Corporate tax in Hungary

Basics of Corporate Income Tax in Hungary

From our article you will learn the basics of corporate tax in Hungary, like what is the tax rate, what expenses are deductible, what rules relate to depreciation, provisions, loss carried forward.

Taxpayer

All business companies are subject to corporate tax regime, and shall pay corporate tax (“társasági adó” or “TA” or “TAO”) on their taxable profit.

Tax rate

The tax rate is 9% of the positive tax base. There is an expected minimum tax base that is 2% of the total income.

Tax base adjusting items

Domestic and foreign businesses alike assess their corporate tax base as the earnings before taxation modified by the items set out in the Corporate Tax Act, such as:

  • Loss carried forward
  • Provisions
  • Depreciation and amortisation
  • Declared share
  • Declared intangible goods and chattels
  • Dividends
  • Research and development
  • Costs and expenses not incurred in the interest of business operations
  • Penalty
  • Thin capitalisation
  • Controlled foreign company (CFC)

Non-deductible costs and non-taxable incomes

Bribes, ‘kickbacks’, and illegal payments are not recognised as business costs, nor are fines and penalties. Any expenses that are not related to the taxable business operation of the company shall not be recognized. Corporate tax base shall be increased with forgiven (waived) receivables if those wouldn’t qualify as uncollectible. Expenses that relate to payments to controlled foreign companies, unless the tax payer proves that those are in relation with the business activity.

Depreciation

Tax depreciation charges are considered as tax deductible expenses for tax purposes at statutory rates. At some types of assets accounting depreciation is accepted for tax purposes. Some assets may not be depreciated, such as land.

Tax depreciation rates of some typical assets are:

  • buildings: 2.0%
  • computers and it assets: 33.0%
  • industrial robots: 33.0%
  • vehicles: 20.0%
  • other fixed assets: 14.5%

Tax Loss Utilization

Inasmuch as the tax base is negative in any tax year, the taxpayer may deduct such amount of loss from its pre-tax profit spread out at any rate, depending on his decision, in the following 5 tax years.

According to the general rule, losses deferred from previous tax years may be deducted from the pre-tax profit up to 50 percent of the tax base for the tax year calculated without any appropriation thereof.

Minimum Tax

Companies, whose corporate income tax base does not reach the expected minimum tax base are expected to pay corporate tax based on the expected tax base.

The expected minimum tax base is 2% of the total revenues adjusted with certain items (for example 50% of private member’s loan increment from prior year is an increasing item).

Those companies, whose corporate tax base doesn’t reach the minimum tax base may opt to not to pay tax by the expected minimum tax base but the actual tax base. In this case a detailed declaration shall be filed regarding the incomes and expenses recognized during the tax year.

Dividends

The dividends distributed to members are not subject to dividend tax. Natural persons may incur personal income tax on received dividend.

The pre-tax profit shall be reduced by any income received or due from dividends and shares, with the exception of the income received or due as dividends and shares from a controlled foreign company if the party approving the dividend records it as an expense.

Under the Corporate Income Tax Act, the taxable person may deduct the dividend received from a controlled foreign company from the pre-tax profit if he/she had previously settled an item which increases the tax base and he/she had not been taken it into consideration as a reducing item.

Filling Requirements

Generally, the tax period is equal to the calendar year. However, companies can apply for different tax and accounting year. A tax return shall be submitted to the respective tax authority up to five calendar months following the last day of the tax period.

Group taxation is not recognised in Hungary, all entities are taxed separately.

Double Taxation Avoidance Treaties

Hungary has concluded double taxation avoidance treaties with 81 states. These bilateral tax treaties are based on the OECD Model Treaty.

Transfer Pricing

Transfer price regulations are based on OECD guidelines. Under transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company

  • may decrease its pre-tax profit by the difference, provided that:
    • the consideration applied renders the pre-tax profit greater than it would have been in case the arm’s length prices had been applied and
    • the related party is also a resident taxpayer or such non-resident company which is subject to corporate tax in their country of residence (with the exceptions of controlled foreign companies) and
    • it holds a document signed by both parties establishing the amount of the difference, or
  • shall increase its pre-tax profit by the difference, provided that the consideration applied renders the pre-tax profit smaller than it would have been in case arm’s length prices had been applied.

The above rules of transfer pricing shall not be applied to long-term agreements concluded by small and medium-sizes enterprises if the associated enterprise was established in the interest of purchases and sales and the voting rights of the small and medium-sized enterprises held in the affiliated company exceeds 50 per cent on the aggregate.

Transfer pricing documentation shall be prepared for each contract between related parties to justify that the price applied is in line with the market price. The documentation may be prepared in English, German or French too.

Tax changes 2019

2019 tax changes

The Hungarian Parliament has approved the 2019 tax changes in July 2018. The most important changes will be seen at fringe benefits and dividend taxation.

In line with the original intentions the parliament approved the bill on taxation changes effective from 2019.

Dividend taxation goes under social security tax

The rate of the tax gets maintained at 19.5 percent though there were intentions to reduce to a possible 17.5 percent.
Several types of incomes that previously had been governed by healt-contribution rules will be subject of social security tax from next year.
This inlcudes:
– sole entrepreniour’s income withdrawal
– income from security rental
– dividend
– exchange gain incomes

This will add serious tax burden for those company owners who want to withdraw dividend. Up till the end of 2018 dividend payment to an insured person attracts 14 percent healt-care contribution which is capped at HUF 450’000 a year.

What will change from next year in dividend taxation?
Those who will pay dividend to an insured person will pay 19.5 percent social security tax instead of the prior health-care contribution.
The social security tax payment will be capped at a different level.
Tax on the above mentioned income types will need to be paid until the income of the private person will have reached 24x the minimum salary. At this time the amount of next year’s minimum salary is unknown.

Let’s see some examples.
Let’s assume that the owner of the company is insured in Hungary, and has salary of HUF 150’000, 200’000 or 300’000 gross.
From his company he pays HUF 5’000’000 dividend on 1 July (after 6 months’ employment in the year). Also let’s take HUF 150’000 gross as minimum salary in 2019.

Taxation will develop accordingly:

Scenario 1 Scenario 2 Scenario 3
huf 200’000 salary huf 150’000 salary

huf 300’000 salary

2018

2019 2018 2019 2018

2019

Salary

200’000

200’000

150’000

150’000

300’000

300’000

Dividend

5’000’000

5’000’000

5’000’000

5’000’000

5’000’000

5’000’000

Minimum salary (assumption)

150’000

150’000

150’000

150’000

150’000

150’000

Taxes on salary

Social security tax on salar

19,50%

19,50%

19,50%

19,50%

19,50%

19,50%

tax/month

39’000

39’000

29’250

29’250

58’500

58’500

6 months’ tax

234’000

234’000

175’500

175’500

351’000

351’000

Health tax

7,00%

7,00%

7,00%

7,00%

7,00%

7,00%

tax/month

14’000

14’000

10’500

10’500

21’000

21’000

6 months’ tax

84’000

84’000

63’000

63’000

126’000

126’000

Taxes on dividend

Health care contribution

14%

14%

14%

tax amount

700’000

700’000

700’000

threshold

450’000

450’000

450’000

 – less paid tax after salary

-84’000

-63’000

-126’000

threshold

366’000

387’000

324’000

effective tax

366’000

387’000

324’000

Social security tax

19,50%

19,50%

19,50%

tax amount

975’000

975’000

975’000

capped at 24x min.salary

702’000

702’000

702’000

threshold

702’000

702’000

702’000

effective tax

702’000

702’000

702’000

Total tax  

684’000

1’020’000

 

625’500

940’500

 

801’000

1’179’000

It can be seen that the change will create additional tax on dividend.

Further disadvantegous change is that social security tax benefit after employment of protected age persons won’t be available any more.

Personal income tax of fringe benefits

The other significant tax change will appear in personal income taxation. A great bunch of benefit types will get out of the beneficial taxation as from next year.
Will not be any longer tax exempt (the list is incomplete):
– employer’s accomodation support
– mobility purpose accomodation support
– risk insurance
– etc

Additionally only the SZÉP (Szechenyi recreational) card top-ups will belong under preferential taxation, the others will get removed.
Cash as fringe benefit (up to HUF 100’000) also comes to an end from next year.

Taxation considerations before company formation in Hungary

Before engaging in a company formation in Hungary we present you this short summary on the taxation of business associations. Should you have any further queries relating to establishing a company in Hungary please feel free to contact us.

Corporate and dividend tax

The profit of companies is subject to corporate tax.

 1. Taxable person of corporate tax

Pursuant to Act LXXXI of 1996 on Corporate Tax and Dividend Tax [hereinafter referred to as the ‘Corporate Tax Act’], resident taxable persons include:

  • business associations established under Act V of 2013 on the Civil Code, and, before 15 March 2014, Act IV of 2006 on Business Associations (such as joint-stock company, limited liability company (kft.), general partnerships (kkt.), limited partnerships (bt.) and other organisations (e.g. foundations, associations);
  • non-resident taxable persons with a place of business management in Hungary.

Pursuant to Hungarian legislation, group taxation is not permitted.

Generally the tax year corresponds to the calendar year. However, pursuant to the Accounting Act, taxable persons may exercise discretion in deciding on the operation of a financial year differing from the calendar year, especially if it is made reasonable by the characteristics of operation (with special regard to the cyclicity of the course of business or the information claim of the parent company).

 2. Taxable income

The incomes deriving both from Hungary and abroad of resident taxable persons shall be subject to tax. Pre-tax profit, determined by applying the tax base increasing and decreasing items set forth in the Corporate Tax Act, represents the corporate tax base.

Pursuant to the general anti-avoidance rule, the Tax Authority shall qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to enable tax advantages (tax exemption, tax allowance) to be obtained.

 Items adjusting the tax base include:

2.1 The tax base must be increased with the costs and expenses incurred in relation to items specified in legislation, including e.g. fines, penalties, late payment penalty interest due to delay in the payment of taxes.

 2.2 Depreciation

Regarding taxation, the entire purchase value or cost of production – in the course of several years – may be written off the tax base.

 2.3 Development reserve

The portion of the retained earnings committed to future capital investments (development reserve) shall be regarded as accelerated depreciation and can be deducted as a lump sum from the pre-tax profit. The taxpayer may release the non-distributable reserve exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserve. The full amount of the development reserve cannot exceed 50 per cent of the pre-tax profit or HUF 500 million per tax year.

 2.4 Provisions

The tax base must be increased with the amount of the provisions for probable liabilities and future costs accounted for as expenses; however, the amount recognised as income due to the utilisation of such provisions qualifies as a tax-base decreasing item.

 2.5 Loses

In principle, deferred losses of previous tax years (negative tax bases), can be deducted from the tax base in an amount of the taxpayer’s choice, in the forthcoming five tax years after the occurrence of the losses (up to 50% of the tax base calculated without losses), and the deferred but not yet deducted loss may be rolled on, with regard to the time limit of five tax years.

 2.6 Dividend

Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, the amount of dividends received from a controlled foreign company cannot be deducted from the tax base.

From 1th January 2006, income from dividends is not subject to dividend tax. No withholding tax is imposed on dividends paid by a resident company to another (either resident or non-resident) company. (This is not the case – according to a separate law – if dividends are allocated to private individual members of a resident company).

 2.7 The tax base of taxable persons in contact with a controlled foreign company

The part of the previous-year income (tax base) of the controlled foreign company calculated according to the rules of the CIT Act (considering the controlled foreign company as a resident taxpayer) increases the taxpayer’s pre-tax profit which arises from the following incomes of the controlled foreign company

  • income related to interest and financial assets,
  • income related to intellectual property rights,
  • income arising from retaining and derecognising shares,
  • income related to financial leasing activity,
  • income related to insurance, banking and other financial activities,
  • income from a person who deals with the purchase and sales of goods and services for related parties if this person does not or only slightly realises an added economic value.

The increasing item shall only be applied if pursuant to the rules of the CIT Act, the assessed income is positive and

  • it exceeds the third of the controlled foreign company’s total income, or
  • the foreign company conducts leasing, banking, insurance or other financial activity and the third of its total income arises from transactions made with the taxable person or its related parties.

 Payments made to the controlled foreign company do not usually qualify as eligible cost incurred in favour of the undertaking except if the taxable person can prove that the payment has incurred in connection with its business activity.

 2.8 Transfer price

Transfer price regulations are based on OECD guidelines. Under transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company

  • may decrease its pre-tax profit by the difference, provided that:
    • the consideration applied renders the pre-tax profit greater than it would have been in case the arm’s length prices had been applied and
    • the related party is also a resident taxpayer or such non-resident company which is subject to corporate tax in their country of residence (with the exceptions of controlled foreign companies) and
    • it holds a document signed by both parties establishing the amount of the difference, or
  • shall increase its pre-tax profit by the difference, provided that the consideration applied renders the pre-tax profit smaller than it would have been in case arm’s length prices had been applied.

The above rules of transfer pricing shall not be applied to long-term agreements concluded by small and medium-sizes enterprises if the associated enterprise was established in the interest of purchases and sales and the voting rights of the small and medium-sized enterprises held in the affiliated company exceeds 50 per cent on the aggregate.

 3. Rules of income (profit) minimum

Pursuant to regulation on income (profit) minimum, if pre-tax profit or the tax base, whichever is higher, does not reach 2% of the adjusted total income, the taxpayer shall

  • pay tax on 2 % of the adjusted total income, otherwise
  • make a statement in the form complementing the tax return, which shall qualify as a return.

 4. Tax rate

As of tax year 2017 the corporate tax rate is 9 % of the positive tax base.

 5. Tax allowances

 5.1 Development tax allowances

Among others, development tax allowances can be obtained with regard to the following investments:

(1) investments started and operated within the administrative jurisdiction of a preferential local self-government of a value of HUF 1 billion or more;

(2) environmental protection investments of HUF 100 million or more;

(3) investments of HUF 100 million or more related to the production of films and videos;

(4) investments promoting the creation of jobs.

 5.2 Tax allowance of sponsoring spectator team sports

By applying the tax allowance granted by legislation, taxpayers may achieve a tax saving if they support organisations with an approved sport development programme conducting activities in any of the following five sports.

Spectator team sports include:

(1) football;

(2) handball;

(3) basketball;

(4) volleyball;

(5) ice-hockey.

 5.3 Additional tax allowances

In addition to the above, the assessed tax may be reduced with the following tax allowances:

  • Tax allowance of supporting performing arts organisations,
  • Tax allowance of supporting film making,
  • Tax allowance of supporting cooperatives to create community funds,
  • Tax allowance of the SMEs investment credit interest,
  • Tax allowance of supporting Olympic bid,
  • Tax allowance of supporting energy efficiency investment,
  • Tax allowance of supporting live music service.

 6. Avoidance of double taxation

Double taxation may be avoided unilaterally or on the basis of a treaty. A unilateral tax withholding shall be applied to income taxes paid or payable abroad, limited to 90% of the foreign tax and may not exceed the amount determined according to the Hungarian rules.

If a treaty is to be observed, allowances serving the purpose of avoiding double taxation may be obtained under the treaty.

 7. Non-resident individuals

7.1 Foreign companies conducting entrepreneurial activities in premises in Hungary (known as ’non-resident entrepreneurs’ in Hungary) shall pay tax on their income deriving from their entrepreneurial activities conducted in premises in Hungary.

The cases in which foreign companies shall apply a form of business establishment in Hungary (for example stablishing a branch office) are specified by specific other legislation. A branch office is an organizational unit of a foreign company, without legal personality, vested with financial autonomy but registered in Hungarian company registration records. For taxation purposes, a branch office is considered a place of business in Hungary if it complies with the definition of place of business provided under tax legislation. The definition of ‘place of business’ in the Corporate Tax Act fundamentally corresponds to the one in the OECD Model Convention. However, sites of construction or assembly operations – in case of lacking a convention – may be regarded as a place of business only after at least three months elapse.

Taxable incomes related to the place of business shall be determined under the rules applicable to resident companies. Furthermore, the tax base of a foreign entrepreneur in respect of their place of business in Hungary shall be adjusted by reducing it by a portion of its operating costs and expenses and overhead charged to the place of business establishment as commensurate with total revenues and be increasing it by operating costs and expenses and overhead of the place of business charged to the pre-tax profit or loss; furthermore, it shall be increased by 5 per cent of the revenues earned through but not accounted for at the place of business.

The profit of the place of business is subject to tax at the general tax rate and also tax allowances may be obtained, if relevant conditions are fulfilled.

No corporate tax liability is incurred by foreign organisations with no place of business in Hungary with respect to their revenues deriving from Hungary.

7.2 Non-resident individuals who obtain any income through the transfer or withdrawal of their share in a company with real estate holdings (’member of a company with real estate holdings’ in Hungary), incur corporate tax liability with respect to this income. Corporate tax is calculated at the general corporate tax rate and payable to the Hungarian Tax Authority. The tax base of members of companies with real estate holdings shall comprise the consideration received upon the transfer of their share in the company, or the sum received when decreasing the subscribed capital of the company through disinvestment, less the costs of acquisition or maintenance as verified, if the resulting amount is positive.

 8. Administration (tax refund and tax return, payment of taxes)

An annual return of corporate tax shall be filed by taxpayers operating according to the tax year by 31st May of the year following the tax year. In case of taxpayers opting for a business year other than the calendar year, a return shall be filed until the last day of the fifth month following the last day of the tax year.

Corporate tax shall be established by the taxpayer through self-assessment.

 Other income taxes

Local self-governments impose a local business tax on business activities carried out on a permanent basis at a maximum rate of 2%. This shall be collected by the tax authorities of self-governments of Hungary.

Taxes imposed on property

In Hungary, local taxes, i.e. building tax and land tax, are payable to the local self-government. Owners are liable to declare and pay the above taxes. The annual maximum rate of building tax is HUF 1,100 per square metre or a maximum 3.6% of the market value of the real property. The annual maximum rate of the land tax is HUF 200 per square metre or 3% of the market value. The above taxes can be accounted for as costs when determining the corporate tax base.

Company formation in Hungary

AccountingBudapest has great expertise in company formation in Hungary with competitive prices. Our procedures are assisted by financial and legal professionals that guarantees the easy and hassle-free process.