In our previous article, we presented the changes in Hungarian economic support trends and clarified the basic concepts of R&D. In this article, we review the various available incentives. These can be grouped into three main categories: the first includes tax base and tax allowances that can be applied during research and development activities; the second category covers incentives related to the use of intellectual property created through these activities; and finally, R&D projects are also given preference in direct financial grant funding.
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R&D incentives
Tax incentives related to ongoing R&D activities
The Hungarian tax system therefore provides significant tax incentives for ongoing research and development activities: these can include benefits related to corporate tax, local business tax, and other taxes.
R&D tax base allowances related to corporate income tax
The Hungarian Corporate Income Tax Act allows the double recognition of R&D costs in the corporate tax base: the direct costs of basic research, applied research, and experimental development are first recorded as expenses in the accounting records, and can then be deducted once again from the resulting corporate tax base.
A condition for this is that the R&D activity is carried out within the taxpayer’s own scope of activities—this may, within narrow limits, also include certain R&D services received from external providers, as well as joint or contracted research, provided they are accounted for within the taxpayer’s own activities.
The tax benefit can also be claimed through self-revision if the taxpayer previously failed to apply the double recognition of such costs when calculating corporate income tax.
An even greater deduction—up to 400%—is available, up to a maximum of HUF 50 million per year, if the research activity is carried out in cooperation with the entities listed below:
- higher education institutions,
- the Hungarian Academy of Sciences (MTA),
- HUN-REN Hungarian Research Network,
- research institutes operating as central budgetary agencies,
- research institutes jointly established by them,
- research institutes operating as economic organizations that are directly or indirectly majority-owned by the state.
One of the favourite areas of the consultants at LeitnerLeitner is advising on tax incentives. Our clients can achieve their business goals more easily and quickly, without having to deal with complex requirements and administrative processes. For us, the work related to obtaining and optimally using these incentives is a creative and challenging puzzle. We are proud when our advice contributes to our clients’ more prosperous and efficient operations!
Local business tax base allowance based on direct R&D costs
The costs of R&D activities can also reduce the local business tax base. The same amount can be deducted from the local business tax base as from the corporate tax base. However, each cost can only be considered once: for example, if a raw material cost has already been taken into account when determining the business tax base, it cannot be deducted again with reference to R&D activities. Any previous calculation, however, can still be corrected retrospectively through a self-audit.
R&D tax incentive: among the development tax incentives
The development tax incentive is one of Hungary’s most significant corporate tax benefits, supporting the implementation of high-value investments and strategic projects. This incentive can be directly deducted from corporate tax, potentially providing an effective tax rate as low as 1.8% for taxpayers carrying out the investments. The tax benefit—available in the form of an 80% tax credit against the payable tax—can be claimed for up to 13 tax years, but no later than the end of the 16th tax year following the start of the investment. Manufacturing, technological, energy efficiency, and environmental investments, as well as basic research, applied research, and R&D activities, can all qualify for and access this highly advantageous tax-saving opportunity. However, several conditions must be met in order to claim it.
The minimum investment threshold for R&D projects eligible for the development tax incentive is HUF 100 million.
Another condition for claiming the incentive is that the investment must be reported to the tax authority in advance and operated for the period specified by law. In addition, the intensity limits for state aid set by the European Union must be observed, which may vary depending on the size of the company and the region of implementation. If all these conditions are met, the incentive can result in a significant reduction in corporate tax burden, which in the long term contributes to increasing the company’s competitiveness and facilitates the financing of strategic developments.
The drawback of the incentive is that it significantly reduces the effective corporate tax burden. Therefore, if a company that falls under the scope of the global minimum tax claims the incentive, it may be reversed according to international rules— depending on whether the taxes paid in other tax categories (e.g., local business tax, innovation contribution, and special tax on energy suppliers (Robin Hood tax) in addition to corporate tax) amount to the required 15%.
New R&D incentive: does not pose a disadvantage under the global minimum tax
In order to increase the effective tax rate, which is of key importance from the perspective of the global minimum tax (GloBE), a new type of GloBE/Pillar II-compliant R&D tax incentive can be chosen as an alternative to the corporate tax base allowances and tax incentives described above. While the previously described tax base and tax incentives reduce the effective tax rate, the use of this new type of incentive does not, which may result in a lower top-up tax under the global minimum tax rules. However, the new R&D incentive can only be applied to R&D projects started on or after January 1, 2024, and cannot be combined with previous R&D incentives.
A specific feature of the GloBE-compliant R&D tax incentive is that, under the global minimum tax rules, it qualifies as a qualified refundable tax credit (QRTC). As a result, in GloBE calculations it does not behave like a traditional tax credit. When determining the effective tax rate (ETR), it does not reduce the amount of ‘covered taxes’, i.e. the taxes taken into account, but is recognized as other income and thereby increases GloBE income. In other words, the numerator of the ETR calculation remains unchanged, while the denominator increases. As a consequence, the effective tax rate is less likely to fall below 15%, meaning that applying the incentive does not result in a top-up tax liability under the global minimum tax rules.
Although in this case as well a tax benefit equal to 10% of eligible costs may be claimed against the calculated tax, more favourable rules can be applied for collaborations falling within the category of priority support.
Accordingly, in the case of joint research projects carried out in cooperation with a higher education institution, the Hungarian Academy of Sciences (MTA), a central budgetary or other specialized research institution, or with the involvement of the HUN-REN Hungarian Research Network, up to the full amount of eligible costs may be deducted, up to a maximum of HUF 500 million.
However, this benefit may not exceed EUR 55 million in the case of basic research, EUR 35 million for applied research, and EUR 25 million for experimental development. The benefit may be utilized up to 100% of the corporate income tax payable, and if it cannot be fully utilized due to the low amount of corporate income tax payable, it may be claimed as a cash refund.
Although the range of eligible costs is narrower than in the case of the previously mentioned incentives, the costs and expenses directly related to the following R&D activities may still be deducted:
- depreciation of tangible assets calculated for the duration of the project;
- personnel costs (excluding indirect costs such as entertainment and severance costs);
- costs and expenses related to the use of patents;
- operating and maintenance costs.
The tax benefit can be claimed in the year the cost is incurred and in the following 3 tax years. The duration of each development project may not exceed a total of 5 tax years.
The existing R&D incentive system (i.e., the old, traditional R&D cost-multiplier deductions) as well as the development tax-credited R&D support are generally more advantageous for companies to which GloBE does not apply. The choice of the new tax incentive must be indicated in the tax return for the first year of its application, and a return to the old system is only possible from the 6th tax year following the year of the choice.
Additional tax benefits
Since 2019, a social tax allowance has been available for the employment of highly qualified personnel involved in research and development activities (i.e., individuals pursuing PhD studies or holding a PhD degree), as well as for the employment of personnel participating in R&D activities. However, only this single benefit can be claimed: the same costs cannot also be taken into account as a deduction reducing the corporate tax or local business tax base.
Incentives available after the completion of the development
Some incentives are linked to profits from royalties, so it is important to understand the concepts of royalties under corporate tax and local business tax law.
The concept of royalties in corporate tax:
In corporate income tax, “royalties” are defined as such “results” or revenues that arise from patents, utility models, plant variety protection, supplementary protection certificates, patented topographies of microelectronic semiconductors, or software protected by copyright, as well as from medicines for rare diseases, and furthermore from the sale or in-kind contribution of the exclusive rights listed above, or from the provision of goods or services attributable to those exclusive rights.
The concept of royalties in the local business tax:
Any (consideration-based) income received for granting permission to use or exploit a patent, utility model, plant variety protection, supplementary protection certificate, patented topography of microelectronic semiconductors, or copyright-protected software, or for the sale of the exclusive rights listed above. The two concepts are therefore similar, but not the same!
As an introduction, however, it is also important to emphasize that the benefits are only available if there is a direct link between the income benefiting from the relief and the related expenses. Costs related to services provided by related companies cannot automatically be accepted without conditions, whereas R&D service fees paid to unrelated companies are generally considered deductible expenses for tax purposes. It must always be taken into account to what extent the taxpayer has contributed to the creation and development of the intangible asset in question.
Corporate income tax base relief applicable to royalty income
Under the applicable current rules, 50% of royalty profits (profit = revenue – costs) is considered a tax base reducing item, but only up to 50% of the positive pre-tax accounting profit. And if this asset generates a loss in the following tax year, 50% of that loss would increase the tax base.
Exemption of royalty income from local business tax and innovation contribution
Royalty income is exempt from local business tax and innovation contribution. This exemption can also be applied retroactively through self-correction.
Incentives related to the disposal of intangible assets connected to R&D
Tax base allowance for reported intangible assets
Intangible assets eligible for royalties, whether acquired or self-created, may be reported to the Hungarian tax authority within 60 days from the date of acquisition or from the date they are recognized as intangible assets. If the taxpayer subsequently holds the reported intangible asset continuously among its assets for at least one year, then the gain (profit) arising from its sale or contribution in kind may be deducted from the corporate tax base. This incentive cannot be used together with the relief applicable to intangible assets generating royalty income.
Tax base relief for intangible assets generating royalty income
The profit arising from the sale or disposal of ‘royalty-generating’ intangible assets may reduce the corporate income tax base, provided that a new intangible asset is acquired or created within the next five tax years following the sale. In the year of the sale/disposal, in addition to applying a tax base reduction equal to the amount of the profit, restricted reserves must be increased simultaneously by reducing retained earnings. This results in the fact that the additional profit realized upon disposal cannot serve as a basis for dividend distribution (since the basis for dividend payment is post-tax profit and retained earnings, taking into account certain reducing items, such as the value of restricted reserves).
Compared to the incentive applicable to reported intangible assets, the advantage of this system is that there is no one-year holding period and no increase in the tax base in connection with a potential “loss-making” sale, while a disadvantage may be that “continuous development” is required. It can also be applied later within the framework of self-revision.
Monetary incentives
R&D-related projects may also receive more favourable treatment in terms of monetary subsidies than general investment projects. For example, a general project of a large company in Budapest may not receive any support at all, and in Pest County the support intensity is also relatively low, but an R&D project may still have a chance to successfully apply even there.
In summary, an R&D project or activity can receive support in many ways within both the Hungarian and EU systems. It is worth exploring these options and carefully planning the tax aspects of the developments so that businesses can make the most optimal use of the available opportunities. It is also advisable to review the company’s current activities to determine whether there are any eligible elements, and whether it is already carrying out activities that could be classified as R&D. How these can be identified will be presented in our next article.
