Next year the so-called collective corporate taxation which is a popular tax planning technique in Germany and Austria will also become available in Hungary. Thanks to the new opportunity for companies the Hungarian tax system might become more attractive, i.e. it can catch foreign investors' attention and improve the competitiveness of Hungarian corporate groups. Let's see how it works!
The tax package represented to the Parliament in the middle of October introduces a very interesting new regulation in Hungary: the collective corporate taxation. The system of group taxation for corporate income tax purposes, which is not unknown in international taxation, provides an excellent opportunity to equalise the tax bases within the group. Companies in the group can balance each other's loss-making or profitable operation and share the beneficial effects of tax allowances obtained by a group member. In the end, the commonly set tax burden will be shared among each other. Certain countries, such as the neighbouring Austria, apply cross-border collective corporate taxation, while others, such as Germany, which is a big investor in Hungary, only extend this benefit to domestic corporations.
The Hungarian collective corporate taxation – according to the proposal – would cover all resident taxpayers; including not only domestic business organisations, but branches and foreign companies qualified as domestic taxpayers in Hungary regarding their place of management as well. Even two companies may form a group, but the number of participants is not limited. However, a taxpayer may only be a member of only one group at the same time.
Nevertheless, a strict ownership concentration is the prerequisite of the creation of a tax group for corporate income tax purposes. There must be a business relationship based on the voting rights of at least 75% of the participating group members. The group members shall have the same balance sheet date, their books and records shall be kept in the same currency, and they shall prepare their financial statements similarly based on the Hungarian accounting law or the IFRS.
Based on the proposal, the collective corporate taxation will be available for the first time from the tax year of 2019; however, the transition shall be notified between 1-15 January 2019; thereafter, it is no longer available for that year. The decision shall be thoroughly considered, taken into account the potential benefits and the disadvantages of joining or not joining to the group for each entity. A tax grouping will only be established with the approval of the Hungarian Tax Authority.
Each group member will be obliged to prepare a separate tax base calculation, which shall also be filed to the HTA in a declaration equivalent to a tax return. However, the calculation of the tax base shall also be handed over to the group representative who prepares the group's tax return based on the collected data. The collective tax base may be reduced according to special rules by loss carried forward; and tax allowances (e.g. investment tax incentives, R&D tax allowances, tax incentives for small and medium-sized enterprises, tax benefits in connection with film production, performing arts and sight-seeing sports, tax allowance for energy efficiency) may also be enforced together, upon meeting the specific conditions.
The group's corporate income tax payable for the tax year will have to be divided among the group members in proportion to the individually calculated positive tax bases.
The group members may also be exempted from the preparation of intra-group transfer pricing documentation, which is a significant simplification of the administrative burden. Once the group taxpayer has been created, only transfer pricing documentation at the group level shall be prepared.