The Double Tax Treaty for the avoidance of double taxation with respect to taxes on income and on capital concluded between Hungary and the Government of the Republic of Iraq was signed on 22 November 2016 and the related Act IX of 2017 was officially published on 16 March 2017.
The contracting states shall notify each other in writing through diplomatic channels that their domestic requirements for the entry into force of the convention have been complied with.
The convention shall enter into force on the 30th day following the receipt of the latter of the notifications referred to above and its provisions shall have effect in both contracting states:
- with respect to taxes withheld at source, on income derived on or after 1 January of the calendar year following that in which the convention enters into force;
- with respect to other taxes on income and taxes on capital, for taxes chargeable for any tax year beginning on or after 1 January of the calendar year next following that in which the convention enters into force.
The provisions of the new DTT shall apply to taxes on income and on capital imposed on behalf of a contracting state, or of its local authorities, irrespective of the manner in which they are levied.
The existing taxes to which the DTT shall apply are in particular:
- in Hungary:
(i) the personal income tax;
(ii) the corporate tax;
(iii) the land parcel tax; and
(iv) the building tax.
- in the Republic of Iraq:
(i) the income tax;
(ii) the real estate tax;
(iii) the vacant land tax; and
(iv) the income tax on foreign oil companies contracting for work in Iraq.
The DTT shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Dividends
Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state may be taxed in that other state. However, such dividends may also be taxed in the contracting state of which the company paying the dividends is a resident and according to the laws of that state, but if the beneficial owner of the dividends is a resident of the other contracting state, the tax so charged shall not exceed 5 per cent of the gross amount of the dividends.
The term “dividends” means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
Interest
Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state.
However, interest arising in a contracting state may also be taxed in that state according to the laws of that state, but if the beneficial owner of the interest is a resident of the other contracting state, the tax so charged shall not exceed 5 per cent of the gross amount of the interest.
Interest arising in a contracting state and beneficially owned by a resident of the other contracting state shall be taxable only in that other state if such interest is paid:
a) in connection with the sale on credit of any merchandise or equipment;
b) on any loan or credit of whatever kind granted by a bank;
c) to the Government of the other Contracting State, including any political subdivision or local authority thereof, the Central Bank or any financial institution owned or controlled by that Government;
d) to a resident of the other State in connection with any loan or credit guaranteed by the Government of the other State, including any political subdivision or local authority thereof, the Central Bank or any financial institution owned or controlled by that Government.
The term “interest” means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest.
Capital Gains
Gains derived by a resident of a contracting state from the alienation of
- immovable property situated in the other contracting state,
- shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other contracting state
may be taxed in that other State.
Gains, other than these, from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State.
Gains from the alienation of
- ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in that contracting state;
- any property, other than those referred to above shall be taxable only in the contracting state of which the alienator is a resident.
Impact on investors: Hungary has progressed further with extending the circle of existing DTTs, thereby increasing the possibility of avoiding double taxation.