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On 1 January 2007, rules enabling taxpayers to request advance rulings in respect of transfer prices entered into force in Hungary (Arts. 132/A and 132/B of Act XCII of 2003 on Tax Procedure). In particular, an application can be submitted to the tax authorities to determine the transfer pricing method, the decisive facts and circumstances, and, if possible, the fair market price or price range applicable in future transactions between associated enterprises.

A taxpayer may request both unilateral and bi or multilateral advance ruling procedures. In the latter case, the Hungarian tax authorities cooperate with the tax authorities of the associated enterprises in order to determine a transfer price that will be accepted by each of the tax authorities concerned by the cross-border transactions, thereby eliminating potential double taxation. If the taxpayer requests a bi or multilateral procedure and (i) the foreign tax authorities do not provide the necessary information and information or (ii) the cooperation with the foreign tax authorities regarding the determination of the correct transfer price is unsuccessful, the application will be rejected. In these circumstances, the taxpayer has the option to transform its request to an application for a unilateral procedure.

An advance ruling can be issued for a definite period of 3 to 5 years. On request, this period can be extended with another 3 years. The ruling is binding on the tax authorities, unless:

-   the relevant circumstances change;
-   the taxpayer has provided false information in the application for the advance ruling;
-   the taxpayer has provided false information in the application for the advance ruling;
-   the laws underlying the ruling have changed and the ruling is not amended accordingly;
-   the critical conditions included in the ruling are not fulfilled; or
-   the taxpayer and its associated enterprises do not comply with their annual reporting obligations.

Participation exemption extended to capital gains

Changes to the Hungarian corporate income tax rules that extend the participation exemption regime to capital gains derived from the disposal of certain qualifying participations entered into force on 1 January 2007. In particular, capital gains realized through the disposal of a "reported participation" are exempt from corporate income tax (i.e. can be deducted from the corporate income tax base) provided that the taxpayer has held the participation for at least 2 years before the disposal. "Reported participation" is a participation of at least 30% in the capital of a Hungarian or foreign company (except for controlled foreign corporations) the acquisition of which was reported to the tax authority (within 30 days from the day of acquisition). The exemption applies only to participations acquired after 1 January 2007. Capital gains from reported participations are also exempt from the solidarity tax

The extension of tax exemption to capital gains completes the favourable Hungarian tax regime for holding companies, which already featured an exemption from corporate income tax for all inbound dividends without minimum participation threshold and exemption from withholding taxes on interests, royalties and dividends paid to non-resident companies.

Further changes to those already reported were introduced by Act CXXXI of 2006 (published on 22 December 2006) that entered into force on 1 January 2007. These include, inter alia, the refinement of the rules relating to the calculation of the "anticipated tax base" for the purposes of the minimum tax. The "total income" from which the anticipated tax base is calculated is now defined as covering net sales revenue, other revenues, income from financial transactions and extraordinary revenues. In order to comply with the Merger Directive (90/434/ECC), further items deductible from the total revenue were introduced to ensure the rollover relief for capital gains derived from preferential transformation, preferential transfer of assets and preferential exchange of shares.

Similar deductible items were introduced in calculating the tax base for solidarity tax. As a result of the amendments, the solidarity tax base can also be reduced by the direct costs of research and development or by the depreciation of capitalized value of research and development.