Business taxation

The Hungarian tax system is similar to the level of complexity found in other OECD countries and harmonized with EU directives and provides a secure legal framework for the conduct of business. Tax acts in Hungary are enacted by the Parliament; nevertheless, local municipalities may enact local tax decrees. The tax authority provides only interpretative and administrative guidelines for these laws. Court decisions currently play an increasing role in interpreting tax laws and the European Court of Justice (ECJ) case law is also applicable.

Hungarian taxation operates under a self-assessment system. Taxpayers are required to register, determine their tax obligation, make advance payments, file tax returns on their own behalf, make corrections to the tax returns as needed, keep records and supply information as required by law. Corporations are subject to continuous assessment throughout the year. The tax authority randomly examines tax returns to enforce the self-assessment system.

The tax year is the calendar year for individuals and the calendar year or the business year for companies. In general, tax returns must be filed annually. However, for VAT, payroll and social contribution quarterly or monthly filing is required. Generally, on the basis of the tax returns, taxpayers must pay their taxes monthly (VAT, social contribution) or quarterly (VAT) or annually. In addition, corporate taxpayers should top up their annual tax payable for the given tax year by 20th of December each year up to 90 percent of their expected annual tax liability. Corporate income tax returns for corporate taxpayers should be submitted within 150 days of the business year-end. Personal income tax returns for individual taxpayers are due by 20th of May following the calendar year-end.

Subject to the fulfillment of the general, size related conditions, companies may also choose to prepare a simplified annual report form.

The law repeals the condition that the impact of exchange rate changes upon the year-end revaluation of balance sheet items is to be recorded only if the effect is significant. A simplification is that the gain or loss is the value of participations or debt securities denominated in foreign currencies may be determined without filtering out the foreign exchange effects. Since 2010, any enterprise has been entitled to keep its books and prepare its financial statements in Euro without any restriction.

Hungary’s corporate tax rate is competitive in the EU, although the low corporate tax rate is complemented with local business tax levied by the municipalities, and high social security charges. Hungary does not impose withholding tax on dividends, interest or royalties paid to corporate entities.

Hungary has a broad network of bilateral tax treaties on double taxation and it is a signatory to DTTs with 73 countries worldwide . The DTTs usually reduce foreign withholding tax down to zero or 5 percent. Hungary also has set up a broad investment protection treaty network providing a safe and regulated environment to foreign investors. Regarding the investment protection in Hungary there are three independent layers in place within the system. These are the Treaty on the Functioning of the EU (TFEU) that protects both EU and third country investors; bilateral investment protection treaties and the Hungarian Constitution. The TFEU and international treaties override the Hungarian domestic regulations.

Business taxation 2.
Taxes, contributions and stamp duties in Hungary

Dear readers, in this blog about the Hungarian business taxation I provide you a general overview about the Hungarian tax regime. This blog does not provide tax or legal advisory. This blog deals with the Taxes, contributions and stamp duties in Hungary.

Currently, the following taxes, contributions and stamp duties are imposed in Hungary:

2.1 Central Taxes

1. Corporate income tax (CIT) ,
2. Simplified entrepreneurial tax (EVA )
3. Itemized tax for small businesses (KATA )
4. Tax for small business (KIVA )
5. Value-added tax (VAT)
6. Personal income tax (PIT)
7. Simplified contribution to public revenues (EKHO )
8. Special taxes
9. Property taxes
10. Registration tax
11. Excise tax

2.2 Local Taxes

1. Property taxes (Building tax and land tax),
2. Local business tax
3. Communal taxes (individual’s communal tax and tourism tax)
4. Municipal tax

2.3 Social contributions

• Contribution for sick payment
• Social contribution tax
• Health contribution (EHO)
• Health service contribution
• Vocational training contribution
• Pension contribution
• Contribution of health insurance
• Labor market contribution

2.4 Environmental taxes

1. Environmental protection product fee
2. Environmental pollution fee
3. Energy tax
4. Mining contribution

2.5 Other taxes and fiscal obligations

1. Vocational training contribution
2. Rehabilitation contribution
3. Gambling tax
4. Innovation contribution
5. Cultural tax
6. Public health product tax
7. Accident tax
8. Insurance tax
9. Utility lines tax
10. Telecommunications tax
11. Advertisement tax

2.6 Stamp duties

1. Duties of asset acquisition
2. Procedure duties

In this chapter we only deal with the significant taxes, contributions and stamp duties in details. Due to the complexity of the system in this paper we provide only the main characteristics of the tax system and do not elaborate the details of the taxes, contributions and stamp duties.

Business taxation 3.
Corporate Income Tax – Tax liability and taxpayer

Dear readers, in this blog about the Hungarian business taxation I provide you a general overview about the Hungarian tax regime. This blog does not provide tax or legal advisory. This blog deals with the Corporate Income Tax (Tax liability and taxpayer).

Corporate income tax is one of the most dominant central taxes in Hungary. A Hungarian corporate tax resident entity is taxed on its worldwide income. The resident corporate taxpayers are subject to unlimited tax liability, as long as nonresident corporate taxpayers are subject to limited tax liability in Hungary. If a nonresident entrepreneur or person performs business in Hungary through domestic premises, this activity triggers limited tax liability in Hungary and the person becomes corporate taxpayer in Hungary. The effective place of management in Hungary creates unlimited corporate income tax liability.

Subsidiaries of foreign companies registered in Hungary are corporate taxpayers; therefore, these are subject to corporate income tax under ordinary domestic rules. Foreign companies are deemed to be resident in Hungary, if their effective place of management is in Hungary. Registered branch offices and non-registered permanent establishments are taxed under the same regime applicable to Hungarian-registered corporate entities.

The shareholder of a company whose Hungarian real estate property exceeds 75 percent of the aggregate market value of assets shown in its financial statements is subject to Hungarian taxation when transferring the shares in the company, assuming a member of the company is resident in a country with which Hungary has not concluded a double tax treaty or if an applicable treaty allows the taxation of the capital gains in Hungary.

Business taxation 4.
Corporate Income Tax – Controlled foreign company

Dear readers, in this blog about the Hungarian business taxation I provide you a general overview about the Hungarian tax regime. This blog does not provide tax or legal advisory. This blog deals with the Corporate Income Tax (Controlled foreign company).

A company is deemed to be a controlled foreign company (CFC) if a Hungarian tax resident ultimate beneficial owner owns or controls at least ten percent participation in the foreign company or more than fifty percent of the company’s revenue derives from Hungarian source and the effective payable foreign corporate income tax of the company is less than ten percent of the gross pretax profit and the company is not registered in the EU or OECD countries or those jurisdictions that have double tax treaty with Hungary and there is no such an owner of the company that listed in recognized stock exchange and owns at least twenty five percent of the company, all over the tax year.

Business taxation 5.
Corporate Income Tax – The corporate income tax rate and tax base

Dear readers, in this blog about the Hungarian business taxation I provide you a general overview about the Hungarian tax regime. This blog does not provide tax or legal advisory. This blog deals with the Corporate Income Tax (The corporate income tax rate and Tax base).

There is only on bracket in the corporate income tax rate, that is nine percent of pretax profits.

The taxable income of resident corporate taxpayers is based on pretax profits, calculated in the profit-and-loss statement prepared in accordance with the accounting rules, with a number of corrections for the differences in deductive and nondeductible items recognized by accounting and tax law. The tax base is the pretax profit modified by the decreasing and increasing items. The pretax profit contains the operating profit, the result on financial operations, modified by the extraordinary profit. The Corporate Income Tax Act contains the requirement of minimum income that is equal to the gross revenue minus the revenue of the foreign premises; multiplied by 0,02.

Business taxation 6.
Corporate Income Tax – Main tax-deductible and non-deductible items

Dear readers, in this blog about the Hungarian business taxation I provide you a general overview about the Hungarian tax regime. This blog does not provide tax or legal advisory. This blog deals with the Corporate Income Tax (The corporate income tax rate and Tax base).

The accounting system operates two levels tax base modification system. First, there are items that increase the tax base and there are items that decrease the tax base. Second, there are several tax-deductible and non-deductible items that modify the pretax profit. The general rule is that an item decreases the tax base if it is in connection with income generating activities of the taxpayer and it increases the tax base if it is not in connection with income generating activities of the taxpayer. The main tax base decreasing items are: depreciation and amortization, materials, wage cost, taxes and other public burdens, financial expenditures, extraordinary expenses. The main tax base increasing items (no connection with income generating activities of the taxpayer) are listed in the Corporate Tax Act.

There are items that modify the stated tax-base; these are the tax-deductible and non-deductible items.

Allowable deductions include:

• losses carried forward, maximum fifty percent of the tax-base in one accounting year;
• recognized provisions;
• the costs of switching to double-entry accounting and switching between accounting currencies;
• foreign currency gains and losses;
• gain of reported participation;
• gain of reported intangible assets;
• received dividend;
• income of capital reduction;
• gains of supported participation exchange;
• Corporate taxpayers may deduct fifty percent of royalties but the deduction may not exceed fifty percent of the taxpayer’s total pretax profits.
• The tax base may be reduced by research & development costs.

Non-deductible expenses include:

• non-business related expenses;
• loss in value accounted for in the tax year for receivables;
• interest on loans if the thin capitalization rule is applicable;
• fines;
• canceled debt if the claim is not uncollectable;