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Hungarian Intra-Group Tax Scheme Faces Probe

by Ulrika Lomas, Tax-News.com, Brussels

22 March 2007


The European Commission announced on Wednesday that it has opened a formal investigation procedure under EC Treaty state aid rules into a Hungarian tax scheme, relating to the taxation of interest in the context of intra-group transactions.

The Hungarian scheme allows companies to claim as taxable income or expenses only 50% of the balance of interest received from or paid to affiliated companies in the context of intra-group relations.

When a company based in Hungary has a positive balance of interest with its affiliated companies, only half of the interest is taxed. In turn, if the affiliated company paying the net interest is based in Hungary, it deducts only half of the amount from the taxable income.

However, when the interest-paying affiliated company is located abroad, it is not subject to Hungarian tax rules. Therefore it is able to deduct the whole balance of interest paid from its taxable income.

The Commission doubts at this stage that the scheme would constitute a general measure and wants to investigate further whether it is in line with the state aid rules and whether it could distort competition. The opening of proceedings enables interested parties to submit their comments on the measure and does not prejudge the outcome of the investigation.

EU Competition Commissioner Neelie Kroes announced yesterday that:

"We must ensure that fiscal measures respect EC Treaty state aid rules and do not distort competition by unfairly influencing the allocation of economic activities."

The Hungarian authorities introduced the scheme in 2003. As it was not put in place before 10 December 1994, listed in Hungary's Accession Treaty, or covered by the accession interim mechanism, it is not existing aid.

Consequently, if the Commission's investigation concludes that the measure constitutes incompatible illegal aid, the Commission may request the recovery of the aid amount granted since the accession of Hungary to the EU.


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