Most European jurisdictions that tax the disposal of shares in a property-rich company describe that company in a way an investor can check on its own balance sheet. Hungary does not. The definition in section 4, point 18/a of the Corporate Tax Act is drafted so that a company can fall inside it because of assets it does not own, and a shareholder can fall inside it because of a declaration it did not make.
The result is a rule that catches structures nobody designed as real estate structures. It also runs, in the Dutch case, into a treaty signed in 1986 that contains no clause allowing Hungary to tax a gain on shares because the company behind them is property-rich, and into a multilateral instrument that, on the positions the two states actually deposited, does not supply one either. Those facts together explain why the question is worth taking seriously at the design stage rather than at the point of sale.
What the statute actually defines
Section 4, point 18/a defines a real estate holding company by reference to two conditions that have to be met together. The first is quantitative. It compares the value of immovable property situated in Hungary with the book value of assets shown at the balance sheet date, measured in the company’s own financial statements or in the individual statements of the company taken together with its related enterprises that qualify as resident taxpayers or as foreign entrepreneurs. The ratio the definition requires, and the statements and dates on which it is read, are fixed by point 18/a itself and have to be read there rather than reconstructed from an economic test that looks similar.
The second condition concerns the shareholders. It requires that a member of the company, or a member of any company in that group, is resident on at least one day of the tax year in a state with which Hungary has concluded no double tax treaty, or with which the treaty permits the capital gain to be taxed in Hungary.
Neither condition is unusual by itself. It is the way the first is measured, and the way the second is presumed, that make the definition wider than its wording first suggests. That it is a live provision, and that it bites on a foreign shareholder rather than on the company alone, is confirmed by the Hungarian tax authority’s own corporate tax guide, which lists the foreign member of a Hungarian real estate holding company that alienates or withdraws its participation among the persons carrying a limited Hungarian corporate tax liability, and cross-refers that status to point 18/a.
The ratio is measured across a group
The Act does not confine the test to the company whose shares are being sold. The immovable property numerator and the total asset denominator can both be taken across the company and its related enterprises that are Hungarian resident taxpayers or foreign entrepreneurs, a combination the Act itself calls the group.
The practical effect is that a Hungarian trading company with no real estate of its own can be pulled inside the definition by a sister company that owns the site the group operates from. An investor testing the position by reading the target’s own balance sheet will conclude that the ratio is nowhere near the threshold, and will be wrong, because the test was never confined to that balance sheet.
The point is not that the rule is harsh. It is that the answer cannot be obtained from a single set of accounts, and the group perimeter has to be established before the ratio means anything. Establishing that perimeter is an exercise in identifying related enterprises, not in valuing property, and it is the step that is usually skipped.
Book value, and the date it is read on
The test is a book value test, not a market value test. Immovable property carried at historic cost and depreciated over decades can sit far below its market value, and a group holding old Hungarian property may therefore fall outside a definition that an economic test would catch. A group that has recently acquired or revalued property may fall inside one that an economic test would not.
The dates are equally mechanical. Point 18/a specifies which financial statements are to be used, by reference to those available by a fixed date in the calendar year, and imposes, on the terms it sets, a separate duty on the company to inform every related enterprise in the group, by a second fixed date, of the data needed to establish the property ratio. Both dates are set in the point and are read there. That information duty exists precisely because no single company in the group holds the figures required to run the test.
Point 18/a states that its provisions do not apply to a taxpayer listed on a recognized stock exchange.
The presumption that runs against silence
The most consequential detail in point 18/a is a single clause about evidence. Residence of the member is taken into account by the company on the basis of the member’s declaration. In the absence of a declaration, the condition in the second limb is to be presumed to be met.
That reverses the ordinary position. A Hungarian company that cannot obtain declarations from its shareholders does not fall outside the definition for want of proof. It falls inside it. Where shares are held through nominees, through a fund, or through a chain the Hungarian company cannot see, the presumption operates against the company by default.
For a Dutch holding company the answer is straightforward and should be handled as routine annual housekeeping rather than as a transaction step. The declaration is cheap to give and expensive to omit, and it should be renewed rather than given once at acquisition, since the test is applied by reference to at least one day of each tax year.
What the Netherlands treaty says about the gain
The instrument is the convention signed at The Hague on 5 June 1986, which the Dutch consolidated text shows as in force from 25 September 1987 and current. It was done in duplicate in the English language, so there is no second authentic version to reconcile. Article 13 allocates capital gains in four paragraphs and then adds a fifth. Gains from the alienation of immovable property as defined in Article 6 and situated in the other state may be taxed in that other state. Gains on movable property forming part of a permanent establishment or fixed base may be taxed there. Gains on ships, boats or aircraft operated in international traffic, or on movable property pertaining to their operation, are taxable only in the state of effective management, the Protocol adding that boats means any vessel engaged in inland waterways transport. And gains from the alienation of any property other than those three categories are taxable only in the state of which the alienator is a resident.
Paragraph 5 is the only qualification, and it is narrow. It preserves the right of each state to levy, according to its own law, a tax on gains from the alienation of shares or jouissance rights in a company resident there, derived by an individual who is a resident of the other state and has been a resident of the first state in the course of the last five years preceding the alienation. It applies to individuals, and it applies to former residents.
There is no land-rich clause, and the convention confirms that from the inside. Article 24, which governs the elimination of double taxation, lists the provisions for which the Netherlands grants relief where a Dutch resident’s income may be taxed in Hungary. Paragraphs 1 and 2 of Article 13 appear there, in the exemption paragraph; paragraph 5 of Article 13 appears in the credit paragraph; paragraph 4 appears in neither. The Protocol, which the parties agreed forms an integral part of the convention, touches Article 13 only to define boats. A Dutch resident company disposing of shares in a Hungarian company falls within paragraph 4, provided the shares are not movable property forming part of the business property of a permanent establishment it has in Hungary, and the gain is then taxable only in the Netherlands.
That is the answer the second limb of point 18/a is asking about. For a shareholder that is a company resident in the Netherlands, holding shares that are not business property of a permanent establishment in Hungary, the convention does not permit the capital gain to be taxed in Hungary, so that shareholder, on a reading of the condition shareholder by shareholder, does not satisfy the second condition by its own residence. The answer is narrower in two respects. An individual resident in the Netherlands who has been resident in Hungary in the course of the last five years preceding the alienation is within paragraph 5, which preserves Hungary’s right to tax that gain, so for that shareholder the condition is met. And the conclusion for a company assumes it can rely on paragraph 4, which is what the principal purpose test discussed below can put in issue.
The multilateral instrument does not supply one either
A consolidated treaty text does not show the multilateral instrument, so this part of the answer has to come from the positions the two states deposited. Both of them listed this convention. Hungary’s status of reservations and notifications, deposited on 25 March 2021, carries the 1986 agreement with the Netherlands as a covered tax agreement, and the Netherlands’ status, deposited on 29 March 2019, carries Hungary. The convention is therefore covered, and the question becomes which articles of the instrument reach it.
Article 9, the article on gains from the alienation of shares deriving their value principally from immovable property, does not. Hungary reserved, under Article 9(6)(a), the right for Article 9(1) not to apply to its covered tax agreements, so the paragraph that would graft a testing period and an extended class of interests onto an existing land-rich clause is switched off, and there was no existing clause here for it to modify in any event. The Netherlands, notifying under Article 9(7) those of its agreements that already contain such a provision, listed more than twenty counterparties and did not list Hungary. Article 9(4), the paragraph that would insert a complete land-rich rule where none exists, applies to a covered agreement only where every contracting jurisdiction has notified its choice to apply it, and neither state notified that choice.
Article 7 does reach it. Both states chose to apply Article 7(4), neither reserved the principal purpose test in Article 7(1), and neither notified this agreement as already containing a provision of the kind Article 7(2) describes. The consequence should be stated precisely, because it is easy to overstate. A principal purpose test can deny a benefit of the convention, and the allocation in Article 13(4) is such a benefit, but it cannot create a taxing right the convention does not contain. What it puts in issue is whether a particular shareholder can rely on Article 13(4), not what Article 13(4) says.
The condition is about every shareholder, not the seller
This is where files go wrong. The second condition is not satisfied only by the shareholder that sells. It is satisfied where a member of the company, or a member of any company in the group, is resident in a qualifying state on at least one day of the tax year.
A Dutch holding company that owns 90 per cent of a Hungarian company can therefore find that the company is a real estate holding company because of a 10 per cent minority shareholder resident elsewhere, or because of a shareholder in a sister company inside the group perimeter. The Dutch shareholder’s own treaty protection under Article 13 remains intact and, subject to the principal purpose test, continues to shelter its own gain. But the company acquires the status, the reporting obligations that go with it, and a set of consequences for the other members.
Where a group has a Hungarian company with property exposure and a mixed shareholder register, the first step is to map the register and the group perimeter together, and to identify which shareholders are treaty protected and which are not. That is a short exercise. It is considerably shorter than the one required after a sale has been signed.
The calendar, and who pays if it is missed
Where the charge does arise, the mechanics sit with the shareholder rather than the company. Section 15/A computes the member’s base on the alienation of the participation, or on the reduction of the company’s registered capital by withdrawal, as the consideration less the acquisition value and the documented expenses connected with the acquisition or holding of the participation. The tax is then computed at the corporate income tax rate, which the tax authority’s guide states as 9 per cent of the positive tax base.
Section 15/A is worth reading before any reorganization. Alienation for these purposes includes not only a sale but also a contribution in kind and a transfer without consideration, and the consideration is set as section 15/A specifies, including at arm’s length value where the transfer is to a related enterprise and at market value where it is made for no consideration. A group restructuring that moves a Hungarian participation between affiliates is therefore a taxable event under this regime even though no cash changes hands.
The filing obligation falls on the member, who must assess, pay and declare the tax itself, on the return and by the deadline that section 15/A fixes. The same section then adds a provision that transfers the exposure back to the company. Where the member cannot assess and declare its liability because the company failed to notify the tax authority of its status as a real estate holding company, the company bears unlimited and joint and several liability for the tax assessed on the member. A company that does not run the test therefore does not avoid the consequence. It absorbs it.
That allocation is the reason this regime belongs on the Hungarian company’s annual governance calendar, alongside the accounts and the transfer pricing file. The test is run on the statements point 18/a designates, the information passes across the group by the date the Act sets, the declarations from shareholders are collected as a standing item, and the notification is made or is documented as unnecessary. None of that is difficult. What is difficult is reconstructing it, three years later, for a buyer’s counsel.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.