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.
All business companies are subject to corporate tax regime, and shall pay corporate tax (“társasági adó” or “TA” or “TAO”) on their taxable profit.
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
- Depreciation and amortisation
- Declared share
- Declared intangible goods and chattels
- Research and development
- Costs and expenses not incurred in the interest of business operations
- 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.
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.
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.
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.
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 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.