Usually, when a domestic tax situation becomes too overbearing, many high net worth individuals (HNWIs) would consider safeguarding their wealth and assets somewhere more amenable to their needs. Traditionally, this alternative location might take the form of an offshore tax haven, such as the British Isle of Jersey, or the British Virgin Islands. However, a proliferating global transparency regime has made it increasingly difficult to adopt these means in a more confidential manner, with greater regulatory enforcement including the Register of Beneficial Ownership (RBO), the Common Reporting Standard (CRS), and the Foreign Account Tax Compliance Act (FATCA).
Although the privacy benefits of a traditional tax haven are diminishing in the face of this regulatory regime, they also come with a host of their own issues. Due to some of the growing negative sentiments towards tax havens, HNWIs that use tax havens may be subjected to additional scrutiny from their local regulatory authorities. This could take the form of tax audits and other investigative measures. Additionally, many reputable banks regard tax haven users as higher risk clients. This is likely to result in greater due diligence requirements with a lower probability of being accepted for opening a corporate account.
Apart from risks stemming from a perceived lack of propriety, tax havens come with their own issues related to the very thing they ostensibly simplify: taxes. For instance, many offshore tax havens lack double taxation treaties, so although taxes paid there may end being minimal, HNWIs may still end up having to pay taxes elsewhere. Additionally, offshore tax havens may lack appropriate tax compliance, resulting in the potential for fines or legal action.
In light of these tax issues HNWIs ought to consider an EU trust registered in Hungary, which suits needs similarly to those offered by offshore tax havens, but which also come with a range of additional benefits related to taxes. The first is that these trusts are tax compliant, meaning that trusts in Hungary are subject to tax returns. While EU trusts enjoy very favorable tax treatment in Hungary, they are fully tax compliant, as the trustee must report the trust’s annual financial statement to the Hungarian Revenue Service. As a result of being fully tax compliant, no one can challenge the trust from a taxation perspective, as there is always available proof of the source of the funds.
Another benefit is that establishing a trust in Hungary is tax free, as is transferring assets to that trust; it comes with no similar type of financial charge or burden. Next, a qualified Hungarian trust is subject to a special tax exemption regime and all the financial incomes of the trust are tax exempt. These financial incomes include dividends, interest earned, capital gains, foreign exchange gains, swaps gains, profit from options and receivables, and similar types of incomes. Trusts are imbued with such tax exemption if the trust’s settlor and beneficiaries are private individuals and the trust has only financial income.
Meanwhile, a non-qualified Hungarian trust, as a corporate taxpayer, can also enjoy the tax benefits of the Hungarian tax regime. For example, incoming dividends are tax exempt. Being a part of the participation exemption regime results in capital gains also being tax exempt. Additionally, the vast double tax treaty (DTT) network of Hungary reduces the foreign sourced income’s withholding tax (WHT) rate to 0-10%. Also, every cost item which is related to the profit generation activity is tax deductible, with any loss being carried forward for five years. Qualified royalty income is 50% tax deductible resulting in 4,5% effective tax rate, and the general corporate income tax rate is only 9% flat.
Another benefit of an EU trust in Hungary is asset distribution. First off, capital distribution is always tax free in Hungary. Additionally, yield distribution is WHT free if the beneficiary is a legal entity, and subject to a maximum 15% WHT if the beneficiary is a private individual. The applicable DTT may reduce the WHT rate to 0-10%. However, private individuals enjoy a tax exemption or a dollar-to-dollar tax credit in their home country. If a qualified trust, the trustee is allowed to open a permanent savings account for the trust. In that case, all income coming from securities is tax exempt on both the trust and individual level; resulting in zero withholding tax upon distribution.
To emphasize these and a few other benefits a Hungarian trust has over offshore tax havens, it is worthwhile to look at some specific examples, such as Cook Islands, Nevis, and St. Vincent. One of the benefits an EU trust in Hungary has over these offshore tax havens is historical longevity. While Hungary identifies the foundation of its state at 895 A.D., the Federation of St. Kitts and Nevis achieved its independence from Great Britain only in 1983, and Saint Vincent and Grenadines gained its independence only in 1979. Meanwhile, despite gaining independence in 1965, the Cook Islands still maintain a free association with New Zealand, being dependent on it for defense, foreign affairs and many other areas.
Legal precedents are also another consideration of this historical legacy. The legal systems of the Cook Islands, Nevis, and St. Vincent are based upon English Common Law which is partly codified and partly based on case law which could lead to many uncertainties in respect of the application of the law. Generally, their judicial system consists of 2 levels in certain cases with the possibility of final appeal to her Majesty’s Privy Council. Meanwhile, Hungary is an independent, democratic, constitutional State governed by the rule of law, whose legal system is based on the Fundamental Law of Hungary. Additionally, assets and citizens in Hungary are also under the protective shelter of the EU law and the European Court of Justice.
Accordingly, as a member of the EU, Hungary’s law is in accordance with European Commission (EC) Regulation No. 1606/2002, which requires the application of IFRS in the preparation of consolidated financial statements. As a result of such a regulated and strict accounting system in Hungary, full tax compliance and fully proved source of the funds are completely guaranteed. To conclude, these are concrete examples about why an EU trust registered in Hungary may be a better option for HNWIs, as opposed to a more traditional offshore tax haven.