The Double Taxation Agreement (DTA) between Italy and Hungary is a fundamental tool for Italian entrepreneurs with a KFT in Budapest. Understanding how it works allows for legal and efficient tax planning.
What is the Italy-Hungary DTA?
The treaty has been in force since 1980 and establishes which of the two countries has the right to tax different types of income. The objective is to prevent the same income from being taxed twice – once in Italy and once in Hungary.
How it applies to business income
- Company profits: taxed in the country where the company has its effective tax residence
- Dividends: maximum withholding tax of 10% in the source country; exemption possible with holding structures
- Royalties: taxed in the beneficiary's country with a maximum withholding tax of 10%
- Employment income: taxed in the country where the activity is performed
The risk of foreign registration
The DTA does not automatically protect against foreign registration. If the Italian Revenue Agency proves that the KFT is effectively managed from Italy, the income will be taxed in Italy. Real economic substance in Hungary is essential.
Correct tax planning
A well-designed structure with a real operating office in Budapest, a local administrator, and regular Hungarian accounting allows for full benefit from the DTA and the 9% flat tax.
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