What are some of the key legal and fiscal provisions that impact real estate players in Hungary?

Recent legislation, Act C of 2023 on Hungarian Architecture, has amended several laws impacting the real estate sector. The act introduces architectural principles that must be considered throughout the planning and construction process, focusing on factors such as environmental protection.

The real estate market is significantly influenced by sustainability issues, as properties (whether industrial, office, or residential) play a major role in energy consumption and greenhouse gas emissions. Therefore, the extent to which a given property is ESG-compliant is crucial. 

There are numerous voluntary and business-based ESG ratings available in the real estate sector, and regulations are continuously evolving to better incorporate sustainability considerations. These factors greatly influence the decisions of real estate market participants. The Hungarian ESG Act, adopted at the end of 2023, and the EU sustainability reporting frameworks (CRSD, EU taxonomy) also include numerous sustainability topics related to properties and the associated reporting obligations.

The acquisition of real estate in Hungary by foreign individuals is subject to legal restrictions. Foreign legal or natural persons can only acquire ownership of real estate that is not classified as agricultural or forestry land with the permission of the competent government office. However, no government office permission is required for citizens of the EU member states, the states party to the Agreement on the European Economic Area (Norway, Liechtenstein, Iceland), and Switzerland; thus, the regulation only imposes restrictions on investors from third countries.

In terms of financial provisions, the non-resident capital gain tax has to be highlighted. Hungarian legislation contains a special provision for cases where a foreign tax resident sells its shares in a domestic taxpayer that owns real estate in Hungary. In such cases, foreign persons may become – although only to a limited extent, in relation to that specific transaction – taxpayers in Hungary, but only if the respective double tax treaty (DTT) grants taxing rights for Hungary over those gains. For the purposes of non-resident capital gain tax, a company is considered to own real estate if more than 75% of the book value of its assets consists of real estate located in Hungary. 

This provision might have a significant impact on foreign real estate players, as they may incur Hungarian tax liabilities in cases of certain transactions. Shares in a company owning real estate are treated as real estate itself from a taxation perspective; therefore, similar to acquiring real estate, their acquisition may be subject to a 4% transfer tax.

How attractive is the current tax framework in Hungary for property investments?

The current Hungarian tax framework is considered highly attractive within the CEE region, especially because Hungary's corporate income tax rate is 9%, which is not only the lowest tax rate in the CEE region but also among all OECD member states. Furthermore, there is no withholding tax levied on interest, dividends, and royalties paid to foreign companies.

In addition to the rather favourable tax burdens, Hungarian tax legislation includes the concept of participation exemption (i.e. reported shares). If a shareholding is reported to the tax authority within 75 days from the date of acquisition, the capital gains from the sale of the reported shares – in case they are held in the company’s assets for at least one year – are practically tax exempt. This tax exemption regime of capital gains is highly advantageous for holding structures.

For real estate investors, the REIT (regulated real estate investment trust, in Hungarian known as SZIT) structure offers further additional benefits. Although establishing a REIT is subject to strict conditions, the regulatory environment is highly favourable for REITs. For instance, REITs and their project companies are exempt from corporate tax and local business tax, and a reduced transfer tax rate of 2% applies to them.

Companies in Hungary have to pay up to 2% local business tax to municipalities, the tax base of which is the net sales revenue, rather than the profits actually realised. However, the local business tax base might be decreased by certain cost elements such as subcontractors and material costs, which can result in a significant reduction in the tax base for some real estate investors.

What is your outlook for the taxation changes in Hungary this year?

Hungary presents an outlook with several features that might encourage investment. The favourable VAT rules on real estate transactions - that are particularly advantageous for property investments - were originally applicable until the end of 2024, but recent legislation has extended their applicability until 31 December 2026. Until the end of 2026, newly built residential buildings that do not exceed the size limits prescribed by law are subject to a reduced VAT rate of only 5%.

Additionally, this reduced tax rate can be applied until the end of 2030 for properties for which the building permits were issued by the end of 2026. Such favorable VAT regulations further enhance the attractiveness of the Hungarian real estate market for both domestic and international investors.

How is Forvis Mazars supporting real estate companies looking to develop their presence on the Hungarian market?

Forvis Mazars is dedicated to providing exceptional support to its clients through an extensive range of services. Our legal team assists clients in determining the most suitable corporate structure for their activities and provides comprehensive support in the legal establishment process. With the help of our accounting and VAT compliance professionals, our clients can achieve significant cost savings and risk reduction. Our specialists are experienced in both Hungarian and international standards, ensuring compliance and efficiency.

We offer flexible, tailor-made advisory services to help clients navigate the complexities of the Hungarian tax system. Furthermore, our extensive regional network allows us to provide harmonized, high-quality services across Europe.

Does the focus on sustainable buildings have any impact on property developments from a tax perspective?

It certainly does, for instance, by means of tax incentives that might reduce the corporate income tax of companies. Development tax credit may be claimed – in case certain criteria are met – by companies that invest at least HUF 100 million at present value in environmental protection projects. Besides, energy efficiency tax incentives might be granted for investments provided that they are in possession of a certificate issued by an energy auditor and the investment results in energy savings that reduce final energy consumption.

How competitive is Hungary across the CEE from a tax perspective in the eyes of real estate companies?

One of the unique selling points of the Hungarian tax regime is that no withholding tax is imposed on dividends, interest, and royalties paid by a Hungarian company to a foreign one. Also, Hungary has a wide international treaty network with more than 80 treaties on the avoidance of double taxation. Although the United States-Hungary tax treaty has been terminated as of 2024, we are positive that the new US presidency will create the possibility of renegotiating the treaty. Another feature of the Hungarian tax system is group taxation, which allows affiliated companies to be taxed as a single entity, optimizing their tax liabilities. Companies can prepare their financial statements according to International Financial Reporting Standards (IFRS). Hungary's local business tax is recognized as a covered tax under the Pillar II framework; therefore, in the case of some companies, global minimum taxation may not result in actual tax payment liability. These factors collectively make Hungary an attractive and competitive market for real estate investment, offering both stability and significant growth potential.

As for investment trends, the value of industrial properties in Hungary is increasing due to significant investments from major foreign companies. The hotel sector also remains a highly appealing area for investment. Hungary continues to attract tourists, with the number of guest nights returning to those before the pandemic, creating a robust demand for new properties, especially in Budapest.

What are some of the taxation trends recorded in the CEE?

Taxation trends are primarily shaped by global and EU requirements, which all countries in CEE must implement. Under the international framework of Pillar II, developed by the G20 and OECD, the global minimum tax was recently implemented across many of the European nations. Pillar II sets out global rules to ensure that multinational groups with global annual revenues of at least €750 million pay a minimum effective tax rate of 15% in all jurisdictions, which newly implemented criteria must be taken into consideration in tax planning strategies of companies involved in investments in CEE.

As a result of growing reporting and compliance obligations – such as reporting obligations required by the abovementioned Pillar II framework –, companies encounter an increase in their administrative burdens. To improve compliance with the expanding number of obligations, many authorities in CEE apply new digital tools for streamlined tax reporting and collection, including the eVAT system in Hungary, the Standard Audit File for Tax (SAF-T) in Romania and Poland, or the real-time invoicing system in Slovenia.