Wednesday, 11 May 2016

Learn about the Hungarian transfer pricing rules!

In our current article we reviewed the common rules of transfer pricing. We are giving answers such basic questions like: what is transfer pricing, how is evolved, why is needed, how strict is the Hungarian regulation, what are the consequences of default, what is exactly the transfer pricing documentation in Hungary, who-, when-, and about what should this be prepared, what kind of review obligations and simplifying options are available.

network, transfer pricing

What is the transfer pricing?

The transfer prices are the clearing prices between associated companies. The associated parties can be any legal entity and/or natural person, who – according to the civil code (Cc.) - have majority control in each other, or when a third party directly or indirectly – based on the civil code – have majority control in both of them.

According to the Cc., the majority control means a relationship where a natural or legal person (holder of a participating interest) controls over fifty per cent of the voting rights in a legal person, or in which it has a dominant influence. The holder of a participating interest is deemed to have dominant influence on a legal person and it has the right to appoint and recall the majority of the executive officers or supervisory board members of the legal person and control more than half of the votes.

Please also note that under Hungarian rules similarities in the management may also create a related party status.

The transfer pricing actually means a duplicated role:

  • First it means the control of the intercompany prices used for the related party transactions (goods trade, loans granted, services sold, guarantee undertaken, capital in-kind movements) to examine whether the pricing meets the arm’s length principle (whether it would be used between independent economic parties).
  • Secondly it covers the documentation of this process, the prices applied and the pricing method used between the associated parties have to be registered.

Why is it necessary?

The authorities always paid special attention to the transfer pricing, as even one associated transaction can significantly modify the tax base of the parties. Based on our experiences the taxpayers are usually anxious to determine a price similarly to the market price, but sometimes the prices applied are not properly configured, and this way does not meet the arm’s length principle.
Originally the OECD transfer pricing regulations had been created with the aim to eliminate distortion of the collectable tax and the market itself by dis-pricing of related parties.

How strict are the Hungarian transfer pricing regulations?

Looking at the international practices, the regulations in Hungary are stricter than the average. In September 2003 – as first in the region – the transfer pricing documentation obligation has been introduced in Hungary. Furthermore we are also in the first line regarding the amount of penalties for potential non-compliance. Despite of this, in the last few years a trend for simplification may be discovered - even in Hungary.

In Hungary the transfer pricing documentation obligation is valid for the domestic transactions as well which is very rare at an international level, most countries require only the cross-border transactions to be documented. As the Hungarian Tax Authority requires a documentation that is usually more detailed than on the other side, sometimes it is difficult for foreigners to understand the incurring additional costs and administrational tasks.

What is the consequence of the default?

For several years the auditing of the transfer pricing documentation is an underlined target during tax audits. This is nowadays part of all complex tax audits; additionally the Authority has a single TP department full of well-prepared and experienced TP specialists. Therefore it is not enough to have the documentation itself, its content is also strictly examined.

Assessable fees:

  • in case the modification of the tax base: next to the payment of the potential tax shortage, a 50% tax penalty plus late payment surcharge (twice of the national banks basic rate) may be levied
  • in case the default in the documentation: default penalty may be levied with the maximum amount of HUF 2 million per documentation per year. It is important to note here that transfer pricing documentation need to be prepared in Hungary on a transactional basis, thus the member of related party transactions multiplies the potential penalty amounts as well. In case of recurrence in the non-compliance, the fines may be duplicated or four-folded.
  • in case the default or delay in reporting: the amount of the maximum penalty can be HUF 500.

Who are concerned?

The tax base correction obligation – which is deriving from the default in pricing the associated transaction contrary to the arm’s length principle - affects everyone making a business with related parties (trading, selling or buying services, give or take guarantees, etc.); therefore, it is worth using the market prices within the company-group.

However, the documentation obligation does not affect everyone equally. Exemptions are available for:

  • small enterprises and in favour of mutual acquisition of the middle-sized companies (in permanent contractual construction)
  • contracts to individuals’
  • stock exchange transactions
  • companies who are using controlled or officially fixed prices
  • mediation or resale of services/goods purchased from independent parties, without any markup
  • free cash handling/overtaking
  • transactions covered by an official Advanced Pricing Agreement (“APA” potential validity: 3-5 years + 3 years within unchanged circumstances), in case the state of the affairs are unaltered
  • transactions which’s amount did not exceeded the HUF 50 million (based on the regulation valid since 21.06.2013).
Which transactions need to be documented?

Preparing the documentation is necessary for all transaction which had not been listed above (as exemptions), even if not concluded in a written, but verbal or implied contract. The documentation needs to be prepared for that business year in which the first transaction related fulfilment had been done. A yearly update of the documentation is also necessary.

What is the deadline for preparing the documentation?

The deadline of preparing the TP documentations in Hungary always equal with the actual filing date of the yearly corporate income tax declaration. Which means that it has to be done latest the 31st of May (for the tax payers where the financial year is parallel to the calendar year), but if someone files the CIT declaration earlier, the TP documentation also has to be prepared by this time. However it does not need to submit the documentation to the tax authority but only to prepare it and provide within 3 days upon request.

How often is it necessary to supervise?

The TP documentations and also the supporting database study – such as AMADEUS - (in case of transaction which takes more than a year) need to be supervised on a yearly basis. A prepared documentation may be used also for the following years in case the relevant terms and the usual market price had not been changed, but in some cases the yearly modification might be necessary.

How can it be simplified?

The companies may simplify their administration by using the official Advance Pricing Agreement (APA) system. This means that the company prepares the TP analysis and the respective documentation for a future transaction which is agreed by the Tax Authority, and fix it for 3-5 years. The validity of the APA may be extended once for 3 years. During this period the yearly modification is not necessary, and the price-determination related uncertainties may also be avoided. The simplification is only valid within unchanged circumstances.

You may find more information about the Hungarian transfer pricing obligations and the transfer pricing documentation requirements on our Hungarian blog.

LeitnerLeitner provides the following services in the field of transfer pricing:
- Transfer price advisory services
- Data base search (AMADEUS)
- Audit and preparation of transfer pricing documentation
- Representation in fiscal procedures (APA – Advanced Pricing Agreement)

For further information, please visit our website  or contact us via e-mail at