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HUNGARY

BUYING PROPERTY IN HUNGARY

BUYING PROPERTY IN BUDAPEST

 

WHAT ARE THE STEPS IN BUYING PROPERTY IN HUNGARY?
For a foreign investor who wants to purchase real estate in Budapest there are two ways to proceed:

1. The buyer can apply for a permit as a private person, which means submitting an application to the local authorities to acquire the properties(s). The costs associated with the procedure is approximately € 250
2. Foreign buyers can establish a local Hungarian company, usually a limited liability company. This is preferable if the purchaser wishes to acquire multiple properties.

ACQUISITION OF REAL ESTATE BY A BUSINESS VENTURE
The advantage of buying property through a company is that all expenses relating to the apartment can be written off (e.g.) travel, accommodation, legal & agency fees, purchase (stamp) duty, renovation costs, furniture, utilities, and all associated services, including the interest on loans. Under this approach, the company can be sold along with the property, which makes it attractive for future buyers, as no purchase stamp duty needs to be paid. The only disadvantage is that the company shall require an accountant and need to submit annual reports. Establishing a company in Hungary is a routine procedure, which can be arranged within a day.

The basic procedure is as follows:

- The company's Articles of Association needs to be signed in front of a lawyer*.
- The lawyer will also need the name of the new company, its seat, the personal data of the owner(s) and designation of a delivery agent for official documents. The founding capital of a limited liability Company is HUF 3m. or Euro 12, 000 - this amount can be applied to the purchase of the property.
- After the Articles of Association are prepared, specimens of signature need to be signed in front of a public notary, then a bank account must be opened.
- Then all the documents, forms, authorizations and invoices must go to an accountant who will take care of all the administration and prepare the required reports.

ACQUISITION OF REAL ESTATE BY PRIVATE INDIVIDUALS
To buy a property in Hungary is straightforward and will require the following:

- Appointing a Hungarian legal representative and paying in the initial deposit of Euro 1000 to 2000/property
- Going to a notary public and certifying the buyer's identity to initiate the permit approval process. If the permit is refused (which is a remote possibility) establishing a company is the next suggested option. The issue with the public notary can be done at any Hungarian embassy or consulate but opening hours vary and the price abroad for this service is much higher than doing it locally. The cost associated with the procedure is approximately € 250.
- Signing the purchase-sale agreement can be taken care of in your home country if time is an issue whereby the agreement is signed by yourself, notarised at the Embassy and then mailed to your local legal representative.

You can also have your purchase sale agreement signed in Hungary or you can appoint a proxy. In this case you either sign the Power of Attorney in front of your legal representative while you are in Hungary, or in your home country in a Hungarian consulate.

From January 2006 the Municipal Authority would accept the passport legalization only by a notary public or the Hungarian consulates (like earlier), so the legalization by law firms would not be sufficient. Clients who are coming to Hungary shall visit a notary public / clients who are not coming to Hungary shall also legalize the copy of their passport at the consulate.

It is also important to mention that according to Hungarian legislation the developer of a new property has a warranty obligation for 3 years.

 

THE TABLE BELOW HIGHLIGHTS THE KEY DIFFERENCES BETWEEN BUYING AS A PRIVATE INDIVIDUAL AND BUYING AS A COMPANY

 

Private Person

Company

Permission

Permit granted by the local director of the regional public administration office

No permission needed

Restriction on the number of properties that can be purchased

No restrictions but in practice permit is given for up to 2 properties

No restrictions

Purchase related costs

Approx EUR 350

Approx EUR 800

On going legal and administrative costs

None

Accounting approx EUR350/year

Tax

25% capital gains tax

16% corporate tax on profits

Re-selling

None

When selling the company owning the property, no stamp duty needs to be paid which makes it attractive for future buyers

WHAT TAX DO I PAY WHEN BUYING A PROPERTY?
Whether buying a flat as a private individual or through a company, you will have to pay a transfer tax or stamp duty. The tax is payable by the transferee and is levied on the market value of the property.

When buying property the following rates for stamp duty are applicable:

Type of Property

Criteria

Buy As Individual

Buy As Company

Used Property (Re-sales)

Lower than HUF 4M (EUR 16,000)

2%

2%

Higher than HUF 4 M (EUR 16,000)

6%

6%

New Apartments

Lower than HUF 15M (EUR 60,000)exempt

Exempt

2% on the total price

Between HUF 15 - 30M (EUR 60,000 – 120,000)

6%

See Above

Higher than HUF 30M (EUR 120,000)

6% on the total price

See Above

Commercial and plots

None

10% of the property price

10% of the property price

WHAT TAX DO I PAY WHEN USING OR SELLING A PROPERTY?

VAT
- Vendors are not liable to pay VAT on certain real estate transactions (treated as exempt) including the rental of residential property or the sale of residential property for the second or subsequent time after its construction. However, such vendors are not entitled to reclaim any VAT charged to them in connection with these activities.
Income Tax
- Individuals are taxed at 25% on income from the sale of property in Hungary, unless a double tax treaty provides otherwise. So, if you bought a flat for HUF 20 million and now sell it for HUF 24 million, you will have to pay a quarter of the HUF 4 million profit to the tax man.
- The documented costs of acquiring and developing the property allowed by Hungarian law may be deducted on income from the sale. It may be possible to deduct the costs of travel and service fees as well that are associated with the property as part of your global income; we suggest that you consult a tax advisor in the country where you pay taxes. Hungary has long standing double taxation treaties with most countries making this situation fairly straightforward.
- Here is no annual amortization on the property and the level of tax payable starts to depreciate at 10% per year only from the sixth year of ownership onwards.
- Tax can be reclaimed on any income from a property sale used by the seller (or a close relative) to buy or to secure title to other residential properties within a limited period of time, but this is only really of relevance to buyers who are legally resident in Hungary

CORPORATE TAX ABD DIVIDEND TAX
- In the case of property acquired by a company, the profit from the sale of the real estate is taxed at the current corporate tax rate of 16%.
- The company can deduct all expenses relating to its activity which is holding the property. The cost of any renovation work that increases the value of the property, stamp duty, and lawyers/agents fees can be used to reduce your tax base on income from rentals or profit from selling the property. Such work does not include maintenance costs - so just painting the place doesn't count.
- The company can amortize the property; this basically means that the company will only have profit in the books when selling the property. The maximum tax-deductible depreciation on industrial buildings and buildings with long useful lives is 2%, while rental properties can be depreciated at a preferential rate of 5%. When calculating book depreciation, it is important to ensure that it corresponds to the anticipated useful life of the property and to the company's accounting policy.
- Under the Act on Corporation Tax, 20% withholding tax must be deducted from dividends paid abroad by Hungarian companies unless paid to an EU resident parent whose holding in the payer meets certain conditions or a double tax treaty provides otherwise.

Lastly, if a company sells the whole company, the seller doesn't have to pay capital gains tax in Hungary, and the purchaser does not have to pay stamp duty.

WHAT TAXES DO I PAY WHEN RENTING OUT MY PROPERTY?
There are two options for the private landlord who is registered in Hungary as a taxpayer: can either pay a simple 25% of rental income to the tax office, or you can have the income included in your earnings and pay income tax after it. Unless you are a very low wage earner in Hungary, you will probably find yourself in the upper 38% income tax bracket, so the second option is not usually worth doing however if you choose the 25% flat rate all income earned shall be taxed, the expenses cannot be deducted.

A company has to pay 16% corporate tax on any profit made from renting out a property. Agents' fees and - if you live abroad - the cost of necessary travel to Hungary might be tax-deductible.

Hungary is relatively unusual in that a company can depreciate the value of a residential real estate asset over time at 2% per year. This means that if you buy a flat for HUF 10 million, it can go through the company's books as an expense at the rate of HUF 200,000 per year, which will considerably reduce the corporate tax payable from rental income.


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