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Hungary Update Introduction of new corporate entity: the regulated investment company. Regulated investment companies A new type of corporation has become available in Hungary, the regulated investment company (RIC). This new company is largely similar to the real estate investment trusts that exist in several other countries. RICs may also invest through their ‘special purpose entities’ (SPE) into real property projects. Both RICs and SPEs are exempted from corporate income tax and local business tax but they are subject to a 2% discount rate of transfer duty. The profits are taxed at the shareholders of the RICs. The RIC is a publicly held company limited by shares and must be engaged in one of the following activities: ■ Sale of real property ■ Renting and operating of real property ■ Management of real property ■ Holding activities. There are certain limitations to the owners of a RIC: ■ No more than 10% of the shares or voting rights is held by insurance companies or credit institutions ■ Must have a 25% ratio of public ownership on a regulated market ■ At least 25% of the shares must be held by shareholders owning less than 5% of the RIC. that have not been paid is not in line with the VAT Directive. The relevant legislation has been changed and taxpayers are now allowed to reclaim such VAT. All related penalties from the previous periods can be reclaimed as well. The Government has revealed the main features of the tax changes effective from 2012: ■ The standard rate of VAT is expected to be increased from 25% to 27% ■ The current rate of 20.32% personal income tax will be decreased to 16% up to a monthly tax base of 202,000 HUF (approx. 700 EUR), and to 18.16% above this limit. At the same time, a tax credit will no longer be available to ensure the PIT exemption for the minimum wage ■ Reverse VAT will be introduced in agriculture ■ The minimum wage will be increased to 92,000 HUF (approx. 320 EUR) ■ The excise duty on cigarettes, alcohol and diesel will be increased from 1 November 2011 ■ The game tax will be significantly increased from 1 November 2011. For more information please contact: Vadkerti Krisztián PKF Hungary T: +36 1 391 4220 F: +36 1 391 4221 E: vadkerti.krisztian@pkf.hu The other conditions for RICs include: ■ At least 90% of the profits must be paid to the shareholders as dividend ■ Its initial capital is not less than 10 billion HUF ■ Its real property assets must be revaluated at least quarterly ■ Can only own shares of other RICs or SPEs ■ There are certain limitations to the asset and liability structure. Other recent changes The European Court of Justice ruled that the Hungarian legislation which did not allow the reclaim of VAT on invoices 17 // PKF International Tax Alert All Regions Issue 8 November 2011
India Update An introduction to Transfer Pricing Law in India The law on Transfer Pricing has evolved in India as a logical consequence of the exponential increase in international transactions post globalisation. The participation of multinational groups in the economic activities of India has given rise to complex issues, particularly so when it involves transactions between two enterprises belonging to the same multinational group. The Finance Act 2001 introduced an entire gamut of provisions dealing with Transfer Pricing (TP) which came into force on 1 April 2002 and are applicable to the assessment year 2002–03 and subsequent years. The law essentially mandates arm's length pricing of international transactions between associated enterprises, specifies the methods for determining the arm's length price (ALP), details the documentation requirements for companies entering into international transactions, and stipulates penalties for non-compliance. Key features of Transfer Pricing Regulations The Transfer Pricing law in India requires that pricing of international transactions between two Associated Enterprises (AEs), either or both of whom are non-residents, should be at arm's length, a detailed definition of which has been given in the law. The definition is given based on certain objective parameters to assess the relationship between two entities and include: ■ Share Capital Criterion: When one AE holds 26% or more of share capital in the other or when a third party holds 26% or more share capital in both AEs ■ Loan-based Criterion: Loan advanced by one AE constitutes 51% or more of total assets of another AE ■ Management Control Criterion: More than half of the directors or one or more executive directors are actually appointed by one AE in the other AE. If the TP provisions are applicable, the ALP of the international transaction(s) has to be determined. The pricing at arm's length would need to be established by internationally accepted transfer pricing methods including: 1. Comparable Uncontrolled Price Method (CUP) 2. Resale Price Method (RPM) 3. Cost Plus Method (CPM) 4. Profit Split Method (PSM) 5. Transactional Net Margin Method (TNMM) To date, judicial pronouncements indicate a bias towards the CUP method. 18 // PKF International Tax Alert All Regions Issue 8 November 2011
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