Cash Management in Hungary

Hungary has been a member of the European Union (EU) since May 2004 and thus applies the customs code, all associated regulations and commercial policies of the EU. There are virtually no restrictions, other than the ones related to anti-money laundering and on residents holding foreign currency accounts in or outside Hungary. Non-resident accounts are permitted and Hungary has no controls on capital or foreign exchange transactions. As of January 2006, provided certain criteria are met, companies engaged in international transactions are entitled to use a foreign functional currency. Furthermore, the following characteristics of the tax climate make Hungary a favourable location in which to set up a treasury centre:

• At 16 per cent, the Hungarian corporate income tax is the lowest in the region and provides competitive rates even within the EU.
• Tax exemptions on certain types of gains can be achieved, with the total amount capped at 50 per cent of the company’s pre-tax profit, granting an effective corporate tax rate of 8 per cent.
• Since January 2006, the tax base for municipal business tax and the research and development (R&D) tax has been modified in such a way that interest and royalty income no longer have to be included in the tax base. With no capital taxes, establishing a treasury centre in Hungary does not trigger any capital duties either.
• No withholding tax is levied on royalties or interest payments.
• As of 2006, Hungarian companies can pay dividends free of withholding tax to their foreign corporate shareholders irrespective of their fiscal domicile.
• Hungary has a vast number of tax treaties with numerous countries.

The Hungarian banking sector continues to be dominated by foreign-owned players, along with the largest Hungarian bank, OTP Bank. All major banks are connected to the Swift system and use the local giro for domestic payments. For high-value payments they use the local real-time gross settlement (RTGS) system called Viber. Cash still plays an important but significantly decreased role; cards are, at the same time, more widely used. With a population of approximately 10 million, the number of cards issued in Hungary is almost 7 million. Compliance and anti-money laundering regulations are in place and all payments need to bear a title code. Most banks can offer remote account opening in Hungary from various Western European locations. Electronic banking, both on- and off-line solutions, are commonplace in Hungary for companies, and the developments are mostly driven by the clients’ need to increase the ratio of straight through processing.

Cash Concentration Techniques and Products

Both major pooling techniques, i.e. cash concentration (typically zero balancing) and notional pooling, are available and applicable in Hungary. On the domestic level, zero balancing is the most common liquidity management tool for both resident and non-resident accounts. Different legal entities can participate in the same cash concentration structure if they are owned and managed by the same holdings company. Cross-border cash concentration is also offered, mostly by major international banks.

Notional pooling techniques are applied, both on the domestic and international level. Multi-layer solutions are popular mostly with clients that have various business lines within several legal entities in Hungary. In this case, banks typically apply zero or target balancing on the business lines’ level and notional pooling among the legal entities’ accounts.

Legal, Tax and Regulatory

As already mentioned above, cash concentration among different (group) companies will in principle create inter-company loans and as such have fiscal implications. For Hungarian participants, the following issues have to be considered:

• Thin capitalization provisions
  Based on the provisions of the Hungarian corporate tax act, there is a limit on the interest deducted from loans received from entities other than financial institutions. Limitations would apply if the amount of the loan exceeds 300 per cent of the net equity (whereby both are measured as daily average amounts). Interest related to the excess amount will not be deductible for corporate tax purposes. It is the client’s responsibility to observe thin capitalization provisions. Hungarian thin capitalization is an issue only if the Hungarian participants are lending. Otherwise, assuming cross-border cash balancing, the rules of the jurisdiction of the participating member will have to be observed.
• Transfer pricing provisions
  Based on the Hungarian corporate tax act, transactions between related parties have to be performed at arm’s length and detailed documentation in this respect should be prepared. Non-compliance may result in additional tax liabilities, penalties and delayed interest charges. It is the client’s responsibility to prepare the relevant transfer pricing documentation.
• Group financing provisions for determining the Hungarian corporate tax base
  Based on the Hungarian corporate tax act, a Hungarian company involved in group financing (e.g. through cash balancing) can opt for decreasing its corporate tax basis with 50 per cent of the interest margin incurred on these group financing activities and thus reduce the effective corporate tax rate on the group financing revenues to 8 per cent. If a Hungarian pool member has a debit position in the pool it must increase its corporate tax basis by 50 per cent of the group interest it paid. This only applies if the recipient of the interest is a Hungary-domiciled pool leader that opted for the group financing incentive; if the pool leader is based outside Hungary, then there is no need for restricting the deductibility of the group interest. It is the client’s responsibility to decide the location of the pool leader.

As detailed above, the fiscal and tax implications are the responsibility of the client, however, the most successful cash management banks on the market are the ones that are proactive in the creation of a pooling structure that would most fit the customer’s needs.

Role of the Central Bank

Hungary has an independent central bank, the National Bank of Hungary. Transactions between residents and non-residents as well as on residents’ bank accounts abroad have to be reported to the National Bank of Hungary on a monthly basis if they exceed euro12,500. Both companies and banks have to report, on a monthly basis, on pooling transactions.

The Euro and SEPA’s Impact on Hungary

As the planned date for adoption of the euro in Hungary coincides with the target date of the full Single Euro Payments Area (SEPA) compliance for EMU countries, the Hungarian banking society has also taken the necessary steps to achieve SEPA compliance. An initiative from the Hungarian Banking Association, with the active assistance of the National Bank of Hungary, the Hungarian Payments Forum has been established and formally set up, reflecting the scheme and the structure of the EPC. There are various working groups, the same as the ones within the EPC, with all major banks represented at the discussions and one member delegated to each of the EPC working groups. At the end of 2005 the working groups received, evaluated, discussed and commented on the SEPA rulebook drafts. With SEPA in sight, the Hungarian giro has also made steps that will gradually change the local payment environment. At the end of 2005 there were 20 payment types available from the giro – some of these were totally obsolete and were eliminated in 2006. Besides the development of the most frequently used domestic payment methods (single and multiple payments and collections), the giro is planning to introduce the pan-European credit transfer and pan-European direct debit modules that, according to their plans, will be ready by the time these payments need to replace domestic payment methods.