Tax Treaty Case Law around the Globe 2016

S. 359Chapter 30 Hungary: Application of Article 23 on Foreign Tax Credit for Lack of Taxable Net Income

Dániel Deák

30.1. Introduction

In this Supreme Court case, a Hungarian-resident company granted a loan accompanied by two swap transactions to a Brazilian affiliated resident company.

30.2. Facts of the case

This was a case in which the taxpayer was a Hungarian-resident company that on 29 February 2008 granted a loan to a Brazilian-resident company that is affiliated to the Hungarian one. The loan was accompanied by two swap transactions. The first is to cover the risks of foreign exchange; the second those of interest rates. The Hungarian company paid 15 % tax on the gross amount of interest received in Brazil. The tax paid in Brazil was available for foreign tax credit in Hungary, based on article 23(b)(2) of the Brazil-Hungary double tax convention (signed at Budapest on 20 June 1986). The Hungarian taxpayer calculated the foreign earned interest income as such for foreign tax credit purposes.

The Hungarian tax authorities were of the opinion, however, that the losses arising from the swap contracts, which were concluded with Spanish banks and were related to the fiscal year 2008, had to...