Global Tax Adviser
December 20, 2011
Hungary-U.K. Tax Treaty Will Affect 2012 Taxes
Montreal, International Corporate Tax
National Leader, International Corporate Tax
The Hungary-United Kingdom income and capital gains tax treaty, signed in
Budapest on September 7, 2011, will enter into force on December 28, 2011.
The treaty's provisions, which will generally apply in 2012, will cause
companies that continue to use a Hungarian financing company with either a
Swiss branch or Luxembourg branch to finance U.K. affiliates to incur
withholding tax liabilities on interest at a rate of 15% (rather than the
current rate of 0%).
Most Canadian-based multinationals have already migrated their Hungarian
financing structures to other jurisdictions due to a similar change in the
new Hungary-U.S. treaty (which is not yet in force). Companies with non-U.S. financing carried out through these
Hungarian structures now should consider more efficient structures for their
U.K. financing activity.
Overview of the new treaty
The treaty's provisions will generally apply in Hungary on January 1,
2012. In the United Kingdom, the provisions will apply to withholding tax
amounts arising on or after January 1, 2012, to corporation tax from
April 1, 2012, and to income and capital gains tax amounts from April 6,
Interest and royalties
Under the new treaty, interest
and royalties are only
taxable in the company's country of residence. However, the new
treaty contains a triangular clause that will result in a withholding tax rate
of 15% when the effective tax rate for the branch (e.g., Switzerland,
Luxembourg) is less than 60% of the head office
tax rate (e.g., Hungary).
Withholding tax applied to dividends is generally:
- 0% on dividends paid to a beneficial owner that is a
pension fund or a foreign company that owns at
least 10% of the payer company
- 15% if the dividends are paid out of a real
estate investment trust (REIT)
- 10% in other cases.
The new treaty generally will replace the 1977
Hungary-United Kingdom tax treaty.
For more information, contact your KPMG adviser.