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Draft of the Autumn Tax Package 2019 – VAT, PIT, Social Security and Tax Rule Changes

From the amendments included in the autumn tax package, we discuss the key points of VAT on vouchers, new flats, and leasing and the rules of personal income tax, social security, social contribution tax, small taxpayers' itemized lump sum tax ("KATA") and customs duty below.

1. Changes concerning VAT

VAT on vouchers

The bill supplements the already introduced provisions providing that the free-of-charge transfer of single-purpose vouchers will also generate tax payment obligation if the taxable person had full or partial right to deduct tax at the time of acquisition of the voucher. However, the free-of-charge transfer of vouchers by the taxable person issuing the single-purpose voucher in question will not qualify as a VAT-able transaction. This means that VAT payment obligation will only arise in the case of issuing single-purpose vouchers if the vouchers are transferred at the time of their issuing for consideration. All further transfers of vouchers are VAT-able transactions irrespective of whether the vouchers are transferred for consideration or free of charge. A further condition of the latter is that the VAT relating to the acquisition of the voucher must be deductible. In the case of the free-of-charge transfer of single-purpose vouchers, the tax base is the purchase price of the voucher without tax. 

The bill still does not clarify the interpretation of the rules relating to small-value gifts and product samples for the purposes of free-of-charge transfers and does not specify what qualifies as the issuing of vouchers and who the issuer of the vouchers is. 

50 percent of the VAT on passenger car leasing is not deductible if business use is not certified 

According to the bill, partial deduction ban will apply not only to the VAT on services necessary for the operation and maintenance of passenger cars but also to the VAT on the rental and leasing fee of passenger cars. 50 percent of the input VAT on these services is not deductible. From the perspective of the application of the 50 percent deduction ban, the taxable person must, first of all, examine in relation to the passenger car used if the passenger car in question serves to any extent the economic activity of the taxable person eligible for a tax deduction (which must also be certified). If yes, the actual rate of the use of the passenger car for the purposes of the economic activity does not need to be substantiated further with a mileage log or other record for the taxpayer to apply the 50 percent VAT deduction (irrespective of the actual rate of business and private use). Details of the VAT on car leasing are included in our previous post. 

Car rental eligible for VAT deduction in the ratio of business use based on a separate record

According to the bill, if the taxable person does not wish to apply the prescribed 50 percent deduction rate in relation to the mixed (business and private) use of rented passenger cars, he has this option. In this case, the taxable person may exercise the right of deduction (based on the relevant, properly substantiated documentation) to the extent to which he uses or utilizes the passenger car for the purpose of his economic activity eligible for tax deduction. 

Narrowing down of the group of services subject to reverse taxation

From 2021, employee leasing, assignment, and placement will only be subject to reverse taxation if it relates to construction, installation and other installation works serving the creation, extension, remodeling or other alteration of real estate (including termination by pulling down). 

Tax-exempt status up to 12 million forints

According to the proposal, the value limit of opting for tax-exempt status is increased from 8 to 12 million forints. 

Transitional provisions relating to the phasing-out of the 5 percent VAT on flats

According to the transitional provisions of the proposal, the preferential, 5-percent VAT rate will apply to the sale of residential properties that satisfy all of the following conditions on 31 December 2019: 

  • the required documents (in particular, the sale and purchase contract) were filed with the property administration authority for the purpose of the registration of ownership in the land register. 
  • the condition of the residential property in question is at least structurally complete. 

Regarding the latter, the seller of the residential property must submit a declaration to the tax authority on a separate form. 

A residential property qualifies structurally complete if its external boundary elements (including walls, slab and roof structure, doors and windows and, depending on the construction documentation, chimney, balcony, external stair structure) are complete. 

2. Changes in the rules of personal income tax, social security, and social contribution tax

The autumn tax package includes a number of changes concerning personal income tax, social security regulations and small taxpayers' itemized lump sum tax ("KATA"). 

Changes concerning the cafeteria system

Although not as radically as the changes introduced in the summer, the autumn tax package submitted on 19 October 2018 also narrows down the group of benefits companies may provide with taxation more favorable to that of wages. From next year, we see the Széchenyi Recreation ("SZÉP") Card dominating fringe benefits. 

From voluntary mutual aid fund benefits, employer's contributions were already categorically transferred to incomes taxed as wages by the summer tax package, however, it seemed that amounts paid for targeted services and supporter donations would remain under benefits taxed more favorably to wages. The autumn bill now terminates the taxation as certain specified benefits of the amounts paid for supplementary mutual aid services as targeted services. The services which may be provided as supplementary mutual aid services (such as support for the repayment of housing mortgage loans, health screening, and health prevention programs or the payment of public utility fees) will be taxed as other income on the side of the individual from next year. 

However, the autumn amendment keeps under the taxation of other specified benefits e.g. the amounts paid as health fund targeted services while health fund targeted services themselves (e.g. healthcare services, medicine, service financing health insurance etc.) will remain exempt from tax next year also. 

According to the commentary to the bill, the tax treatment of supporter donations will not differ from that of employer contributions, which, according to the pessimistic interpretation, means that these will be taxed as wages. As a result, the employer will qualify as a payer in this benefit relation, which means that it will have to assess the tax advance, personal contribution and social contribution tax (in respect of which the fund will still not qualify as payer) as well as the training fund contribution at the time of payment. 

The possibility of providing employee housing loans, even interest-free, will remain with the income from the interest benefit not to be considered on the side of the payer. The practical application of this legal concept is supported by the fact that the terms used in relation to the tax-exempt employee support eliminated from 2019 (e.g. flat purchase and modernization, equitable housing need etc.) are moved within the legislation to employee loans. 

A favorable change in tax-exempt benefits is that the provision of commercial accommodation services is now also an option in the case of workers' hostels. 

The tax package also concerns Employee Stock Ownership Plans which are expected to be given greater emphasis in the system of benefits next year. In this regard, we have to point out that the benefit provided may now not only include ordinary shares but also other shares and other securities. 

Possibilities for dividing family tax base allowance extended

In relation to the incomes included in the consolidated tax base, we have to point out the extension of the possibilities for the division of family tax base allowance. In cases when the individual receives increased amount family allowance but has practically no other income (e.g. in the case of first-degree students of higher education institutions, persons with altered working capacity, persons who have reached the old-age pension age limit etc.) the division will be applicable from 1 January 2019. 

A technical rule relating to the application of tax base allowance is that the electronic system to be used for the shared application of family allowance or first marriage allowance will only be launched from 1 January 2020. 

Termination of the tax exemption of term insurance

The bill contains a number of changes relating to the termination of the tax exemption of term insurance and mixed life insurance. It defines: 

  • the assessment of the tax base in the case of group insurance premiums (it can be allocated to employees in equal amounts as wages), 
  • the tax payment obligation in the case of mixed insurance depending on who the beneficiary is. 

According to the transitional provision, the exemption rules relating to term insurance are applicable to the insurance years starting in 2018 and may be applied until 31 December 2019 at the latest.

Change in social security rules

An administrative simplification may be for the future that payers will not have to announce data regarding the education, professional qualification, vocational training of the secured persons employed by them and data regarding the name of the institution issuing the qualification and the number of the relevant certificate. Payers had this announcement obligation from 2016 based on the Act on Tax Procedure. 

In line with the employment promoting trends, the summer tax package already released pensioners on their own right who are employed from the insurance obligation as a result of which the contribution payment obligation of this group ceased, which came with the termination of their eligibility for various social security services. The proposal extends the definition of pensioners on their own rights. As a result, a person will also qualify as a pensioner on his own right if the disbursement of his pension is suspended. This means that personal contributions, social contribution tax, and training fund contribution will not be payable in these cases either. 

The provision that for determining whether a certain income is to be considered in the contribution (and social contribution tax) base it is not the date of payment but the fact whether it was provided with regard to an existing insurance relationship that matters has importance, above all, from the perspective of assignments. 

Social contribution tax

From 1 January 2019, the tax rate will be 19.5 percent. 

Payers qualifying as research organizations may apply for social contribution tax allowance with regard to their researcher-developer employees. The rate of the allowance is 50 percent of the tax on the wage cost arising as a direct cost. At the same time, the bill supersedes the relating loss carry forward rule of the Corporate Tax Act and also makes it clear, with regard to the ban on applying for multiple benefits, that the corporate tax base may not be reduced by the wage (and relating public burden) cost that was already taken into account for social contribution tax. 

A benefit was introduced in relation to the re-employment of state-employed employees dismissed above the age of 60 according to which the new employer has no social contribution tax payment obligation on the employment of such persons on wages up to four times the minimum wage. 

A legal technical specification concerns capital gains, which provides that social contribution tax may only be imposed on parts of income subject to personal income tax in Hungary. 

In line with healthcare contribution regulation, incomes qualifying as fringe benefits, certain specified benefits and income from interest benefit is not included in the tax base in the case of persons qualifying as foreign persons for the purposes of the Social Security Act. 

Small taxpayers' itemized lump sum tax ("KATA")

A favorable change for persons taxed under the KATA regime is that the limit for VAT-exempt status will be increased from 8 million to 12 million forints.

The proposal extends the group of small taxpayers not qualifying as full-time employees to entrepreneurs under the age of 25 studying in higher education institutions during the suspension of their studies also. This group will only have to pay 25 thousand forints of tax monthly. 

3. Changes concerning customs administration

Rules of customs representation changing

Beside customs representatives, a new player, the participating person employed by the customs service provider is introduced. The employment of subcontractors may be necessary for companies providing customs clearance services in relation to commercial transactions in order to perform services. 

A participating person may only be used if this is agreed in the service contract between the client and the customs representative or if the client provides so in the power of attorney. The participating person does not qualify as a customs representative. 

A release of customs collateral

According to the current practice, in the case of consolidated collateral prescribed for the pursuing of certain customs operations, the customs authority cannot release the guarantor or the surety from the financial liability undertaken in a guarantee declaration or joint and several guarantee contract until the expiry of the general customs law term of limitation (3 years). According to the proposal, the customs authority will hold back the financial elements provided under the consolidated collateral, including cash, for a period of 1 year instead of the previously applicable 3 years. These elements will be released after the expiry of this period. 

Supply of information to AEO license holders

For the holders of AEO Customs Simplification licenses, the customs authority gives the opportunity to request information for risk analysis purposes to support self-revision or the reduction of risks deriving from indirect customs representation. 

Specification of the term of limitation rules

If the customs debt is related to the initiation of the criminal procedure, the 10-year term of limitation rule shall apply instead of the general term of limitation rules. 

Starting date of post-release control

The starting date of post-release control is modified depending on the type of communication of the relevant notice. 

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