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Corporate tax changes

In relation to the Act on Corporate Tax and Dividend Tax (the Corporate Tax Act),the proposal would fundamentally change the definition of royalty with effect from 1 July 2016.

The change would narrow down the scope of the definition.
According to the proposal, royalty means results deriving from the following:

  • patent,
  • utility model,
  • plant variety right,
  • supplementary protection certificate,
  • protection of topography of microelectronic semiconductor products and
  • permit to utilize, use software protected by copyright and
  • classification as medicine for rare diseases.

Royalty shall also include any results deriving from the sale or de-recognition as non-financial capital contribution of exclusive rights relating to the above and the part of the results from the supply of goods and services attributable to the exclusive rights listed above.

As a result of this change, after the entry into force of the amendments, for example the permit to use trademarks, trade names and business secrets, the permit to use author’s work protected by the Copyright Act and performance protected by rights relating to copyright (with the exception of results deriving from the permit to utilize and permit to use software protected by copyright) will not qualify as royalty for the purposes of corporate tax.

Due to the change in the provisions relating to royalty, the definition of registered intangible assets will also change substantially from 1 July 2016.

Based on the proposal, from 1 July 2016, the tax base allowance relating to royalties received will be calculated on the basis of the profit deriving from the royalty instead of the previously applied calculation method based on revenue calculated from royalty. The maximum ratio remains 50 percent.

According to the proposal, from 1 July 2016, the items decreasing profit before taxation arising with regard to intangible assets entitling to royalty, the acquisition of registered intangible assets and the profit from royalties received may be applied based on a certain ratio. In order to determine the ratio in question, the taxpayer must have a detailed record and other documents.

Changes in the definition of preferential transformation and preferential transfer of assets

The definition of preferential transformation and preferential transfer of assets would both be amended from 1 January 2017. In order for the taxpayer to apply the allowance relating to these the condition must be fulfilled that the transformation or the legal transaction must be grounded on real economic, commercial reasons. As a new element, compliance with this condition would have to be proven by the taxpayer, which means that the burden of proof is reversed in this case.

The proposal includes a number of changes concerning the items decreasing pre-tax profit

From 1 January 2017, the amount applied in the tax year as so-called mobility housing support as defined in the Personal Income Tax Act and the amount recognized in the tax year as cost, expenditure with regard to the creation, maintenance and operation of workers’ accommodation would be introduced as new tax base decreasing items. The cap on both tax base decreasing items would be the amount of pre-tax profit.

The proposal would introduce a new pre-tax profit decreasing item from 1 January 2017. The cost of maintenance of monuments and buildings subject to special local protection would also be a pre-tax profit decreasing item subject to a cap of 50 percent of pre-tax profit and not exceeding a limit of EUR 50 million calculated with the effective tax rate.

Another change from 1 January 2017 would be that the taxpayer may decrease its tax base by twice the amount of the costs incurred if he carries out a renovation increasing the value of a monument or building, structure under special local protection. The cap on the decrease applied would be EUR 100 million calculated with the effective tax rate.

In addition, the taxpayer may also recognize the above costs as acknowledged expenses for corporate tax purposes.

Related parties

The option of applying tax base allowance with regard to irrecoverable receivables from related parties will be tightened from 1 January 2017 as the taxpayer may only apply this tax base adjustment if, when filing its corporate tax return, the taxpayer supplies data regarding the related party concerned and to substantiate the classification of the receivable as irrecoverable.

If the taxpayer applies the tax base decreasing item relating to profit from royalties received from 1 July 2016, it will have to increase its pre-tax profit by up to 50 percent of the loss calculated using the above ratio.

From 1 January 2017, the proposal would apply a further condition regarding the tax base allowance applicable in respect of preferential transfers of assets between related parties, clearly tightening the former regulation.

The proposal also contains a new element applicable from 1 January 2017 in respect of the tax base decreasing item relating to transfer prices. It provides that in order to apply the adjustment item, in the future the taxpayer would have to obtain a declaration from the other related party stating that it will take the amount deriving from the difference of the arm’s length price and the price actually applied in its corporate tax return.

Regarding the tax allowance of small and medium sized enterprises, from 1 January 2017 the proposal would amend rules by providing that the interest allowance may extend to maximum 100 percent of the interest paid in the given tax year on the loan, unlike the 40 and 60 percent applied earlier. The HUF 6 million value limit relating to the interest allowance of small and medium sized enterprises would be eliminated also.

The value limit of investment tax allowance will change

From 1 January 2017, the proposal would eliminate the former HUF 30 million value limit of investment tax allowance applicable to small and medium sized enterprises. This allowance could only be applied in years in which all members of the taxpayer entity were private individuals. The rules relating to development tax allowance are specified in the proposal in order to fully comply with the background EU regulations. The new rules would take effect on the day following the promulgation of the amendment.

The proposal also specifies in respect of the avoidance of double taxation that when applying progressive exemption, the taxpayer shall consider the corporate tax assessed using the average corporate tax rate calculated for its total income for the purpose of his income taxable abroad. The change would enter into force on the day following promulgation of the amendment.

Further changes concerning the Corporate Tax Act

From 1 January 2017 the proposal would also specify the principle defined in Section 1 (2) of the Corporate Tax Act that the provisions diverging from general rules representing a benefit for the taxpayer shall be applied only if the purpose of the benefit is achieved and shall not be applied exclusively for the sake of the tax advantage. The proposal extends the application of this principle by excluding the exclusivity from the purpose of applying the benefit. This means that the taxpayer may already violate this principle if it applies the tax benefit mainly but not exclusively because it wishes to use the tax advantage.

From 1 January 2017, the proposal would amend the Corporate Tax Act’s definition of cost and expenditures not incurred in the interest of the entrepreneurial activity. The amendment introduces an additional condition that the tax base of the recipient shall not be negative and the corporate tax relating to the grant shall actually be paid.

The proposal would extend the group of costs incurred in the interest of the enterprise from 1 January 2017 to include costs and expenditures relating to the operation of a nursery at the work place.

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