Monday, 4 January 2016

TAXATION OF CORPORATIONS IN HUNGARY

In the following guideline we will introduce the main principles of corporate income taxation in Hungary.  If you are considering doing business in Hungary, wish to improve the tax position of your corporation or simply face with any direct taxation problems; please don't hesitate to contact us for further information! LeitnerLeitner Hungary offers its full-scope professional assistance in taxation and accounting matters.














LeitnerLeitner offers high quality tax advisory in the field of:
  • Corporate income tax
  • Transfer pricing
  • Value added tax (VAT)
  • Personal income tax
  • All other specific/sectoral taxes and surtaxes
  • Tax audits
  • Special transactions
  • External trainings for taxation and accounting. 
In terms or corporate income taxation, we are at your kind assistance in preparing or verifying tax calculations, and in advising you about tax credits and allowances granted by the Hungarian tax system, such as tax incentives for investments, R&D, IP and royalty income, increasing labor force, other developments. We also help to calculate tax advantages on supports for public purposes, education, team sports, performing arts and film production. You may also turn to us concerning the barriers of the Hungarian legislation, just like loss carry forward restrictions, thin capitalization, controlled foreign corporation (CFC) rules, taxation of FX differences, etc.

TAXPAYERS AND RESIDENCE
Entities established according to the Act on the Civil Code (including corporations and partnerships) are deemed to be non-transparent taxable persons under Hungarian corporate income tax law. Therefore, income generated by these entities is taxable at the level of the entities. A corporation or partnership having its statutory seat or place of effective management in Hungary is also subject to unlimited corporate income tax liability, which provides for a taxation of the worldwide income (subject to the applicable tax treaties).

PRINCIPLES FOR DETERMINATION OF THE TAX BASE
Taxable income is based on the financial statements prepared in accordance with the Hungarian accounting standards as provided for by Act no. C of 2000 on Accounting (Act on Accounting), which is to a large extent based on the EC directives. The corporate income tax (CIT) base is then calculated by adjusting the accounting pre-tax profit by increasing and decreasing items described in Act no. LXXXI of 1996 on Corporate Income Tax (Act on CIT). In particular, the corporate income tax base and the CIT are calculated as follows:

The most important tax base adjustment items are listed in the following sections.

Business and non-business expenses
Business expenses are generally deductible for corporate income tax purposes. Moreover, expenses for certain benefits in kind and for the private use of a company car are also acknowledged costs of a company. As from 1 January 2012 costs of representation and business gifts are deductible for corporate income tax purposes (however, representation costs and gifts are subject to personal income taxation). A qualified deductibility is valid for expenses incurred concerning controlled foreign companies (CFC). Expenses (at a value including VAT) deriving from uncompensated financial or other support (covering the free-of-charge provision of assets and services) would not be deductible if provided to foreign persons and foreign tax residents or to domestic persons the financial result of whom would be negative without the above support. Irrespective of the above, deductibility is available for support granted for films, art performances and certain sport activities.

Tax and accounting depreciation
Assets may be depreciated for accounting purposes over their useful life. The Act on CIT, however, contains a list of depreciation rates, which for tax purposes are overriding the accounting amortization rates. As the accounting rules do not provide for specific depreciation rates but works according to the useful life of the asset, usually the rates stipulated by the Act on CIT are applied for accounting purposes as well. Tax vise, the taxpayer has the possibility to opt for a lower depreciation rate compared to the rates included in the Act on CIT; however, the rate applied for CIT purposes should not be less than the depreciation rate applied for accounting purposes. Higher depreciation rates, mainly as an investment incentive, are also available for new assets and for specific categories.

In general, accounting depreciation increases the tax base, while depreciation determined for tax purposes is deductible from the tax base.

Provisions
Provisions accounted for as expenditure (for future liabilities and costs) must be recognized as tax base-increasing items, while previously created provisions accounted for as revenues may be treated as corporate income tax base-decreasing items.

Loss in value and bad debts
In general, the loss in value accounted for receivables and the amount of bad debts calculated according to the company’s accounting policy increase the tax base and are only deductible for tax purposes if they fulfill the conditions set out in the Act on Accounting. In addition, 20% of the bad debts which do not necessary fulfill the above-mentioned conditions but are overdue for more than 365 days may also be deducted. The waiver of still recoverable receivables increases the tax base only if the debtor is a related party (not including a natural person).

Provisions accounted for as expenditure (for future liabilities and costs) must be recognized as tax base-increasing items, while previously created provisions accounted for as revenues may be treated as corporate income tax base-decreasing items.

Thin capitalization rules
The Act on CIT provides for a debt-to-equity ratio of 3 to 1 for thin capitalization purposes. Accordingly, if the debts of a Hungarian company exceed three times the net equity, the interest paid on the excess is not tax deductible at the level of the paying company. These provisions are applicable to all loans – except for loans from financial institutions – including non-public bonds and certain bills of exchange, irrespective of the related party status of the borrower.

Dividend income
The Hungarian tax legislation provides for a widely applicable participation exemption for dividends. In general, dividend income earned by Hungarian companies is deductible from the tax base, except for the dividends received from a controlled foreign company (notional dividend distributions from controlled foreign companies are also an exception where taxation is due in Hungary).

Development reserve
Companies are entitled to set up a tax-deductible reserve of up to 50% of the pre-tax accounting profit, subject to a maximum of HUF 500 million (approx. EUR 1.6 million). Assets acquired using this ≫development reserve≪ may not be depreciated for tax purposes up to the value of the reserve used. Therefore, the development reserve has the effect of an accelerated depreciation. The reserve has to be used for investments within four financial years; otherwise it has to be repaid (tax due must be calculated at the 19% tax rate) with late payment interest added (twice the Hungarian prime rate). As the depreciation rates applied for immovable property are quite low, the use of development reserves could generate a tax-effective investment structure.

Research and development costs
Research and development (R&D) expenses are not only accepted accounting costs decreasing the accounting profit before tax, but also constitute a tax base-decreasing item with respect to corporate income tax. These costs may be deducted twice for tax purposes. However, the advantage is applicable solely for R&D costs incurred by the taxable person’s own activities (including R&D based on an R&D agreement). The direct expenses of basic research, applied research and experimental development may be deducted in the year in which the expenses are incurred or in the year of accounting the depreciation if the costs of the experimental development were capitalized. Four-time deductibility is available for R&D projects carried out with universities or scientific institutions. As of 2014, the above R&D advantages may be shared among Hungarian related parties.

Donations
Cash or asset donations granted to non-profit-organizations may – subject to certain conditions – qualify for a tax base reduction of 20% or 50% (and an additional 20% in case a permanent donation contract exists) of the donation capped by the pre-tax accounting profit. From 2015, donations granted to higher education institutions in a long term agreement may also be a tax base decreasing item with a rate of 50%, subject to meeting certain preconditions.

Royalty exemption
Under special legislation, a 50% tax base decreasing item is available on royalty income; which advantage may be continued for the old-IP assets under the grandfathering provisions up to 30 June 2021. The tax base decreasing item is capped by 50% of the pre-tax accounting profit. Special restrictions apply on intangibles acquired from a related party entity in the period of 1 January – 30 June 2016.


Different tax holiday is available on intangibles acquired or developed beginning from July 2016. Instead of the 50% decreasing item on the royalty income as introduced above, a certain proportion of royalty profits are available as a tax base increasing item, whereby the Hungarian implementation of the Nexus ratio shall be applied for calculating the amount of the tax base decreasing item. By performing own R&D activities with own assets and personnel, the nominator of the Nexus ratio may be increased by 30%; however, the ratio itself shall not exceed 100%. The application of the tax base deduction is capped at half of the positive pre-tax accounting profit.

Carry-forward of losses
Moreover, loss utilization is capped at 50% of the annual tax base. From 2015, losses generated may be carried forward for a period of 5 tax years only and losses generated prior to 2015 may be utilized in the tax year including the date of 31 December 2025 the latest. Limitations are also valid in case of quota sale or corporate transformations.

TAX ALLOWANCES
Numerous subsidies and tax allowance forms partially backed with European Union aid resources are still available in Hungary. The first tenders of the 2014-2020 developing period are just opened at the second half of 2015. For investment projects; however, we also highly support to always consider the taxation impacts carefully and not to forget about the potential related tax allowances – for which LeitnerLeitnter offers its professional assistance for tax optimization and allowance claims.

The tax payable by corporations may be reduced by 70%, 80% by means of tax credits.

Development tax allowances (80%) may be granted for investment projects (depending on the investment volume, the geographical location and also on the status of the investor), research and development activities, independent environmental projects, investments in the film industry, and creating new jobs. In general, a portion of the investment value (determined by the intensity ration given by the EU) may be credited from the corporate income tax payable within within 16 tax years after the finalization of the investment in 13 tax years including the year of capitalizing the investment or the subsequent tax year. Commitments pertaining to the increase of headcount and salaries become more favorable to the taxpayers regarding certain development tax allowance schemes.


Beginning from 1 January 2017, a new tax credit scheme was introduced connected to investments aiming at increasing energy efficiency. Investments resulting in any minor decrease in energy consumption may be sufficient for such tax allowance. Application in parallel to the development tax allowance scheme is not allowed. The corporate income tax payable may be lowered by 30% (for SMEs 40% or 50%) of the eligible costs of the investment, capped by EUR 15 million and 70% of the CIT payable. The tax credit is available in the year of capitalizing the investment and in the 5 subsequent tax years.


Further CIT allowances (70%) and other in-cash credits may also be available as well in the case of granting support to film production, performing art, and certain team sports such as soccer, handball, basketball, water polo and ice hockey.

As another potential tax credit, supports to film production, performing art and certain team sports may also be granted by redirecting the CIT advance payment obligations of the taxpayer. For such support, a further proportional cash credit (7.5% or 2.5% depending on the timing of the grants) may be received to the tax account of the taxpayer.

Also within the scope of de minimis support, as of 1 January 2017 100% of the interest paid by SMEs to financial institutions on loans financing tangible assets may be taken as an allowance, decreasing the CIT payable.

TAX RATES AND TAX PAYMENTS

Corporate income tax
From 1 January 2017, the CIT rate is 9% instead of the preceding 10% / 19% progressive rates.
A minimum CIT is levied on the tax base amounting to 2% of the total adjusted income. From 2015 the calculation method of minimum tax base has changed and the total income cannot be reduced by the purchase price of goods sold and by the value of mediated services. Nevertheless, the minimum tax obligation may be avoided by submitting a special declaration to the tax authorities.



Tax assessment and filing obligations
The CIT should be assessed on a financial year (calendar or business year) basis. All business entities are obliged to make tax prepayments based on their business result and their tax liabilities of the preceding year. If the preceding year’s tax liability exceeded HUF 5 million (approx. EUR 16,000), monthly prepayments have to be made; otherwise, quarterly ones.

In Hungary a special tax advance payment liability applies at the end of the tax year. In general, by 20 December of each financial year, the tax advance payments must be filled up to the expected tax liability of the given year (»top-up obligation«). The top-up obligation applies to CIT, local business tax and innovation contribution. If a taxpayer fails to top-up its taxes by at least 90% of the final tax liability, a special default penalty of 20% of the difference is levied. The top-up obligation is applicable for entities which generated a turnover (net sales revenue) on a yearly basis over HUF 100 million (approx. EUR 317,000) during the previous tax year (except for the top-up obligation for the innovation contribution, which is applicable without a threshold).

Growth tax credit
A new tax credit was introduced to the Act on CIT in June 2015. If the taxpayer’s adjusted pre-tax profit in the given tax year exceeds at least five times the absolute volume of its adjusted pre-tax profit of the previous tax year, then the taxpayer may opt for deferring the tax payment due on such positive difference. The deferred payment may be fulfilled in eight equal installments throughout the subsequent two tax years. Certain types of income, such as dividend and interest income or cash received from a related party without repayment obligation may not be included in such tax deferrals.

The taxpayer is eligible to the growth tax credit if the following conditions are met:

  • The taxpayer has been a taxable person for three or more years preceding the tax year,
  • The taxpayer did not participate in any transformation, merger or demerger in three tax     years preceding the tax year,
  • The taxpayer submits a declaration about using the growth tax credit by the deadline of the top-up obligation.
The taxpayer may reduce the remaining amount of payable tax on growth tax credit by implementing a fixed-asset investments and raising headcount in two years after the submission of its declaration about using the growth tax credit. For the reduction strict conditions need to be fulfilled.

If you need a reliable partner in tax advisory don't hesitate to contact us!


LeitnerLeitner

Address: 1027 Budapest, Kapás utca 6-12.
Telephone: +36 1 279 2930
Fax: +36 1 209 4874
Email: office@leitnerleitner.hu