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Who should choose group taxation?

Based on the adopted tax laws for the coming year, Hungary will join a number of European countries with a modern tax system, where group taxation is also available with regard to direct taxes, in addition to the VAT. From the 2019 tax year, it will be possible also in Hungary to choose group corporate taxation, which can be notified to the Tax Authority in the first two weeks of January. Let us see who should choose this and what aspects should be considered in the next two months?

What is the condition of choosing group corporate taxation?

The conditions for choosing a group corporate taxation will limit the scope of potential users, as prospective group members must simultaneously comply with the following requirements:

  • business organizations qualifying as resident taxpayers,
  • and being linked undertakings on the basis of voting rights of at least 75%, and
  • their balance sheet date, the currency of their bookkeeping and their rules of accounting are identical.

Establishment of group taxation

Group corporate taxation will be established with the authorization of the HU TA as of 1 January 2019, upon the joint written application of the prospective members of the group, which may be submitted subject to a limitation period between 1 January 2019 to 15 January 2019. In the application, the group representative must also be designated, who shall then fulfill the group corporate taxation related tax liability under the group ID number and exercise its rights as a taxable entity.

Fulfillment of tax liability

At the first sight, administrative reductions may not necessarily be evident from the amendment of the law, since group corporate taxation in practice means that the group member prepares a presentation of their individual tax base per fiscal year and makes a statement equivalent to the tax return to the group representative and the HU TA, and then the group representative provides data to the HU TA in the group’s tax returns. In other words, group members shall act in the course of the establishment of their individual tax base as if they were independent taxpayers, and a group tax return must also be submitted in addition thereto.

Establishment of the tax base for the group

The group’s tax base is the amount of non-negative tax bases individually established by the group members which can be reduced according to special rules on the accrued loss of group taxation. The group’s loss carries forward for the tax year is the sum of the tax bases of group members with a negative tax base in the tax year (provided that it was incurred in compliance with the principle of the proper exercise of the law). The group’s tax payable for the tax year shall be divided among the group members in proportion to the positive tax bases individually established.

Use of loss carry forward

The group’s loss carry forward can be recognized in the tax year when it is incurred and in the subsequent five tax years as a reduction of the tax base of the group. The extent of the loss carry forward individually validated by the group or the group members may together not exceed 50 percent of the amount of individual positive tax bases without validation of the loss carry forward.

In view of the abovementioned rules for the use of losses, the question arises as to how the loss carry forward incurred by group members before group membership can be used going forward. By means of group taxation, the enforceability of the loss carry forward may potentially be more favorable, depending on the individual situation. In order to find an optimum solution for the group, it is advisable to examine this in detail. 

Interest deductibility

Under the new rule for interest deduction limitation, the pre-tax profit is increased by the portion of the net financing costs exceeding the higher of 30% of the EBITDA and the nominal value limit of HUF 939,810,000. For members of the group corporate taxpayer, this limitation shall be applied when determining the individual tax base that the portion of the limit value calculated as a ratio of the net financing cost incurred by the group member to the total net financing cost incurred by the group corporate taxpayer. In any case, it is useful to examine in advance the extent to which the prospective group or group members are affected by the restriction.

Settlement of transactions between related undertakings

The greatest achievement of this measure may be that, as regards the transactions between group taxation members, the provisions on transactions between related undertakings (Corporate Tax Act, Article 18 (1) and (5)) do not apply in principle. That is, group members will not be obliged to determine the arms-length price for corporate tax, and to modify the tax base in case of a deviation therefrom, and to document such transactions. The documentation obligation as per the Corporate Tax Act is only to be met at the group level (i.e. in relation to related undertakings outside the group). 

At the same time, the above applies only to transactions executed after group membership has been established! In the case of transactions effected before that date, the adjustment of the tax base to the arms-length rate shall be implemented.

Additionally, related parties shall, regarding transactions between them, also apply accounting based on the arms-length price also in the case of other tax types (e.g. VAT, local industrial tax and innovation contribution). In practice, this means that group members should continue to endeavor to apply the market price in their transactions between them and to maintain records of those.

Use of tax allowances

Group corporate taxation is considered to be a single taxpayer for the purposes of tax allowances.  The group may use the tax allowance if a member of the group agrees to comply with the terms concerning the tax allowance and that member of the group actually fulfills such conditions. The group corporate taxation applies the 80 and 70 percent validation limits individually to the eligible group member.

The limit of tax allowances determined in the amount of the tax calculated and payable shall be applied by the group member by taking into account the tax base for group corporate taxation for the tax year in proportion to its individually established positive tax base. R&D tax base allowances and other tax allowances or the possibility to enforce a tax offer is not ruled out by the regulation, but the feasibility of this should be examined in the individual situation. 

The group member can continue to validate its pre-group membership tax allowance as a member of the group corporate taxation, provided that the terms of the allowance are met as a group member as well.

Overall, group corporate taxation does not represent a disadvantage for the participants (provided that companies are not affected by the limitation of interest deduction),but it does have potential benefits. In the case of companies that comply with the conditions, it is certainly advisable to consider joining this modern endeavor to exploit the targeted benefits as quickly as possible.

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