Hungary: Does the Hungarian Local Trade Tax Fall within the Substantive Scope of a DTC?

Abstract

In theory, there are clear-cut categories of turnover and profit taxes, respectively. In the practice of a number of countries, there is still a variety of biases from these simple categories. The Hungarian local trade tax is a good example for this. It is levied on an amount corresponding to a financial value that is less than sales receipts, but more than profit. Interestingly, it can be a problem to distinguish not only between turnover and income taxes, but also between income taxes and the taxes on the distribution of profit. In an international tax context, in the first case, the question can be raised whether a tax like the Hungarian local trade tax falls within the substantive scope of a double tax convention on income and on capital. In the second case, there can be a conflict of qualification between the business profit Article and the dividends Article of a double tax convention. In the following, I focus on the first question, discussing Hungarian tax cases, the subject of which was local trade tax. However, the problem of withholding taxes will also be touched on with a view to better understanding the distinction between indirect and direct taxes.

Keywords: Local trade tax, indirect and direct taxes, substantive scope of double tax treaties

JEL Classification: K34