Wednesday, 18 September 2019

Introduction to the world of development tax allowances

Entrepreneurs often face that they do not have enough resources to implement their ideas, too many taxes shall be paid, and what is even more annoying is often they get informed only after the closure of an investment about the benefits they missed. However, there are far more opportunities for entrepreneurs than they might think in the field of taxation.

In fact, the tax system is particularly supportive in the field of investments, research and development in Hungary; however, only a few know and dare to take advantage of their opportunities. Therefore, it is not a ‘gent’s fad’ to turn to a tax advisor in order, to create a new construction or even to evolve a headcount or capacity expansion plan. The advisor will help to find tax-reducing opportunities for emerging ideas, but also to manage the change so that the company will surely meet the requirements expected. It is worth to ask a tax advisor for those, who just realized it, because they have just completed a project, and in some cases, it is still possible to apply the benefit retroactively. However, it is also important to emphasize that you should not initiate a new activity or a business to save tax, but rather to seek the most optimal, legal taxation opportunities for the planned program or business plan.
These options have been summarized Hungarian in a previous article but our blog can draw inspiration from many other writings. We now look in detail at the development tax allowances that encourage investment.
The corporate income tax payable can be reduced by development tax up to 80%, so in the fortunate case the actual tax rate will be 1.8% instead of 9%.
The use of the benefit may be applied after the investment has been completed, at the time of putting into use the asset created by the investment or for 12 years from the following year but not later than 16 tax years after the tax year of the application submitted. The rate of benefit depends on the size of the investment and the aid intensity rate calculated based on the site of implementation; its validation takes place with the withholding on the corporate income tax payable.
The intensity of the allowance, i.e. how many percent of the total investment amount can be recovered in the form of a tax credit, also depends on the size of the enterprise: that is, the status of large, medium, small enterprise. The biggest aid intensity is given to small enterprises, which can reach 70% of the value invested. So, in optimal case, for an investment of 100 units, 70 units can be recovered from corporate income tax.
The intensity of the allowance also depends on how novel the project is, e.g. start-up investment for start-up or new economic activity, and it also depends on the location of implementation: the less high and dry the region, the higher the discount amounts.
Of course, you cannot take advantage of this discount for everything. It might have several forms as:
  • investments reach minimum HUF 3 billion at present value;
  • investment in the establishment of hygiene conditions for food production plants of animal origin, if the value of the investment reaches 100 million forints;
  • investment operated within the administrative territory of the specified beneficiary municipality at present value of at least HUF 1 billion;
  • independent environmental investment of at least HUF 100 million;
  • investment for basic research, applied research or experimental development at a present value of at least HUF 100 million;
  • investment only in film and video production at present value of at least HUF 100 million
  • investment for job creation (HUF 100 million);
  • investment at present value of at least 500 million realized by small and medium-sized business;
  • investment operated in the free enterprise zone at a present value of at least HUF 100 million.
Enterprises planning investments may apply for the development tax allowance to the Ministry of National Economy. In practice, they should declare on a form that they are planning an investment for which they would like to apply for a development tax allowance. It is very important to do this before they start their project because they lose their eligibility for the tax allowance if the application is submitted after the start of the investment.