Global Tax Alert | 5 November 2013
Hungarian Government submits 2014 tax amendments to Parliament
On 18 October 2013, the Hungarian Government submitted its proposal on amendments to tax and contribution rules with respect to 2014 to the Parliament. Final votes are expected for the second half of November.
This Alert summarizes the most key corporate tax proposals. However, these proposals may change during the course of the Parliamentary debate.
Proposed amendments to the corporate income tax base
- • Taxpayers will have the opportunity to reduce their pre-tax profit by the direct costs of research and development (R&D) activities carried out by their related enterprises (within the scope of their own activities) subject to the Act on corporate income tax (CIT). This is conditional on the R&D activity carried out by the related enterprise corresponding to the entrepreneurial (revenue generating) activities of the taxpayer and its related enterprise. Also, the taxpayer must hold the appropriate declaration issued by its related enterprise as follows. The declaration must include the direct costs of the R&D activity carried out by the related enterprise within the scope of its own activities in the tax year in question, and the amount that the taxpayer can decrease from its pre-tax profit in this regard.
- • Rules on reported participation will also change. The 30% rate that provides the entitlement to report participation will decrease to 10% and the 60-day deadline by which the acquisition of participation must be reported will be increased to 75 days.
- • Small- and medium-sized enterprises will also be able to decrease their corporate income tax bases by up to HUF 30 million (approximately US$137,000) in relation to purchasing the utilization rights of software products.
- • For companies that transfer their registered seat to Hungary, taxpayers that qualify as tax residents as a result of transferring their place of management will have the opportunity to determine depreciation based on the market value of assets effective on the date on which resident status is obtained; instead of the acquisition value of the assets (which is the general rule).
- • Self-revisions will no longer result in tax base adjustments (either decreases or increases). In this context, the Proposal includes a definition for non-material mistakes, which differs from the Act on Accounting. Based on the definition detailed in the Proposal, for micro-enterprises that prepare simplified annual financial statements, the upper limit of the non-material mistake will be 2% of the balance sheet total. Nonmaterial mistakes have to be reported in tax returns submitted for the tax year in which the mistake in question was discovered. Therefore, the corporate income tax liabilities of previous years do not have to be amended by self-revisions.
- • If restaurant services used for promotional purposes are paid for with debit or credit cards, costs and expenses accounted for in this respect may also qualify as eligible costs for corporate income tax purposes even if the payer holds only the receipt issued on the transaction, provided that the services are used for business entertainment purposes specified in the Act on Personal Income Tax.
- • Foreign persons that sell Hungarian real properties will have permanent establishments for corporate income tax purposes.
- • The actual economic presence of controlled foreign companies will not be able to be verified by investment activities.
The corporate income tax base of foundations (including public foundations), associations and public bodies
Foundations (including public foundations), associations and public bodies will not be able to apply the beneficial provisions on establishing their corporate income tax base in the tax year in which they primarily qualify as economic-entrepreneurial organizations based on the Act governing the operation of foundations.
If a non-profit business association primarily qualifies as an economic-entrepreneurial organization, the provisions of the Act on CIT relating to the termination of non-profit legal status will have to be applied.
Corporate income tax allowance available to small- and medium-sized enterprises
Based on loan agreements relating to tangible asset investments concluded after 31 December 2013, small- and medium-sized enterprises will be able to utilize 60% (rather than 40%) of the interest paid in the tax year in question as a corporate income tax allowance. The tax allowance cap remains unchanged at HUF 6,000,000 (approximately US$28,000).
Employee securities plans
Employee securities plans will no longer have to be registered with the Hungarian Tax Authority. It will become easier to start such programs, since the condition that at least 10% of a company's employees must participate will be cancelled. Plans will have to be published in writing and these must be available to every employee. Employers will still be able to provide employees with securities free of tax up to the annual amount of HUF 1 million (approximately US$4,500) and subject to a three-year vesting period.
The amendment will come into force on the 30th day following the date on which the Act is promulgated. Therefore, it is expected that employee securities plans can also be initiated under the new rules at the end of 2013. Pursuant to the transitional rule, it will be possible to involve employees who were not reported to the tax authority when registering the plan to recognized employee securities plans initiated before 2014.
The tax base of controlled real estate investment companies
The amendment of the Act on controlled real estate investment companies is aimed at facilitating the establishment of such companies. Among other things, controlled real estate investment companies will have the opportunity to own more than 10% of the shares of business entities engaged in organizing building projects as their principal activity. In this respect, profits realized on the alienation of shares exceeding the 10% shareholding in business entities engaged in organizing building projects as their main activity are not exempt from corporate income tax liabilities.
Sectoral levy on financial enterprises
Financial enterprises exclusively engaged in group financing will not qualify as financial enterprises and thus will not be subject to the sectoral levy.
Credit institution contribution
Based on the proposed amendment of the Act on credit institutions and financial enterprises, if a credit institution transfers its general risk provisions or a part of it to its retained earnings, it will become subject to a onetime tax liability of 19% of the amount accounted for as the decrease of general risk provisions (on the balance sheet date of 31 December 2013).
In 2013, credit institutions are subject to a onetime contribution liability of 19% on amounts accounted for as the decrease of general risk provisions in relation to converting the stock of risk provisions specified in the legislation to capital items. The contribution must be reported and settled by 10 March 2014.
Sectoral levy on energy suppliers (Robin Hood tax)
As of 2014, companies subject to the sectoral levy on energy suppliers (Robin Hood tax) will have to pay estimated tax payments.
The procedure and frequency of tax advance payments will correspond to the rule specified in the CIT Act.
There will be various amendments to the green tax regulations. For example, a new provision will specify when new green taxable products are created during the manufacture and processing of certain products.
The rules on reusable packaging will include a new opportunity. Entities that rent out reusable packaging within a rental system will not be subject to any green tax liabilities on renting out reusable packaging. In order to qualify for this opportunity the entities in question must operate a closed computer system through which product history can be tracked. If an entity intends to apply the rental system, the environmental protection authority will provide the license upon request.
Introducing the legal institution of green tax warehouses will lift a significant burden.
Green taxable products will be able to be stored or manufactured without any green tax being paid. Green tax liabilities will only be triggered upon the final use or when products are released for domestic circulation.
Binding tax ruling requests
Under the Proposal, requesting a binding tax ruling will be subject to a duty of HUF 5 million (approximately US$23,000) (or HUF 8 million – US$36,500 - if the ruling is urgent). For permanent binding tax rulings, the duty will be HUF 8 million. In urgent cases permanent rulings will have a duty of HUF 11 million (approximately US$50,000), which is a decrease on the current duty.
The authorities will introduce preliminary consultation with respect to binding tax rulings. This will provide taxpayers with legally controlled opportunities to have a consultation before initiating the expensive binding tax ruling request procedure. Every consultation will be subject to a duty of HUF 100,000 (US$450).
In the future, binding tax ruling requests will be one-level procedures. It will be possible to request that resolutions made in the course of these procedures be revised by the court.
Future binding tax rulings will only be able to establish tax liabilities (or the lack of them) relating to the taxpayer that submitted the request.
The administration deadline of binding tax ruling requests will be extended by 15 days (from 60 to 75 days).
Tax audit methods
In the course of tax audits and data collection procedures, the tax authority will be entitled to become familiar with the software and IT systems (and their contents) applied by taxpayers for bookkeeping and documentation processing purposes.
If taxpayers failed to pay at least 90% of the expected tax liabilities when fulfilling their top-up obligation due to foreign exchange differences for reasons out of their control, they will not become liable to a 20% default penalty in this respect.
Taxable persons not established in Hungary
Under the Proposal, taxable persons that are not established or that are not obliged to establish themselves in Hungary based on the Act on VAT will be exempted from the obligation to register as taxpayers in Hungary. This exemption only applies provided either that the activities that these taxpayers carry out in Hungary only cover selling products that are subject to tax warehouse procedures in such a way that the products in question remain subject to the tax warehouse procedure, or that the customs authority declares that the products left the Community.
Books kept in foreign currencies; conversion rule
The amendment of accounting rules will provide the unconditional opportunity to keep books and prepare financial statements in USD.
In the future, the official foreign exchange rate published by the European Central Bank will also be applicable for accounting purposes when converting certain items incurred in foreign currencies into HUF.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Kft, Budapest
- • Balazs Szolgyemy
+36 1 451 8608
Ernst & Young LLP, Hungarian Tax Desk, New York
- • Miklos Santa
+1 212 773 1395
EYG no. CM3939