1. Changes in the corporate income tax in 2019 to facilitate group corporate taxation, EU harmonization and to combat tax avoidance
In order to transpose the provisions of the Anti-Tax Avoidance Directive (ATAD 1),the draft clarifies the principle of due process of law, tightens the concept of controlled foreign companies (CFC) and introduces the EU interest deduction limitation rules.
The principle of due process of law (general rule against fraud) is clarified by focusing not only on individual legal transaction but also on series of legal transactions the main objective or one of the main objectives of which is to obtain a tax advantage which is contrary to the object or purpose of the relevant tax regulations. If the tax advantage achieved with the transaction or series of transactions is in line with the subject and objective of the legal regulation, according to the preamble of the draft bill the tax advantage may not be limited if real economic and commercial reasons may also be assigned to the legal transaction. However, the definition and qualification of the objective of the transaction and tax advantage may only be established on the basis of the careful consideration of all relevant facts and conditions relating to the transaction/series of transactions according to the Directive but it is no longer contained like that in the draft bill.
The draft bill tightens the definition of a controlled foreign company (CFC) as:
- in future, a foreign entity may not be exempted from being classified as a controlled foreign company because one of its members or associated enterprises is listed on a recognized stock exchange or
- the pursuit of investments may not lead to exemption from the regulations pertaining to a CFC (the investment activity may no longer be a substantive economic activity).
The EU interest deduction limitation rules will also appear in the Hungarian legislation. With the amendment of the undercapitalization rule, the limit also defined in the Directive will be introduced with regard to recognized interest. Consequently, of the net financing costs no more than 30% of the EBITDA or HUF 939,810,000 (approx. EUR 3 million) can be recognized. The portion that cannot be recognized may be reduced by the unused portion of the interest deduction capacity of the previous years (30% of the interest expense, profit before taxation and depreciation less the net cost of financing in the fiscal year).
Compared to the current rules it is definitely a further restriction that credit institutions and financial enterprises must apply the limitation also to the interest expenses yet financial institutions and investment enterprises are exempted from the tax base adjustment.
An option of a group taxable status at associated enterprises
From 2019 those associated enterprises may opt for tax grouping, where one taxable person holds at least 75% voting ratio, either directly or indirectly, in another taxable person or another person holds the same voting ratio in the taxable persons. It is a further prerequisite of a tax grouping arrangement that the balance sheet date and currency of bookkeeping of the group members are the same and that the financial statements are prepared and the books are closed by all members of the group consistently either according to the provisions of the Accounting Act or IFRS.
The legislator expects an increase in competitiveness from the introduction of this new legal concept. The most important advantage of the grouping of taxable entities is that losses of associated enterprises can be used by one another. Another major easement is that the intra-group transactions (only those that are established as group members) are exempt from the amendments of transfer pricing and that the transfer pricing documentation obligation must be fulfilled only at the level of the corporate income taxable group.
There is a relatively short time available for the application in 2019. The declaration for tax grouping must be submitted to the Hungarian Tax Authority by no later than 15 January 2019. A group taxation arrangement may be established subject to the approval of the Hungarian Tax Authority and is granted upon an application submitted in writing and containing the express and unanimous understanding of all members concerned.
A group representative, appointed by the group members for such purposes must also be notified to the Hungarian Tax Authority, who will then fulfill the tax liabilities and exercise the rights arising from the VAT grouping under a group ID number.
The group corporate income tax base is the total of the not negative tax bases established individually by the group members, which may be reduced by the loss of the group carried forward. The loss carried forward of a group may be recognized in the fiscal year of when it arises and in the subsequent fiscal years, last in the fifth fiscal year after the year of origin and in no more than 50% of the total of the individual tax bases.
Support of spectacular team sports
From 2019 the legal titles of support of spectacular team sports may be supplemented with the possibility of providing support for the costs of operation of sports properties.
2. Proposals relating to the tax administration and implementation procedure
Among the modification of the tax administration procedures clarifying the provisions assisting the application of the law and legal technical proposals were formulated in order to promote the practical implementation of the acts entering into force on 1 January 2018. However, beyond those technical clarifications, there are also significant amendments.
Changes in the Rules of Taxation Act
Most amendments of the provisions of the Act on the Rules of Taxation (Rules of Taxation Act) contain clarifications to ease the difficulties of the application of the law that became clear after the entry into force of the Act in January. They include the rules of imposing a default penalty on reliable taxpayers. In addition, the Government’s objectives to reduce administration can also be detected in the draft. They include the elimination of consultations for a fee prior to the submission of an application for provisional tax assessment and the termination of the reporting obligation of the payers concerning the qualifications of the insured parties employed by them.
In addition, remarkable amendments may also be observed in relation to administrative data supply, the classification of risky taxpayers and the rules on fines.
The draft bill clarifies and classifies the decisions adopted in procedures for establishing an arm's length price and standardizes the rules of legal remedies against such decisions.
The maximum rate of the default penalty that may be imposed on the violation of tax advance supplementation/replenishment may be reduced from 20% to 10% of the difference between the paid tax advance and 90% of the tax for the fiscal year.
The draft bill brings back the rules pertaining to default penalty applied under the old Rules of Taxation Act in relation to procedures contrary to accounting regulations and lack or wrong indication of important information in the disclosed report.
According to the draft bill, any taxable person with a registered office at a registered office provider fined with a procedural fine in the current year or in the previous three years due to impeding the procedure shall be classified a risky taxpayer.
It is an administrative supplementation that the taxable person must indicate the envisaged purpose of the certificate in an application for an administrative certificate or certification. In other words, they must indicate the agencies who intend to use the administrative certificate in their proceedings. Thus in case the resolution/certificate is withdrawn, the Hungarian Tax Authority can inform those agencies about it.
Changes in the Tax Administration Act
The proposed bill amends the provisions of the Tax Administration Act, effective from January this year. From 1 January 2019:
- the rules on the procedural deadline will be amended;
- the rules of a precautionary measure and temporary precautionary measure shall be completed with guarantees;
- the Act will be amended at a number of places in relation to the presentation of new facts and evidence;
- in addition, the mandatory tax inspections will be extended by one element, affecting companies that have operated with a loss for a long time.
Mandatory tax inspection at companies with HUF 60 billion sales revenues and a loss
In the future, it shall be mandatory to conduct an inspection at business companies the net sales revenue of which achieved in two subsequent business years reaches HUF 60 billion in each of the two business years, and the after-tax profit is zero or negative in both business years. The state tax and customs authority shall conduct the tax audit after the annual report for the second business year is approved. In the case of start-up enterprises, the rule does not need to be applied for the first four financial years. In the case of legal succession, however, the legal predecessor company’s operation should also be taken into account during the calculation of the period.
Changes in the Foreclosures Act
The modifications of the draft bill relating to the Act on Foreclosures to be implemented by the Tax Authority (Foreclosures Act) are aimed partly at preventing any impediment to foreclosure and at aiming the application of law easier.
However, most amendments and supplementary provisions were submitted to Parliament because on 1 January 2019 the Hungarian Tax Authority will take over the enforcement of the receivables that fall within the competence of court bailiffs.
Considering that from January 2018 the Hungarian Tax Authority also proceeds as a general administrative bailiff upon request yet lacks professional expertise in certain cases, the requesting agencies must definitely be involved in the foreclosure proceedings.