Global Tax Adviser
December 20, 2011

Hungary-U.K. Tax Treaty Will Affect 2012 Taxes

Maryse Mayer
Montreal, International Corporate Tax

Marc Desrosiers
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, 2012.

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).

Dividends
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.

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