Tax legislation amendments
Hungary's Ministry of Finance has submitted draft tax law amendments to Hungary's parliament for the current and forthcoming year (No. T/6349. and T/6351.) on 4 June 2019. This bulletin summarizes the most important changes to tax legislation in Hungary.
Corporate income tax
Interest limitation rules in connection with group taxation would be modified in a way that net borrowing costs and EBITDA (earnings before interest, tax, depreciation and amortization) for the tax year should be calculated for each group member and those amounts should be aggregated. Thus, the aggregate amount of net borrowing costs would be compared to 30% of the aggregated amount of the EBITDA and to a cap of HUF 939,810,000 (whichever limit is higher). The calculated amount of non-deductible net borrowing costs would be allocated to group members based on a ratio of the members' and the aggregated EBITDA.
When a group member would not meet the requirements in relation to the development reserve tax allowance, having reported intangible assets, it would be required to pay a tax shortfall and related late payment penalty as a group member through the assistance of the group representative effective from the tax year 2019.
The minimum tax should also be taken into consideration when determining the corporate income tax base of the group members. The group representative would be entitled to either pay the minimum tax liability or instead to file a declaration with the Tax Authority.
The group member eligible for tax allowances earlier would have the opportunity to utilize remaining tax allowances (not utilized by either the group member or the group), if the secession would not occur in the form of a termination without legal successor.
Taxpayers starting their business activities during the year would also have the opportunity to join the group, if they declare this intention to the Tax Authority at the date of their tax registration. The membership would be applicable from the beginning of the company's tax payment liability (e.g. from the date of its establishment).
The requirement for group members to use the same currency would be abolished.
In relation to the development tax allowance the applicable minimum present value would be reduced for small- and medium-sized companies:
- in 2020: HUF 300 million for small-sized companies, HUF 400 million for medium-sized companies;
- in 2021: HUF 200 million for small-sized companies, HUF 300 million for medium-sized companies;
- in 2022: HUF 50 million for small-sized companies, HUF 100 million for medium-sized companies.
From the day of publication of this amendment law, the requirement to increase staff numbers and salaries in relation to the development tax allowance would be cancelled for the HUF 1, 3 and 6 billion investments, and for HUF 500 million investments for small- and medium size companies, but this applies only for declarations filed from the tax year 2019.
Due to the abolishment of the top-up requirement, starting in the 2020 tax year a declaration in relation to the corporate income tax contribution should be initiated (through a special form) when filing the final (year-end) tax return with the Tax Authority.
The maximum amount of donation granted for popular team sports would be modified in connection with sport-specific properties. The base would be the operating costs instead of the operating losses applied previously. Taxpayers would be allowed to pay only up to 80% of operation costs, but not more than HUF 600 million. This amendment would be applied from 2020/2021 on in line with the sport development programme.
Eligible costs in connection with the tax allowance for energy efficiency investments would only be the costs of tangible and intangible assets which were set up exclusively to reach a higher level of energy efficiency. In addition, the different valuation method for the purposes of calculating cost would be applicable only if the acquisition value and the increase in value cannot be determined.
In order to be in line with EU tax law, rules on exit taxation would be introduced. Taxpayers would be required to increase their tax base with the amount of the fair market value exceeding the book value of the assets and activities, moreover to apply the provisions of Section 7 and Section 8 of the Corporate Income Tax Act for transferred assets and activities. In general, exit tax rules would apply, when a taxpayer transfers its place of effective management to a foreign country and as a result becomes a tax resident/taxpayer in that foreign country, or if it transfers its assets or business activities connected to its business in Hungary to a registered seat or branch located in a foreign country without maintaining presence in Hungary subject to corporate income taxation in relation to such transferred assets.
In addition, rules regarding hybrid mismatches would also be introduced with the aim of harmonizing Hungary's corporate income tax law with European Union tax law. In case of hybrid mismatches, the legal treatment or classification of a transaction under the same set of conditions between related parties is different in the countries in question and this mismatch in legal interpretation or classification results in tax avoidance. Therefore, taxpayers entering into transactions resulting in hybrid mismatches would not be allowed to treat related costs and expenses as tax deductible for corporate income tax purposes in Hungary.
Transfer pricing rules in Hungary in relation to an in-kind contribution should also be applied when the contributor did not hold majority influence before an in-kind contribution when the transaction takes place between related parties.
Rules regarding top-up obligation would be abolished from the 2019 tax year. However, taxpayers would have the opportunity to perform top-up payment on the 20th day of the last month of 2019 (when a declaration is filed).
Trustee foundations (based on the law in effect), which calculate the tax liability based on the rules applied for wealth determined in a trust deed, would be considered resident taxpayers from the corporate income tax point of view.
The exemption limit for controlled foreign companies would be modified up to HUF 24,395,250 in relation to income arising from non-retail activities.
Value added tax
The draft act gives the opportunity to taxpayers to recover VAT when receivables are overdue for more than 12 months. Recovery is available through self-revisions and in respect to transactions performed after 31 December 2015. A recovery is subject to various requirements (e.g. obligatory notification of the partner and the Tax Authority, applicable only between independent parties, and those parties shall not be subject to bankruptcy, liquidation or forced termination proceedings).
Special tax reimbursement procedure
As of 1 January 2020, the draft act would enable taxpayers to ask for reimbursement of VAT directly from the Tax Authority which was unduly (unnecessarily) paid by the taxpayer to the issuer of an invoice provided that the latter paid the VAT amount to the Tax Authority and there is no other way to recover the VAT (e.g. the invoice issuer improperly charged VAT instead of the reverse-charge scheme and the invoice issuer ceased to exist in the meantime). The request for recovery shall be submitted by 6 months before the limitation period for tax assessment expires.
As of 1 January 2020, the draft act decreases the VAT rate of accommodation services from 18% to 5% with an extension of the tourism development contribution of 4% to the respective services.
VAT exemption in case of intra-Community sales of goods
As of 1 January 2020, VAT exemption for intra-Community sales of goods can only be applied if the buyer has a VAT ID number in a member state other than the country of dispatch and this number is provided to the seller. Furthermore, in order to apply VAT exemption the seller needs to report respective transactions properly in the European Sales Listing (or should adjust the Listing and prove that the mismatch has emerged despite his acting in good faith).
VAT exempt supply of services
As of the 31st day following the acceptance and publication of the draft act, the applicability of VAT exemption of services related to importation and certain customs procedures will be limited to services which are directly provided to the seller or buyer of the products subject to importation or customs procedures (e.g. services related to importation of goods, services related to goods under customs suspension or transit procedures).
Call-off stock simplification
Based on the draft act, call-off stock simplification would be applicable only if the customer is known and his VAT ID is available when the goods are moved to a call-off stock in Hungary. The movement of goods would need to be indicated in the European Purchase List. Furthermore, both the seller holding the stock in Hungary and also the prospective customer shall keep detailed records on the goods. The draft act also provides a time limit for the storage of such goods in a call-off stock.
To be in line with the minimum EU tax level the draft act increases excise duties on cigarettes and on certain tobacco products in three phases as of 1 January 2020.
Personal income tax
The draft amendment introduces the definition of private foundations. Private foundations would be foundations established in line with the Act on Civil Code for the benefit of the founder, new member, or a family member of the new member. In addition, trusts for non-public benefit purposes can be considered as private foundations as well. As a further requirement, the above foundations can be recognized as private foundations only if the foundation manages the assets and yields provided by the private individual founder, or the new member for a foundation; or the assets and yields provided by private individuals for trusts.
The amendment contains a number of provisions for foundations:
- If the income is provided as compensation for an activity or service performed by the individual, the legal title of the income (from the foundation) shall be determined by considering the relevant regulations applicable for income received for the underlying activity or service.
- If the legal title cannot be determined, the income shall be deemed as other income.
- When determining the date of acquirement, the establishment of the foundation (or joining the foundation for new members) shall not be considered as exercise of disposal rights.
- Any yield received by a beneficiary from a non-public foundation shall be considered as a dividend. However, if the yield is provided with respect to a service or activity performed by the individual, the income shall be deemed as income received for the underlying activity or service. It should be noted that if the yield cannot be separated from the other parts of the assets, the total amount of income shall be regarded as a dividend (and the tax free treatment as described below cannot be applied).
- When determining the date of acquirement, the establishment of the foundation (or joining the foundation for new members) shall not be considered as exercise of disposal rights.
- Income realized by the individual from the private foundation shall be treated as tax free income (excluding the yield), if it is not provided as compensation for any service or activity and the yield can be separated from the assets of the foundation.
- Fair market value of assets provided by private entrepreneurs to the foundation shall be considered entrepreneurial revenue.
Tax allowance for mothers raising four or more children
The draft amendment would introduce a new tax base allowance, which could be claimed by women, who are entitled to family support for at least four children (including adopted children), or who were entitled to family support in line with the above consideration for 12 years (in such case deceased children can be considered as well).
Tax base allowance can be claimed for income from dependent activity (excluding the termination payment exceeding the amount set out in the law), as well as for six types of income from independent activity.
The draft amendment sets out that income subject to the new tax base allowance cannot be reduced by claiming other tax allowances or credit. However, the statement on family tax base credit can be made to the employer (or to the disburser that regularly provides income including in the consolidated tax base). In such case the social security contribution allowance would be available to the individual.
If the individual performs an independent activity and is obliged to pay quarterly tax advance, the income should be prorated when claiming the new allowance, if the entitlement to the allowance is not available for the whole quarter.
As an administrative obligation the individual should include the children’s' names and tax ID numbers, along with the relevant income and period (if the individual was not entitled to the allowance for the whole year) in the tax return.
The allowance can be considered for income accounted for the period after 31 December 2019, income relating to 2019 and paid after 10 January 2020, or income relating to a year prior to 2019 and paid after 31 December 2019.
The draft amendment contains modifications on the regulation of cooperative banks. If the member of a cooperative bank grants his cooperative shares to the bank and receives cooperative shares in a holding cooperation, the shares shall not be considered income.
Several tax free items would be defined with respect to income and benefits provided by international sports associations or connected to special sporting events. Tax free treatment would be relevant for payments provided in connection with upcoming sporting events to be organised in Hungary.
It would be tax free income if the ownership of jointly-owned agricultural land were transferred to a co-owner.
The amendment contains regulation in connection with Brexit:
- According to the prevailing legislation, social tax liability does not arise for third country nationals, when an assignment (to Hungary) does not exceed two years, and at least three years have passed since the previous working activity took place in Hungary. Based on the draft amendment, assignments with a start date prior Brexit shall be disregarded when examining the 3-year requirement until 31 December 2020. Furthermore, two months should pass between such assignments to Hungary.
- After Brexit, ongoing UK and/or Hungarian assignments should be regarded as assignments from social tax point of view until the originally defined end date.
Health insurance contribution
The health insurance contribution would be HUF 7,710 per month, while the daily amount would be HUF 257 as of 2020.
Local business tax
The State Tax Authority will forward local business tax returns it has received to the appropriate local municipalities on the 15th and the last day of each month (and issues a certification of filing accordingly), if they do not contain any errors or inconsistencies Based on the modification of the LBT Act effective from 1 January 2020, submitting a local business tax return via the State Tax Authority would be possible only if the taxpayer has corrected possible errors automatically noted by the return filling system. If these have not been corrected, the State Tax Authority would not forward the return to the local municipality’s Tax Authority. Thereupon, local business tax returns could only be submitted directly to the local municipality.
Taxpayers who qualify as sports enterprises would be required to report their local business tax liability exclusively on an official State Tax Authority form; this obligation may be applicable starting this tax year.
Apart from the proposed corporate income tax amendment, in respect to local business tax the year end’s top-up return and payment liability would still exist for those taxpayers who are obliged to apply double-entry bookkeeping and whose annual net sales revenue for the year prior exceeded HUF 100 million.
The amendment would abolish the year end’s top-up obligation from this year on. Therefore, taxpayers would be obliged to file and pay only the difference between previously paid advances and the final contribution liability by the last day of the fifth month in the following tax year.
Financial transaction tax
Transactions between the State Treasury’s account for state bonds and a natural person’s bank account would be exempted from financial transaction tax. Cash payments sent to the State Treasury’s account via post office would be exempted as well.
Additionally, postal cheques payments amounting to less than HUF 20,000 would be exempted from financial transaction tax; the 0.3 per cent tax rate remains for payments above the aforementioned limit, with a limit of HUF 6,000 per payment.
Robin Hood tax
Starting this year, the year end’s top-up obligation rules for the Robin Hood tax would be abolished by the draft
In line with the procedure at the Court of Justice of the European Union, the amendment would suspend the flat tax rate for advertisements and set it at 0 per cent for the period from 1 July 2019 to 31 December 2022.
The draft suggests two methods for the separation of the taxable and the exempt tax base: the pro-rata method and determination of the difference between the first half-year and the total tax base based on a closing accounting statement.
For the tax year including 1 July 2019, only half of the tax advance would be payable, with the option to pay it by 20 July 2019 or 20 October 2019.
Act on procedural rules
For documents relating to tax liability on income and wealth subject to double tax treaties, the draft provides 10-years retention, which is longer than that of the general law.
As of the 31st day following the acceptance and publication of the draft act, no default penalty shall be levied related to the fulfilment of the Electronic Public Road Trade Control System (“EKAER”) obligations, provided that the taxpayer can prove that he acted according to expectation. Furthermore, as of 1 January 2020 taxpayers can retroactively modify their reported data in the EKAER system one time, within three working days following the closing of the EKAER number (but before a tax audit is commenced). The modification is subject to payment of interest.