Dividend Payments to Foreign Shareholders: Key Question for Company Managers
A Hungarian private limited company (Kft.) with foreign shareholders residing in the United Arab Emirates (UAE) faces the challenge of correctly handling dividend payments. The central question arises: must the company withhold personal income tax (PIT) on dividends paid to UAE-resident individual owners, and what documentation is required prior to payment?
Why This Matters to Business Owners
Correct tax handling of dividends is crucial to maintaining compliance and avoiding unnecessary withholding. Misapplication of tax rules could result in double taxation or missed opportunities for tax relief based on international agreements. For companies with foreign ownership, understanding the applicable tax treaties and exact documentation requirements is vital to secure smooth financial operations and avoid penalties.
Legal Framework and Practical Examples
The applicable regulation in this scenario is the 2013 bilateral treaty between the Government of Hungary and the Government of the UAE on the avoidance of double taxation and the prevention of tax evasion, signed in Dubai on April 30, 2013. This treaty takes precedence over Hungary’s domestic Personal Income Tax Act (2013. évi CLXI. törvény).
According to Article 11 of the treaty, which defines dividends broadly as income from shares, founder’s shares, or similar profit-sharing rights, dividends paid by a Hungarian company to UAE-resident individuals are not subject to withholding tax in Hungary. However, this exemption applies only if the beneficial owners submit a certificate of residence (illetőségigazolás) before the dividend distribution.
The treaty also contains provisions concerning situations where the beneficial owner operates through a permanent establishment in the country of the dividend-paying company, which would then change the tax treatment under Article 8 of the treaty.
Moreover, the treaty stipulates that income or profits earned by a company resident in one contracting state from the other state cannot be taxed twice. Thus, if UAE tax rates on dividends exceed Hungary’s 15% rate, Hungary will not levy additional tax but no refund of the difference is allowed. Conversely, if UAE taxes are lower, the difference must be settled with Hungary allowing credit for taxes paid in the UAE.
It is notable that no social contribution tax (szochó) arises from such dividend payments.
Recommended Actions and Solutions for Businesses
Businesses should thoroughly study the treaty provisions as they pertain to their specific activities and discuss the details with their foreign shareholders to confirm proper compliance. Prior to dividend payments, ensuring the receipt of an official certificate of residence from foreign owners is crucial for securing exemption from Hungarian PIT withholding.
Adherence to these international tax regulations safeguards Hungarian companies against double taxation risks and helps maintain favorable cross-border financial relationships.