Hungary Tax: Court rules on corporate tax treatment of expenses on loans to fund dividends

A Hungarian court recently held that bank costs and interest expense incurred on a loan obtained to fund a dividend payment are not associated with business operations of the company and, therefore, are not deductible for corporate income tax purposes.

In the case, the company's shareholders authorized payment of extraordinary dividends in accordance with Hungary's Act on Business Associations. However, because the company's financial position did not allow for a dividend payment using equity, the company obtained a bank loan from an independent credit institution to fund the dividend payments.

The Hungarian tax authorities took the position on audit that the loan obtained to fund the dividends and the bank costs and interest expense were not part of the company's business operations since the loan was not taken out to support the company's income-generating activities. As a result, the bank costs and interest expense were not deductible and instead were added to the company's tax base.

The court agreed with the tax authorities because the sole purpose of the loan was to make a payment to shareholders using the company's profits and, hence, the loan did not support the company's business operations.

Given the court's decision, Hungarian companies should be careful to distinguish between bank loans, the interest on which is deductible, and loans obtained to fund dividend payments or to fund activities that are not specifically associated with the business operations and income-generating activities of the company.