Most of the foreign companies do not plan to tax in Hungary. Tax Planning can save you lots of money and annoyance.
Tax optimization is to act within the appropriate legal options and exploit loopholes so that companies have to pay fewer taxes (income tax, wage contributions etc). Also, if a strong base is established for a further tax audit, the company won’t be destroyed by the Tax Authority and criminal procedures will be avoided against the company’s CEOs. In case of a non-resident business the tax planning is highly recommended also for a simple activity with tax advisors, legal experts. Furthermore, it is significant to determine the operational possibilities in Hungary with professionals in an appropriate legal framework.
Unfortunately, during my work I faced too many obstacles related to the Hungarian operation of foreign companies. Companies often pay taxes unnecessarily or they do not receive VAT due to false contracts.
You always have to think ahead, not only the tax planning but contract preparation. Unfortunately the managers often forget the legal consideration by setting up a business. Tax planning has several phases, as well as the company's life. Taxes have to be planed even before the establishment, under the operation of the company and when the company is certainly closing.
Tax Planning in a starting business
Tax planning begins with a Hungarian company formation. A managing director should define how much capital the company will be established with. Moreover, the decision has to be made whether the manager is responsible for their own property or solely assets of the company. In Hungary, the legislation should be defined on the future taxation of the company before business starts. It will determine the company's first fiscal year, therefore an experienced professional help should be highly significant.
A real example represents: due to only one mistake of "x", a company reached 17 million HUF of tax loss after a transaction (HUF 80 million). It could have been easily avoided by the foreign company.
Tax losses may be the recoverable VAT which can not be reclaimed at all or only later on. So the amount can not be invested long and use for something else.
But sometimes not only one, but two firms are necessary to establish in Hungary. For example, it may be appropriate such as the "property" (high-value assets) held by one company and operating function is performed by the other company.
It is also important how to select the site, as it is going to define the amount of local taxes, which tenders you can or you can’t apply for.
It is also an important viewpoint either individuals or an existing company establish the business. Furthermore, the duration of the new company (indefinite or definite time) should be considered as well. But it is also possible that your existing company takes responsibility for paying the tax in Hungary.
One may purchase an existing company as a "special foundation" option. In this case, it can be attractive that the tax will likely cost less than the business establishment. Besides, there is no tax liability after the acquisition of real property.
For example, the tax conditions are better with the purchase of a real estate company.
There is a fierce market competition among economic players, where last longer, smarter, more inventive, more efficient company will survive. The company, which carries out the transactions along carefully with a business plan and a tax optimization, achieves greater benefit. Therefore, the company’s focus can be more emphasised on the development of the company, hiring staff or the owners can take higher dividends.
Tax planning issues arising in the operation of an existing company
You are highly suggested to consult a tax adviser prior to a major contract or transaction. As you will not be able to have the possible tax relief or deduct the VAT if the contract is written improperly.
In the worst case, the tax authority itself discovers the mistakes. In addition to the taxes the company would pay at least 50% or even 200% of fine as well.
Not to mention the fact that criminal liability may also connect to the company's managing director. There is absolutely no way for the managing director to leave the company with debt. As it is sure that criminal cases will be initiated by the tax office.
Be alert for tax purposes when you deal with business:
- Determination of time
- providing correct (formal, substantive terms) invoice
- Submission of papers before the deadline expires
- petty cash balance, bank account management
The tax plans during the operating business will assist preparing tenders, loan request, final business reports, and transfer quotation. The data derived from tax plans can be utilized for controlling and potential investors could be persuaded by it.
Tax solutions in the closure of the company – liquidation, winding up –
The winding up is where the company has accumulated debts and is unable to pay its creditors and liquidation when it closes the company without debt. The Tax Office will check the company in both cases. If there are anomalies, the tax authority can prosecute the company. The review is essential in the case of winding up as well due to occurring disinterest. It turns up because the owners are generally not interested in the fate of the company at the stage of closing the business. Therefore CEOs sometimes have to deal with lawsuits.
During my practice, the most criminal cases were initiated against a foreign-owned company when the business is closing or the liquidation starts. Unfortunately, it is suggested by many people that a company should be sold on close and others will carry out the liquidation. In this case, it is easier for the Authority to prove intention.
What further factors should you pay attention to, if you wish to venture in Hungary
When the company wishes to do business in Hungary, or already operates one here, there are options to save more tax and have better administration.
You are suggested to pay attention to the following:
- Do you work with an appropriate corporate structure to your company? – Do you have a subsidiary corporation, limited liability Company, a European joint stock company or is it sufficient if the company is taxable in other EU countries?
- Is there compatibility of the foreign firms’ contracts signed by Hungarian companies with the Hungarian tax and law?
- What are the workflows, in which a foreign company should hire a Hungarian lawyer, tax consultant office? If you intent to reclaim VAT on purchased goods in Hungary connected to the activity of your business or you requires assistance for your Hungarian business
- Are you aware of what kind of bills, deeds, and documents can be compensated against the company’s petty cash, corporate tax cut, also VAT reclaim Hungary? It is important that contracts and invoices should be in harmony with each other and also those should be issued in accordance with tax legislation.
- If you have a Hungarian company, you surely have thought about rechecking accounts and contracts to get a clearer picture of the company's internal accounting and legal affairs. Please, find our article about the background check.
The benefits of tax planning - a step ahead of the competitors
The tax planning is not just the privilege of the multinational companies. We encourage small and medium-sized corporate customers to ensure the future of their company with tax optimization. With a little attention you can prevent your competitors, as the savings provide more business development to investments.
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