background image
5.2. Treatment of Foreign Profits / Losses

Foreign profits/losses derived by a Hungarian resident entity directly or through its foreign permanent establishment are included in its books and must be considered when determining its tax base.

Foreign business profits/losses are accounted for according to domestic accounting and tax rules and converted into Hungarian currency (HUF). The HUF may be substituted by EUR or USD (and if certain conditions are met other currencies as well). For attribution of profits between head office and permanent establishment, the single entity approach is endorsed, i.e., the permanent establishment is treated as if it were an independent part of the general enterprise dealing at arm’s length with the rest of the enterprise. Foreign exchange gains or losses have to be accounted for in the books, therefore, they are in principle taxable for corporate tax purposes.

When relieving juridical double taxation, Hungary generally uses the tax exemption method ) in tax treaty situation. As a consequence, losses incurred by the foreign permanent establishment can be deducted by the Hungarian head office, which is taxable on its worldwide income.