High-Tax Country Resident Planning To Go Offshore: Hungary

If you are resident and domiciled in Hungary (which will be the normal situation for a native-born Hungarian individual) then you are taxable on your world-wide income and capital gains. There is no wealth tax as such (a 0.35% luxury tax applied from January 1 2010, but was abolished on July 1, 2010), but inheritance tax applies.

Many resident individuals will be participating in domestic Hungarian tax-privileged savings and investment instruments, and usually these can simply be discontinued on leaving without serious tax penalties.

Residence applies to individuals who:

• spend more than 183 days in the country;
• possess a permanent home in the country;
• make Hungary their main base or center of economic activities, directly or indirectly.

In order to lose tax residence it is necessary to stop fulfilling any of the above criteria in a given tax year, and a tax clearance certificate must be obtained from the tax authority. An individual ceasing tax residence in Hungary may be required to demonstrate tax-residence in another country. Dual-residence situation are dealt with under 'tie-breaker' clauses in Hungary's tax treaties.

Although some revenue protection measures apply to countries having "preferential" tax regimes, general anti-avoidance legislation has not progressed far in Hungary, and offshore trusts are generally speaking quite effective at sheltering many types of asset.

For an individual who knows she is going to leave Hungary, there is therefore a case for switching income-generating assets into capital appreciation assets outside Hungary, or at any rate for ensuring that gains are not made during Hungarian residence which could incur capital gains tax. Gains which crystallise after residence has finished will escape Hungarian tax.

Once a definite decision to move offshore has been made, careful thought should also be given to existing Hungarian capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

Individuals who have significant Hungarian business income need to take the residence rules into account. They may be able to make use of offshore corporate tax structures, but anyway need to take expert advice on how to structure this income once emigration has taken place, to ensure that they do not fall within the residence rules.

Once Hungarian residence has been terminated, and if non-residence is expected to be permanent, then an ex-Hungarian resident is free to invest offshore in order to obtain the best possible returns, as long as the new residence itself is not offshore.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 50 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.