Tuesday, 3 January 2017

Tax allowances and other advantages in Hungary

The newly introduced flat 9% Hungarian CIT rate combined with the various tax allowances and tax base reductions; further, with the withholding tax exemption of dividends, interests, royalties and any other services fees to corporate recipients make Hungary a very attractive location for foreign investments. In our present post, we would like to give a hint to the wide range of tax allowances and other advances offered by the Hungarian corporate income tax legislation, with special focus to the 2017 amendments.

Tax allowances in Hungary

Numerous subsidies and tax allowance forms 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. This, combined with the flat 9% corporate taxation, may result in 1.8-2.1% effective taxation.

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 10 (as from 2017: 12) tax years after the finalization of the investment.

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 in the course of de-minimis support, the interest paid by SMEs to financial institutions (including financial lease) on loans financing tangible assets may be taken as an allowance, decreasing the CIT payable.

Now, let’s highlight some 2017 amendments.

Easier eligibility criteria for the development tax allowance of large investments

The eligibility criteria for the development tax incentive for large investment projects will be less stringent. The headcount and wage increase-related requirements will be lowered in order to boost investments. For investment projects of at least HUF 3 billion in present value, taxpayers may opt for increasing their staff number by at least 50 persons or their wage costs by at least 300-times the minimum wage; for investment projects of at least HUF 1 billion in present value, taxpayers may opt for increasing their staff number by at least 25 persons or their wage costs by at least 150-times the minimum wage. For investment projects of at least HUF 500 million carried out by small and medium-sized enterprises, the eligibility criteria will be lowered to at least 5 persons or 10-times the minimum wage for small enterprises, and to at least 10 persons or 25-times the minimum wage for medium-sized enterprises. The less stringent headcount requirements will apply to investment projects registered (applied for) after 1 January 2017.

Parallel to the reduction of the corporate tax rate to 9 per cent, the period of time during which the newly available development tax incentives can be used will be extended. The tax incentive may be used in the tax year following the year in which the investment became operational – or, at the taxpayer’s option, in the year in which the investment became operational - and in the following 12 tax years, but no later than the 16th tax year from the tax year of registration or submission of the application. The extension will only apply to new registrations and applications submitted from 1 January 2017, and will not extend to the already acquired tax incentives. The utilisation of the already available tax incentives must; therefore, be redesigned due to the 9 per cent tax rate!

Introduction of a new tax allowance category for investments aimed at energy efficiency

Earlier only environmental investment projects of at least HUF 100 million in present value were eligible for development tax incentives available for investment projects aimed at energy efficiency. However, from 2017, a new legal title opens the opportunity for taking advantage of corporate tax incentive for the implementation and operation of asset investments aimed at energy efficiency. Such investments may include projects aimed at improving energy efficiency by reducing final energy consumption. The tax incentive is capped at 30% of the eligible costs (but not more than the HUF equivalent of EUR 15 million in present value), which can be further increased by 20 percentage points for small enterprises, and by 10 percentage points for medium-sized enterprises. The mandatory operation period of the investment project is at least five years. The tax incentive can be used in the year in which the investment became operational, /or/ in the following tax year and in the following five tax years. The condition for taking advantage of the tax incentive is for taxpayers to have a support certificate for energy efficiency goals. A separate legislation will be adopted concerning the support certificate.

The new tax incentive may only be claimed in connection with projects aimed at energy efficiency and launched after the amendment act came into force and only for eligible expenses incurred after the commencement of the project.

The tax incentive for investment projects aimed at energy efficiency and the development tax incentive for environmentally friendly projects will be two parallel categories, i.e. for one single investment only one of them may be used. Consequently, investment projects must choose which of the two incentives they want to apply.

New incentive for live music services

A corporate income tax incentive for live music services will be introduced as a completely new category, independent of the development tax incentives. This tax incentive may be used up to 50 per cent of the net consideration (fees) paid for live music services. On the other hand, tax decreasing items, as costs and expenses not incurred for business purposes, will increase the tax base. The tax incentive will be treated as de minimis aid. The Corporate Tax Act introduces a new category related to the tax incentive, the category of restaurants and live music services.

Tax allowances of small and medium-sized enterprises

From 1 January 2017, the former threshold of HUF 30 million for the tax base allowance of small and medium-sized enterprises supporting real estate, tangible and intangible asset investments will be eliminated. A taxpayer that is owned by private persons and qualifies as a small and medium-sized enterprise on the last day of the tax year may decrease its corporate tax base (double deductibility of costs) by its investment costs spent in the given tax year on real property or machinery, equipment, vehicles, software and intellectual products, and by the value of renovation, extension, change of use and property development. A limitation to the tax allowance will remain effective according to which it can only be used on the grounds of a positive corporate tax base; therefore, no loss carry-forward arises.

On top of the above, from 1 January 2017, the scope of tax allowances relating to interests paid on investment credits of small and medium-sized enterprises will significantly expand. In the future, the computed corporate tax may be decreased by the total amount of interests paid (formerly 40 % for credits raised before 2013, and 60 % for credits raised in 2014). The tax allowance can be used during the term of the loan, until the  financed tangible assets are included in the entity’s books. By the elimination of the annual HUF 6 million threshold in 2017, only the general limits will have to be taken into account according to which the above tax allowance may be used up to 70 per cent of the corporate tax payable.

Both tax allowances will qualify as de-minimis aid.

Corporate tax base incentives for business start-ups

An investment in the so-called registered early-stage companies (start-ups) will reduce the investment company’s tax base (pre-tax profit) in four tax years (in the tax year of acquisition and in the three subsequent years), in equal instalments, up to HUF 20 million per tax year. The rate of tax reduction may not exceed by three times the acquisition cost of the shareholding acquired in start-up companies (including the acquisition cost increment due to the capital increase following acquisition). However, when the tax base allowance is applied, the impairment loss recognised for the acquired shareholding (but only up to the amount recognised as tax base allowance) will increase the tax base in the year when it is accounted. The subsequent reversal of impairment loss will decrease the tax base to its original level.

In the tax years when the tax base allowance is used, the average headcount of early-stage companies must reach or exceed two persons, and at least one of the two must be employed in a research and development role. Another requirement for eligibility for tax incentive is that the investor or its related party was not the owner of the start-up in the three tax years preceding the acquisition. This tax incentive will also qualify as de-minimis aid. The detailed requirements for qualification and for the registration procedure will be specified in a separate legislation.

Extending the scope of multiplied cost deductibility

Combining costs and expenses declared according to the Accounting Act with tax base reduction enables taxpayers to effect multiple deduction of costs and expenses from the tax base. This method was applied earlier in the Hungarian corporate income tax scheme in connection with state privileged activities.

First, direct costs incurred in connection with research and development activities may be deducted from the tax base twice or, under certain conditions, four times. 

In addition; however, as of 2017 new scopes of activities will also enjoy this preferential treatment:

  • The corporate tax base may be reduced by the amount of the costs and expenses recognised in the tax year in connection with providing housing assistance for labour mobility purposes and with setting up, maintaining and operating accommodation facilities for workers, but by no more than the amount of pre-tax profit (reduction of the tax base by twice the expenses – double deduction tax incentive).
  • Tax allowance may be used for the maintenance costs of monuments and locally listed buildings and structures (double deductibility of costs), but only up to 50 per cent of pre-tax profits. For renovation, the tax base may be reduced by twice the renovation cost (triple deductibility of costs), moreover, it is not limited by the amount of pre-tax profits, i.e. the resulting negative tax base may be used as loss carry-forward. The scope of taxpayers eligible for the tax allowance may be owners, lessees under a financial lease, holding companies and finance companies. The tax allowance may only be used if the maintenance or renovation of monuments is not carried out upon a compulsory order. Investments aimed at safeguarding cultural heritage may also apply for the triple deductibility of costs. The tax allowance can be used in the tax year when the investment or renovation is completed and in the subsequent five tax years in instalments determined by the taxpayer. The tax allowance can be shared by the taxpayer’s related companies.
New corporate tax base allowance for support 

Similarly to support provided to public benefit companies, the Hungarian Relief Fund or the National Cultural Fund, taxpayers that support the Compensation Fund may be eligible for a corporate tax base allowance. The tax allowance is 50% of the financial support (allocation) provided in the tax year.

Culture and sports support

Taxpayers that provide supplementary financial support paid for film productions, performing arts and spectacular team sports after the deadline, but prior to the date on which the company’s tax return is filed will not lose all but will be eligible for 80 per cent of the tax incentive. If the 30-day deadline following payment of supplementary and additional supplementary support expires after the corporate tax return is filed for the tax year in which the support was provided, taxpayers will not be required to submit an extra report to the tax authority but they may report payments to the tax authority in their corporate tax return for the tax year in which the support was provided.

In addition, energy suppliers may take advantage in their income statement (i.e. also  in the Robin Hood tax) of the tax credit on support offered for the purposes of performing arts, film productions and spectacular team sports recognised as other revenue. This regulation will correspond to the regulation relating to the corporate income tax, and may already be used for the 2016 tax year.

Parallel to the reduction of the corporate tax rate to 9 %, the period of time during which the culture and sports support can be used will be extended from six to eight years. In addition, the level of supplementary support will be adjusted to the new tax rate. Furthermore, the extension of the period during which the tax allowance can be used will apply to the previous support periods: for film productions and performing arts support the tax allowance can already be used in connection with support provided from profits in the 2016 tax year, while for sports support in relation to the support periods of 2011-2012 and 2016.

LeitnerLeitner’s expert team is ready to assist you in claiming and maintaining tax incentives. We maximise the best use of your tax incentives!