Analysis of Hungary's controlled foreign corporation rules

Gröndahl, Gabriella Tünde (2021) Analysis of Hungary's controlled foreign corporation rules. BA/BSc thesis, BCE, International Study Programs. Szabadon elérhető változat:

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Aim: This paper is intended to examine one particular category, the controlled foreign corporations. CFC rules limit the artificial tax deferrals and unethical use of low-tax jurisdictions only for tax avoidance purposes. (OECD, 2021A) It is determined by the income tax law in Hungary and modified severely through recent years. The starting hypothesis is that Hungary first implemented controlled foreign corporation rules mainly to comply with other economies' expectations. For instance, to meet the expectation of the OECD. For this reason, the thesis will try to examine the strictness and the applicability of the Hungarian CFC rules compared to other countries. Methodology: This thesis's methodology will be based on the comparative analysis of the different models written in ATAD, such as Model A and B. The analysis will have two parts: one is a qualitative analysis which determines if the given model determines the CFC status or not. The second part is a quantitative analysis, which checks whether one model taxes a higher amount in total than the other model. The paper contains 16 examples with increasing complexity and determines in each case if the CFC rules apply or not. It will also examine the corporate tax rate in Hungary compared to other countries. Structure of the thesis The first part will provide the literature review, where the topics are set up in a logical hierarchy. The paper aims to give detailed knowledge about the issue. Therefore it will start with some necessary background on international taxation, BEPS, ATP, and ATAD. Then it will give some information about the EU law and fundamental freedoms concerning the CFC rules, like the free movement of capital and the freedom of establishment. In the 4th chapter of Part A, the CFC will be introduced and examined thoroughly. It will start with the origin of the CFC rules, which is the Subpart F in the US. Additionally, this part will discuss one of the most critical law cases, the C 196/04 Cadbury Schweppes case. Moreover, this part will introduce the models recommended by the ATAD and the effect if a company qualifies as a controlled foreign corporation and some economic background about Hungary. The practical representation will give an analysis first of using the different CFC models and introduce some thought-provoking rules around the world. Then it will provide the 16 examples and examine how the different models react to different situations and when double taxation can occur. Lastly, it will inspect Hungary's corporate tax rate and compare it to other EU and non-EU countries. Based on this, the research aims to conclude the possible reasoning behind the Hungarian CFC rules and whether it aligns with the other European countries' aims. Results: The paper concludes that the hypothesis that Hungary first implemented the controlled foreign corporation rules mainly to comply with other economies' expectations can be proven true. Some facts that support the conclusions are the following: the practical part proved that Model B is implemented in Hungary by the exact wording that the ATAD provided as an option. The original limits of 750,000 EUR for total profits and the 75,000 EUR for non-trading income are also applied with direct conversion to HUF in the Hungarian CIT, such as 243,952,500 HUF and 24,395,250 HUF, which makes the Hungarian regulation weaker than if the same regulation was in a large economy such as Germany. There is no modification to make the rule suitable for the country's size. Secondly, the corporate tax rate analysis showed that Hungary has the lowest tax rate, which also reduces the number of countries where it could use the CFC rules. Also, the study concluded that the number of public law cases and Hungarian publication on the topic is minimal. This also shows the fact that the strengthening of the CFC rules is not one of Hungary's main priorities. The goal is seeming to be to meet the minimum requirement set by the EU and to be able to maintain the low corporate tax rate. The corporate tax rate is essential for the Hungarian political and economic goals since the country would like to attract foreign investment. Therefore, Hungary is one of the leading outsourcing points within the EU. Companies establish several shared service centers that can provide workplaces to the Hungarian population for lower salary costs to the companies than the EU average.

Item Type:BA/BSc thesis
International economics
ID Code:14004
Specialisation:Business Administration and Management
Deposited On:13 Oct 2021 10:06
Last Modified:02 Dec 2021 08:54

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