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Hungary: Proposals for corporate, individual income tax changes; VAT amendments

Hungary: Proposals for corporate, individual income tax

The Ministry of Finance in early June 2019 submitted draft tax legislative amendments (No. T/6349 and T/6351) to Hungary's parliament for the current and forthcoming year.

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The legislation includes proposals concerning corporate income tax, individual income tax, and value added tax (VAT) among others.

Corporate income tax

Group taxation

  • Interest limitation rules in connection with group taxation would be modified so that net borrowing costs and EBITDA (earnings before interest, tax, depreciation, and amortization) for the tax year would be calculated for each group member and those amounts then would 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 greater). 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 would 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 use the remaining tax allowances (not used 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  • The requirement for group members to use the same currency would be repealed.


Tax allowances

In relation to the development tax allowance, the applicable minimum present value would be reduced for small- and medium-size companies according to the following schedule:

2020

HUF 300 million for small-size companies

HUF 400 million for medium-size companies

2021

HUF 200 million for small-size companies

HUF 300 million for medium-size companies

2022

HUF 50 million for small-size companies

HUF 100 million for medium-size companies

 
  • The requirement to increase staff numbers and salaries in relation to the development tax allowance would be repealed for certain investments (HUF 1 billion, 3 billion and 6 billion investments, and for small- and medium-size companies, HUF 500 million) or declarations filed from the tax year 2019.
  • Due to the proposed repeal of the top-up requirement, starting in the 2020 tax year, a declaration in relation to the corporate income tax contribution would 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 applicable from 2020/2021 (in line with the sport development program).
  • Eligible costs in connection with the tax allowance for energy efficiency investments would only be the costs of tangible and intangible assets as 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.


Other provisions

  • 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 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 that is subject to corporate income taxation in relation to such transferred assets.
  • In addition, rules regarding hybrid mismatches would be introduced with the aim of harmonizing Hungary's corporate income tax law with European Union tax law. The law would define case of hybrid mismatches with reference to the legal treatment or classification of a transaction under the same set of conditions between related parties being different in the countries in question, and this mismatch 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 would 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 repealed 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 for the corporate income tax purposes.
  • 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. 

Individual (personal) income tax

  • The draft amendment introduces a definition of “private foundations” as foundations established under civil law for the benefit of the founder, new member, or a family member of the new member. In addition, trusts for non-public benefit purposes could be considered as private foundations as well. There are other requirements.
  • 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.

Value added tax (VAT) and excise tax

  • Bad debts: Taxpayers would be allowed to recover VAT when receivables are overdue for more than 12 months.
  • Special tax reimbursement procedure: Effective 1 January 2020, taxpayers would be able to ask for reimbursement of VAT directly from the tax authority if the VAT were unduly (unnecessarily) paid by the taxpayer to the issuer of an invoice and there is no other way to recover the VAT.
  • Accommodation services: The rate of VAT on accommodation services would be reduced from 18% to 5% with an extension of the tourism development contribution of 4% to the respective services.
  • VAT exemption in case of intra-EU sales of goods: A VAT exemption for intra-Community sales of goods could only be applied if the buyer has a VAT ID number in an EU Member State other than the country of dispatch and this number is provided to the seller.
  • VAT exempt supply of services: A VAT exemption for services related to the importation and certain customs procedures would be limited to services directly provided to the seller or buyer of the products (that is, services related to importation of goods, or services related to goods under customs suspension or transit procedures).
  • Call-off stock simplification: Call-off stock simplification would be allowed only if the customer is known and the customer’s VAT ID is available when the goods are moved to a call-off stock situation in Hungary. There would be a time limit for the storage of such goods in a call-off stock facility.
  • Excise tax: To align to the minimum EU tax level, there would be an increase of the excise duties on cigarettes and on certain tobacco products, with the increase to be phased in over three points in time beginning 1 January 2020.


Read a June 2019 report prepared by the KPMG member firm in Hungary

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