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9. FOREIGN TAX CREDITS

The double taxation of corporate profits is mitigated through either a unilateral tax credit, or a treaty-based credit or exemption. The difference between unilateral and treaty-based tax credits is that the unilateral credit is limited to 90% of the foreign tax paid, while under a treaty the entire foreign tax may be credited.

Regardless of whether a tax credit is unilateral or treaty-based, it is limited to the amount of the average Hungarian corporate tax falling on the income on which the foreign tax was paid.

When establishing the corporate tax falling on the foreign income, a country-by-country approach is applicable, separately with respect to each type of income. The foreign sourced revenue has to be reduced by direct cost, expenses incurred in relation to such revenue, as well as all indirect cost in proportion to the foreign source revenues to the total revenues. In addition, tax base adjusting items also have to be applied on a direct allocation/proportion-based indirect allocation basis. (see Sec. 10.1. for the participation exemption regime with respect to dividends and capital gains).