entity may be considered a CFC if a domestic taxpayer holds a direct or an indirect interest of more than 50% of the voting rights or the share capital of the entity, or is entitled to more than 50% of the profits of the entity. The foreign entity or a PE of a Hungarian resident may be treated as a CFC in a year if the tax paid in its country of residence is less than the difference between the tax actually paid and the tax that would be payable in Hungary on the same income. The foreign entity or PE is not treated as a CFC if it possesses sufficient assets, premises and employees to carry out substantial business activities.
Under the “listed-parent exemption” a foreign entity is not treated as a CFC in a year in which it has a shareholder with an interest of at least 25% of the share capital throughout the year that has been listed on a recognized stock exchange for at least five years.
If a foreign entity or PE is treated as a CFC the participation exemption rules do not apply to it and passive or related-party income of the CFC becomes taxable at the level of the Hungarian parent under certain conditions. In this case a credit is allowed for the tax paid by the CFC.