Hungarian Court Blocks Government's Company Cash Tax

by Ulrika Lomas, Tax-News.com, Brussels

14 November 2006

Hungary's constitutional court has struck down a new law which would have taxed companies' cash holdings, dealing another blow to the government's revenue-raising powers in its 'fiscal austerity' package.

The court held that the 20% tax on cash stocks above a certain value was unconstitutional because cash could be considered neither as income nor as assets.

Banks were granted an exemption from the tax.

The government wanted to levy the tax to increase business transparency by encouraging companies to keep only a minimal stock of cash, but it would have also raised an additional HUF5 billion (US$25 million) annually for its coffers. However, the government responded by noting that it would not affect the 2007 budget as it had not anticipated revenues from the new tax until 2008.

The fiscal austerity package also contained the controversial 4% 'solidarity tax' on businesses, but the government was forced to water down this measure last week by shrinking the solidarity tax base for certain companies after Audi, a major investor in Hungary, threatened to pull out of the country. This is expected to cost another HUF5 billion in annual revenues.

The tax hikes and spending cuts in the package are designed to reduce the government's budget deficit from more than 10% down to 3% of GDP so that it can adopt the euro currency, possibly in 2009.

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