Recent tax changes
On 17 July 2019 the Hungarian Parliament approved many amendments to the Hungarian tax legislation regarding corporate income tax, VAT and other taxes. Most of the changes will come into force from 1 January 2020. We also highlight some of the new rules that have been in effect since 1 January 2019.
Changes to corporate income tax
New interest deduction limitation rules
From 1 January 2019, new rules limiting interest deductions replaced the former equity-based thin capitalisation regulations. The new regulations implemented the provisions of EU Council Directive 2016/1164 (ATAD) into Hungarian law. The purpose of the new rules is to further discourage intra-group tax base erosion and profit shifting practices.
Under the new regulations, the amount by which net financing costs exceed the greater of 30% of EBITDA (for tax purposes) or HUF 939,810,000 (~EUR 3,000,000) must be added back to the tax base. There is also a carry forward mechanism which enables, with certain limitations, the cumulative unused interest deduction capacity in previous tax years to be deducted from the current year’s tax base. Members of consolidated groups can utilise special rules.
Exit tax rules
From 1 January 2020, exit taxation will be introduced in Hungary by implementing ATAD regulations. Taxpayers will be required to increase their tax base by the amount by which the fair market value of transferred assets and activities exceeds the book value.
In general, exit tax rules would apply when a taxpayer:
- Transfers its place of effective management to a foreign country and becomes a foreign tax resident as a result, or
- Transfers its assets or business activities connected to its business in Hungary to a registered seat or branch located in a foreign country, and as a result the transferred assets and business activities would not be taxable in Hungary.
Subject to certain conditions, the exit tax can be paid in five instalments if the effective place of management, assets or activities are transferred to an EU member state or an EEA country that has a mutual assistance treaty for the recovery of claims relating to taxes concluded either with the EU or with taxpayer’s EU member state. Special exemptions may apply.
Group taxation arrangement
From the 2019 tax year, with the permission of the Hungarian State Tax Authority, companies have the opportunity to choose corporate group taxation. At least two companies who meet the conditions - prescribed by the legislation - could create a corporate tax group, and may achieve cost and tax savings:
- Carry forward losses generated during the period of group taxation may be taken into account by the group, under certain conditions.
- The members of the group are exempted from the transfer pricing documentation obligation for their intra-group transactions.
- The members of the group are exempted from the transfer pricing adjustments for their intra-group transactions (exceptions may be made for pre-group transactions).
- The group is considered to be one single taxpayer for the purposes of tax relief; the group may benefit from the tax relief if one of the group members meets the conditions.
Controlled Foreign Company (CFC)
There is a significant change in the definition of a controlled foreign company (CFC) and in the related tax base increasing item, in line with the implementation of the ATAD directive.
Qualifying as a controlled foreign company (CFC) will continue to have negative tax consequences in corporate income taxation.
The recent changes include:
- Abolition of the automatic exemption from CFC qualification of companies if one of its related parties is listed on a recognised stock exchange.
- A foreign company will not be considered a CFC if all of its income is generated from genuine arrangements or a series of genuine arrangements. This fact needs to be verified by the company itself. Furthermore, under a certain level of profit, the entity may avoid qualifying as a CFC.
The Government is planning to expand the availability for the development tax incentive in three phases. The minimum present value of investments will be reduced in the case of small and medium-sized enterprises, which makes the tax incentive even more widely available.
Threshold for development tax
From 24 July 2019
Small-sized company: HUF 300 million
Medium-sized company: HUF 400 million
Small-sized company: HUF 200 million
Medium-sized company: HUF 300 million
Small-sized company: HUF 50 million
Medium-sized company: HUF 100 million
The previously-defined conditions regarding the number of workers and wage costs will also be abolished from 2020. However, this tax incentive could be granted only if during the four tax years following the first tax year in which the tax allowance is used, the average number of workers employed does not fall below the mathematical average of employees, based on the three tax years before the commencement of the project.
Changes in value added tax
Possible tax-base reduction in case of total or partial non-payment (bad debts)
One of the major changes is that taxable persons will have the opportunity to reduce their taxable base in relation to bad debts, subject to meeting the conditions laid down in the Hungarian VAT Act.
The introduction of this tax base reduction eliminated a long-standing controversy between the Hungarian VAT Act and the EU VAT Directive. From 1 January 2020, taxable persons can benefit from tax-base reduction in the course of self-revision by fulfilling nine cumulative conditions. The bad debt itself is also defined by the Hungarian VAT Act.
The tax base reduction can only apply to supplies made between 31 December 2015 and 1 January 2020.
Special VAT refund
From 1 January 2020, taxable persons will be entitled to a special tax refund if, contrary to the principle of VAT neutrality, the input VAT incurred on their purchases cannot be otherwise recovered due to reasons that are not attributable to them. Taxable persons must submit a written application for a VAT refund to the Hungarian tax authority not later than six months before the expiry of the limitation period. The tax authority will grant a VAT refund if it was paid to the Hungarian treasury.
Transactions related to the intra-Community supply of goods
In line with the modification of the EU VAT Directive, changes implemented by the Hungarian VAT Act to the treatment of call-off stock, supply chain transactions, and the intra-Community supply exemption will take effect from 1 January 2020:
- Changes to call-off stock simplification: contrary to the current situation, where not all EU member states have adopted call-off stock simplification rules in their local regulations, and if the definition thereof alternates from country to country, making this simplification difficult to apply, there will be a uniform definition for the call-off stock in all EU member states. The Hungarian VAT Act will accordingly be modified from 1 January 2020.
- Changes to the presumption of the place of supply in supply chain transactions: this only affects the transaction of the middleman party (who acts both as seller and as purchaser in the supply chain). Contrary to the rule currently in place, the presumption (i.e. the middleman acts as purchaser in a supply chain) will only be rebuttable if the middleman communicates his tax identification number in the country of dispatch to the seller.
- Changes to the conditions of exemption of intra-Community supply of goods: Intra-Community supplies of goods will be subject to additional two conditions:
- The purchaser has to communicate its VAT number issued by another EU member state with the seller; and
- The VAT exemption does not apply in case of non-submission of intra-Community declaration with respect to the supply of goods (declaration A60), or incorrect or incomplete completion thereof by the seller, unless he can prove that the omission, defect or failure occurred despite acting in good faith, and at the same time he makes available the necessary information for defining the correct and complete content of the declaration to the tax authority.
Further reduction of the VAT rate for the provision of commercial accommodation services (e.g. Airbnb)
From 1 January 2020, the VAT rate for commercial accommodation services (e.g. Airbnb) will continue to be decreased from the current rate of 18% to 5%.
Social contribution tax
The rate of the social contribution tax, which is the main labour-related tax burden of employers in Hungary, is decreased from 19.5% to 17.5% from 1 July 2019. Furthermore, one of the main goals of the Hungarian Government is to further decrease the labour tax rate (especially the social contribution tax rate) in the following years. The proposed reduced social tax rate is 15.5% for FY 2020 (if certain conditions are met) and further reductions are expected in the following years (the final proposed rate is 11.5% by FY 2022, if certain conditions are met).
Reducing the social contribution tax rate also results in a reduction of the tax burden of the cafeteria elements. The decreasing social contribution tax rate will significantly improve Hungary’s competitiveness in the field of employment in the long term.