No wonder that real estate plays a major role in the overall M&A market, since these properties represent financial and emotional security too. Both buyer and seller try to maximize their cost-benefit ratio, and are dependent on reliable data. In this article we would like to give an insight into the specialties of real estate taxation in Hungary.
Next to identifying, for example, future rental income and maintenance costs, the owner/lessor has to be absolutely sure about the funding of fiscal circumstances, including taxes.
In terms of real estate, Hungary levies taxes on the owner for holding, utilization and alienation of the property. Taxes are assessed both at the level of central administration and local municipalities. Upon alienation, moreover, taxes may be imposed for the alienator (capital gain taxation both for corporations and private persons) and the purchaser (real estate transfer tax, gift tax depending on the form of acquisition) too. Although in some cases real estate holdings are also taxable, it is still worth considering structuring real estate investments by share instead of asset deal – it is especially advantageous to combine that with a so-called reported participation scheme, which grants full exemption from the taxation of any capital gains in a future sale of the shares.
It is also advisable to be aware of potential tax savings concerning real estate investments. In planning the investment, one may consider the development reserve that represents a kind of accelerated depreciation. In the case of long-term used tangible assets – such as real estate with a yearly depreciation of 2-6% – this is a good development loan from the budget.
Moreover, a special tax advantage may also be used for the maintenance costs of monument buildings and locally listed buildings (double deductibility of costs). For renovation and investments aimed at safeguarding cultural heritage, the tax base may be reduced by triple the renovation cost. Moreover, the latter is not even limited by the amount of pre-tax profits either, i.e. resulting in losses carry-forward.
Real estate investments may also form part of a project eligible for development tax allowances (providing 80% credit from payable CIT, ending in an effective tax rate of 1.8%) and other state subsidies. Moreover, from 2017, the implementation and operation of asset investments aimed at energy efficiency or reducing final energy consumption also can lead to a CIT credit of 70%. The tax incentive is capped at 30% of the eligible costs, which can be further increased by 10-20% for SMEs (altogether up to EUR 15 million).
In order to build a full picture, the VAT, which is in many cases the most difficult issue in a real estate transaction, should also be mentioned. Generally, the alienation of real estate is subject to VAT at a rate of 27%. The sale of real estate occupied for more than two years or undeveloped land (except building plots) as well as the rental and leasing of property is tax exempt. Notwithstanding this general rule, the taxpayer may opt for taxation, but will be bound to his decision until the end of the fifth calendar year. With respect to real estate transactions, taxpayers may opt to be taxable on the sale, or the lease, or both. In the case of leasing, it is possible to differentiate between residential and non-residential real estate. Considering the varieties, it is necessary to be well prepared for the VAT.
So, tax optimization tailored to each client’s need is very important in real estate transactions. As a renowned M&A advisor, LeitnerLeitner has decades of practical experience in the M&A and real estate market. We provide our clients with high-end tax and financial advisory through all stages of the real estate lifecycle, from establishment or purchase to initialization of sale or demolition of real estate.