KFT Dividends: How Taxation Works for Italian Shareholders

One of the most sensitive aspects for those who own a Hungarian KFT as a resident shareholder in Italy concerns the taxation of dividends. How are they taxed? Where are taxes paid? Is there a risk of double taxation? In this guide, we answer all the most frequent questions.

1. How Profit Distribution Works in a KFT

The KFT (Korlátolt Felelősségű Társaság) is a Hungarian limited company comparable to the Italian SRL. Net profits — after paying the 9% flat tax on taxable profit — can be distributed to shareholders as dividends, following a resolution by the general meeting.

2. Taxation of Dividends in Hungary

In Hungary, dividends distributed to individuals are subject to a 0% withholding tax.

3. The Italy-Hungary Double Taxation Treaty

Italy and Hungary have signed a Double Taxation Treaty (in force since 1980, updated). Under this treaty:

• Dividends paid by a Hungarian company to an Italian resident are taxable in both States
• Hungarian withholding tax cannot exceed 10% of the gross amount of dividends
• The tax paid in Hungary is deductible from the Italian tax due on the same income

4. Taxation of Foreign Dividends in Italy

In Italy, dividends received by individuals from foreign companies (non-qualified) are subject to a 26% flat-rate withholding tax. Thanks to the tax credit for taxes paid abroad, double taxation is partially or totally eliminated.

5. CFC Rules: Beware of the Risk

Italian rules on Controlled Foreign Companies (CFC) may apply to Hungarian KFTs if:

• The Italian shareholder holds a controlling stake
• The KFT is considered to have low effective taxation compared to Italian standards
• A real economic substance in Hungary is not demonstrated

If CFC rules apply, the KFT's income is attributed directly to the Italian shareholder, regardless of dividend distribution. It is essential to structure the company correctly with the support of a specialized advisor.

6. Strategies for Optimizing Profit Distribution

• Reinvest profits in the KFT instead of distributing them, postponing personal taxation
• Transfer tax residency to Hungary to benefit from the 15% rate without Italian taxation
• Structure a holding company to optimize dividend flows between companies
• Document the KFT's real economic substance to avoid the application of CFC rules

Conclusion

The taxation of dividends from a Hungarian KFT for Italian shareholders is a complex issue that requires careful tax planning. The combination of a 9% flat tax on corporate profits and the Double Taxation Treaty offers significant opportunities, but it is essential to operate in full compliance with Italian and Hungarian regulations.

Do you have a KFT or are you considering opening one? Contact Elevate Advisory Group for personalized tax advice and structure your position correctly from the start.