Avoiding Double Taxation of Companies in the System of Income Taxes
As a result of globalization, trade and economic relations and consequently entities’ area of operation impact more and more countries. In order to avoid double, multiple or non-taxation In case of such transactions, double taxation conventions or, failing this, the internal regulations of the countries concerned shall prevail.
In this article we are writing about the avoidance of double taxation of corporate tax.
Section 3 of Act LXXXI of 1996 on Corporate Tax and Dividend Tax distinguishes between two types of taxes, such as full and limited tax liability. Among the recommendations of the Model Tax Convention the rules on the taxation of business profits are normally the same; however, the provisions of certain agreements may vary.
This means that in case of Hungarian tax residency in Hungary fully, that is together with the world’s income, while in case of a foreign tax residence in a limited way only income earned by the site in Hungary shall be taxable.
It is important to note that a separate Article of the Convention establishes provisions for the determination of the site in relation to the contractual countries, which is different in each Convention and affects the taxation right of each state.
When a Hungarian tax resident has income from abroad, this income may happen to be subject to corporate tax or a corresponding income tax liability in the source country. The tax domicile state is responsible for the elimination of double taxation, which – in addition to the internal regulations – is laid down in a specific Article of double taxation conventions and may vary in each Convention. Normally, Hungary manages the avoidance of double taxation with the legal institutions of exemption and offsetting in its conventions. In case of countries with which it has no such Convention, offsetting is applied.
The calculation described above shall be based on Section 28 of Act LXXXI of 1996 on Corporate Tax and Dividend Tax, maintaining Article titled ‘Conventions, avoidance of double taxation in the domicile state’.
Hungary has Double Taxation Conventions in force with nearly 80 countries.