Hungary has implemented the BEPS nexus rules in June 2016, effecting major changes to the Hungarian IP regime. The number of types of qualifying IP-s has decreased and a new cap for tax base deduction has been introduced. However, Hungary remains an attractive location for IP investment and distribution structures, due to the following considerations:

In case of IPs developed completely in-house, the effective tax rate on profits derived from the utilization of different types of IP rights (e.g., patent, software protected by industrial property rights) can be reduced to 4.5% by electing to exclude up to 50% of profits from qualifying IP;
In case of purchased IPs or IPs partially or completely developed by a related party, the nexus rules apply and maximize the available tax base reduction. The cap described by the nexus rules is the ratio of the direct R&D costs related to the in-house development and all the direct R&D costs, increased by 30% (up to 100%);
Thanks to an extensive tax treaty network and/or the EU Interest and Royalty Directive, there are often no (or only limited) withholding taxes on cross-border royalty payments made to a Hungarian entity;
Pursuant to Hungarian domestic law, there is no withholding tax on outgoing royalty payments.
Under the ‘reported IP’ regime, the IP acquired or developed by a Hungarian entity can be disposed of free of tax, provided that the taxpayer acquiring the IP had reported the acquisition to the tax authority within 60 days and the sale is completed after the elapse of a one-year holding period; and
If the ‘reported IP’ conditions are not met, an exemption may still be available if the proceeds from the disposal are used to acquire another qualifying IP within 5 years.

The rules outlined above make Hungary a favorable location in particular for IP structures where the creation or value increasing development of the IP is realized in a project company while the utilization of the IP is carried out by other companies. In such case, if the IP is developed in Hungary, then it can subsequently be transferred at a high value – without Hungarian tax obligations - to the distribution companies, while the distribution companies, due to the high capitalized value of the IP, might be able to account for a significant amortization deductible against the profits they derive from the utilization of the IP. In such structures, a tax-free ‘step-up in basis’ can be achieved by the simple insertion of a Hungarian project company into the structure.

With appropriate planning both the development as well as the utilization of the IP rights can be carried out at the level of a Hungarian company, with a minimal tax burden.

Nexus rules were also introduced. The new rule limits deductibility of revenues that are generated from IP rights developed by affiliated companies or revenues that are generated from IP purchased. According to the nexus approach revenues from IP rights may be deducted in a given proportion only, namely the ratio of the costs incurred by the IP rights-owning company (excluding costs of IP ordered from affiliated companies and costs of IP purchased), divided by all costs incurred in relation to the IP rights.

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