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23 October 2014
Global Tax Alert
UAE – Hungary Income Tax
Treaty enters into force
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The income tax treaty (the Treaty) between the United Arab Emirates (UAE) and
Hungary which was signed on 30 April 2013 has been ratified by both countries and
entered into force on 4 October 2014. As per the provisions of the Treaty, the Treaty
is effective from 1 January 2015.
Highlights of the Treaty provisions include:1
Residency (Article 5)
The term resident of the UAE includes (i) any individual who, under the laws of
the UAE is considered a resident thereof by reason of that individual’s domicile,
residence or any other criterion of a similar nature; (ii) any company or other legal
entity which is incorporated or created under the laws of the UAE by reason of its
residence, domicile, place of management or any other criterion of a similar nature;
and (iii) the State itself and any political subdivision local authority, local government
or governmental institution thereof. Furthermore, the Protocol to the Treaty provides
a non-exhaustive list of government institutions that fall under the term resident for
the purpose of this Treaty.
The Treaty does not require a person to be liable to tax in the UAE for the determination
of residency.
Dividends and branch remittance tax (Article 11)
Dividends paid by a company which is a resident of Hungary to a resident beneficial
owner of the UAE shall be taxable only in the UAE.
Under current domestic law, Hungary does not levy withholding tax (WHT) on
dividends distributed by a Hungarian company to resident and nonresident companies.
Furthermore, Hungary does not levy branch remittance tax. WHT at a rate of 16%
is imposed on dividends paid directly to individuals (both resident and nonresident).
However, the Treaty should override the Hungarian domestic tax law and reduce the
Hungarian WHT on dividends paid by a Hungarian company and beneficially owned
by UAE resident individuals to 0%.
Interest (Article 12)
The Treaty provides that interest
arising in Hungary received by a
resident beneficial owner of the UAE
shall be taxable only in the UAE.
Hungary does not levy WHT on
interest paid to resident and
nonresident companies based on
its domestic laws. Currently, WHT
at a rate of 16% is imposed on
interest paid directly to resident and
nonresident individuals. However,
the Treaty should override the
Hungarian domestic tax law and
reduce the Hungarian WHT on
interest arising in Hungary and
beneficially owned by UAE resident
individuals to 0%.
Royalties (Article 13)
Pursuant to the Treaty, any royalties
arising in Hungary received by a
resident beneficial owner of the UAE
shall only be taxable in the UAE.
Hungary does not levy WHT on
royalties paid to resident and
nonresident companies based on its
domestic laws. Currently, WHT at a
rate of 16% is imposed on royalties
paid directly to resident and
nonresident individuals. However,
the Treaty should override the
Hungarian domestic tax law and
reduce the Hungarian WHT on
royalties arising in Hungary and
beneficially owned by UAE resident
individuals to 0%.
Capital gains from the
alienation of shares (Article 14)
The Treaty specifies that capital
gains derived by a UAE resident
from the alienation of shares in a
Hungarian company deriving more
than 50% of their value directly or
indirectly from immovable property
situated in Hungary may be taxed
in Hungary.
Furthermore, capital gains derived
by a UAE resident from the
alienation of shares forming part of
a permanent establishment that the
UAE resident has in Hungary may
also be taxed in Hungary.
Capital gains derived by a UAE
resident from the sale of shares or
comparable interest in a Hungarian
company other than stated above
may be taxed only in the UAE.
Hungary currently does not tax
capital gains derived by nonresident
companies from disposals of shares
in a Hungarian company, unless:
• The shares are held through a
permanent establishment of the
seller in Hungary; or
• The company is considered a
Hungarian real estate holding
company (except if these shares
are listed on a recognized stock
exchange.)
Generally, a Hungarian company
is deemed to be a Hungarian real
estate holding company if either of
the following circumstances exists:
• More than 75% of its book value is
derived from real property located
in Hungary.
• More than 75% of the total book
value of the group, comprised
of the company and its related
companies that are taxable
entities in Hungary (whether
as resident entities or through
permanent establishments), is
derived from real property located
in Hungary.
Endnote
1. No federal income taxation currently exists in the UAE. Furthermore, in practice, corporate tax decrees issued
by the individual Emirates have not been applied. Taxes are currently levied only on oil and gas production
companies (not affected by the Treaty) and on branches of foreign banks under specific tax decrees or
regulations in accordance with agreements with the Rulers of the Emirates in which the branches operate.
Therefore, this Alert focuses mainly on income earned by UAE resident persons in Hungary.
2
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young Middle East, Abu Dhabi
• Tobias Lintvelt
+971 2 4174 507
• Sven Verschueren
+971 2 4174 418
[email protected]
[email protected]
Ernst & Young Middle East, Dubai
• Stijn Janssen
+971 4 312 9325
• Venice Segarra
+971 4 312 9412
[email protected]
[email protected]
Ernst & Young Advisory Kft, Budapest, Hungary
• Balazs Szolgyemy
+36 1 451 8606
[email protected]
Ernst & Young LLP, Central European Business Group, New York
• Miklos Santa
+1 212 773 1395
[email protected]
• Gabor Toth
+1 212 773 1763
[email protected]
Global Tax Alert
3
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