Taxpayers and tax 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.
Tax rates and tax payment obligation
From 1 January 2017, the CIT rate is 9% instead of the preceding progressive rates (10% / 19%).
A minimum CIT is levied on the tax base amounting to 2% of the total adjusted income. Nevertheless, this minimum tax obligation may be avoided by submitting a special declaration to the tax authorities; which is then subject to specific tax risk assessment analysis.
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 13,500 / USD 14,000), monthly prepayments have to be made;
otherwise, quarterly ones.
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. 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 support.
Irrespective of the above, deductibility is available for supports granted for
production, art performances and certain sport activities. As a tax incentive
double or even higher tax deductibility may be gained for R&D, movement
buildings, education and other specific categories.
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 back 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 fulfil the conditions set out in the Act on CIT. In addition,
20% of the bad debts which do not necessary fulfil 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).
Earlier, the Act on CIT provided for a
debt-to-equity ratio of 3 to 1 for thin capitalization purposes. Now, due to
the ATAD provisions of the EU, interest limitation rules apply concerning the
EBITDA-ratio. If the amount of net financing costs (i.e. interest expenses less
interest revenues) exceeds 30% of EBITDA or HUF 939,810,000 (appr. EUR 3
million / USD 3.1 mil-lion) – whichever is higher – the excess part will not be
acknowledged in the CIT base of the given tax year. However, special
conditions, carry forward provisions may also apply.
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 their pre-tax accounting profit. 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 CIT
rate effective in the year of setting up the reserve) with late payment
interest added (the Hungarian prime rate +5 percentage points per annum). As
the depreciation rates applied for im-movable 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. 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. These R&D advantages may be shared among Hungarian related parties. Also the share of the advantages between the service provider and the recipient is available.
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. 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 profit, 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 2030 the latest. Limitations are also valid in case of quota sale or corporate transformations.
Group taxation
Corporate group taxation is available in Hungary, covering all domestic taxpayers that are related parties linked with at least 75% voting rights (directly or indirectly through one or more domestic or foreign entity). Voting rights of close relatives (defined by the Act on the Civil Code) shall be aggregated. Even two companies may form a group, but a taxpayer may only be a member of one group at any given time. Taxpayers starting their business during the year may also be a member of a tax group if the conditions are met.
Opting for the group taxation scheme for the next year shall be notified in advance, between the 1st and 20th day of the penultimate month of the current tax year (i.e. by 20th November if the tax year is equivalent to the calendar year).
Any members of the tax group may be appointed
as the head of the tax group, who is then liable to represent the group towards
the tax authorities in corporate income tax matters. For tax groups, the tax
base must be determined both separately and jointly. They have the advantage of
being able to share losses for the year and may also have advantages in the
calculation of tax benefits. An additional advantage is that TP documentation
do not need to be created between domestic related parties (belonging to the
same tax group).
- Corporate income tax (CIT)
- Transfer pricing (TP)
- Value added tax (VAT)
- Personal income tax (PIT)
- All other specific/sectoral taxes and surtaxes
- Tax audits
- Tax and financial review (DD)
- Special transactions
- External trainings for taxation and accounting.
