HUNGARY - New possibility of creating Corporate Taxpayer Groups affects transfer pricing requirements
Since 1 January 2019, a new opportunity exists for affiliated companies that meet some specific criteria to create Corporate Taxpayer Groups in Hungary. In accordance with the relevant law amendment regarding intercompany transactions between members of a Corporate Taxpayer Group following the establishment of such a Group, the general reporting provisions in relation to transactions between affiliated companies will, in principle, not apply.
General transfer pricing reporting requirements
Business enterprises, associations, European public limited liability companies, European cooperative societies, cooperative societies and non-resident entrepreneurs that are not considered small enterprises at the last day of the tax year in question (with the exception of public-benefit non-profit business associations, and taxpayers in which the State has majority control, whether directly or indirectly) must generally follow transfer pricing reporting requirements. One of these requirements is to fix the fair market price and the formula, including the data and the type of events on which the formula is based, they use for determining arm’s length price(s), as instructed in the relevant ministerial decree on recording obligation concerning the calculation of arm's length price issued on the basis of the authorisation conferred in the Act LXXXI of 1996 on Corporate Tax and Dividend Tax (CIT Act).
Transfer pricing advantages of creating a Corporate Taxpayer Group
On 23 November 2018, Act LXXXII on the amendment of specific tax laws relating to EU obligations and tax administration was enacted. This law amendment, among others, modified the CIT Act with effect from 1 January 2019. This amendment has significant effects on the transfer pricing reporting requirements in Hungary.
More specifically, the law amendment states that for intercompany transactions between members of a Corporate Taxpayer Group, following the establishment of such a Group, the provisions relating to transactions between related parties (i.e. the Group member companies) will, in principle, not apply.
In the case of transactions carried out by the members of a Corporate Taxpayer Group with other related parties following the creation of such Group, the documentary obligation under the CIT Act must be fulfilled at the level of the Corporate Taxpayer Group. Members of the Corporate Taxpayer Group must fulfill their transfer pricing reporting obligations through the Group representative.
However, in the case of transactions carried out prior to the establishment of the Corporate Taxpayer Group for which the taxable amount has not been adjusted to the normal market rate, the corporate income tax base adjustment still must be made, i.e. adjusted by the difference between the fair market price and the consideration applied in the respective intercompany transaction.
Conditions for the creation of a Corporate Taxpayer Group
The opportunity to create a Corporate Taxpayer Group for corporate income tax purposes is available for Hungarian resident taxpayers from 1 January 2019. In order to establish such a group taxation arrangement, an official request must be submitted to the National Tax and Customs Administration of Hungary (“NTCA”). If the request is approved by the NTCA, the Corporate Taxpayer Group is created on the first day of the tax year following the submission date of the request.
A Corporate Taxpayer Group, which will be treated as a Hungarian resident taxpayer, can be created by at least two entities with the following legal forms:
- Business organisation,
- European public limited liability company,
- Cooperative society,
- European cooperative society,
- Sole proprietorship,
- Foreign person considered a resident taxpayer due to the location of the head office, or
- Any non-resident entrepreneur via its Hungarian branch.
Members of Corporate Taxpayer Groups must comply with the following specific requirements:
a) Direct majority control must exist between the group members, where one member controls at least 75% of the voting rights in the other member, or another person controls at least 75% of the voting rights in the taxpayers; or
b) Indirect majority control must exist between the group members, where one member controls at least 75% of the voting rights in the other member, or another person controls at least 75% of the voting rights in the taxpayers (with the proviso that the voting right of an intermediary legal person may be taken into consideration on behalf of the holder of participating interest, if the holder of participating interest controls at least 75% of the voting rights in the intermediary legal person).
Provided that the relevant affiliated companies meet the above conditions of the CIT Act, the Group members must each also meet the following requirements:
- The balance sheet date specified in the Group members’ accounting policy (or the last day of the tax year in the case of taxpayers not required to file a financial report) is the same.
- The financial report closing accounting statements are prepared uniformly by all Group members either according to Chapter III of the Hungarian Accounting Act or to IFRSs.
- The accounting currency is the same for all Group members.
As a general rule, any taxpayers may join only one corporate taxpayer group at any given time.