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Investment incentives, important VAT and EKAER changes in the summer tax package

About the most important measures of the summer draft tax package concerning companies, we can say in advance that it will include employment and investment incentives as well as measures deriving from Hungary's obligation of international legislative harmonization. Elements of the government's intention to reduce red tape and minimize conflicts with European forums also appeared.

Social contribution tax to be cut to 17.5 percent from 1 July 2019

A new act provides for the reduction of the rate of social contribution tax. As already known, the rate of social contribution tax will reduce to 17.5 percent from 1 July. The expected impacts of the social contribution tax cut were discussed here. 

Small business tax to be cut to 12 percent

The reduction of the small business tax rate is expected from 1 January 2020 according to the draft legislation. This measure boosts employment and is an incentive for investments at the same time. 

Payers of simplified entrepreneurial tax (EVA) may choose from small taxpayers' itemized lump sum tax (KATA),small business tax and corporate tax from next year

In relation to the proposed superseding of the Act on Simplified Entrepreneurial Tax, we have to point out that, as a result, the taxpayers concerned will become subject to VAT again and will have to choose from the tax types KATA, small business tax or corporate tax. 

The decision should be considered carefully taking into account the operation, cost rate and employee headcount of the taxpayer: 

  • private entrepreneurs may also choose KATA beside entrepreneurial personal income tax, 
  • sole traders, limited partnerships (bt.),general partnership (kkt.) and law firms may also be eligible for small business tax and corporate tax beside KATA, while 
  • many simplified entrepreneurial taxpayers may choose from small business tax and corporate tax. 

The Act on Accounting contains the detailed rules of moving back to double entry bookkeeping and, in all other regards, the procedural rules of choosing the tax type in question will apply. 

SME investment incentive in corporate tax

Due to its novelty, the most significant achievement of the summer tax package is most likely the reduction of the limit of development tax allowance available to SME-s. According to the regulation, small and medium size enterprises will be able to apply the allowance in the case of investments of value much smaller than the current 500 million forint threshold: 

  • With effect of 1 January 2020, we can expect the allowance limit to be reduced to 300 million forints in the case of small enterprises and 400 million forints in the case of medium size enterprises
  • with effect of 1 January 2021, it is expected to be cut to 200 million forints for small enterprises and 300 million forints for medium size enterprises and
  • with effect of 1 January 2022, it is expected to reduce to 50 million forints for small enterprises and 100 million forints in the case of medium size enterprises. 

In addition to the creation of new facilities, in the future, the tax allowance may also be applied for the extension of existing facilities, the extension of product range, substantial transformation of entire production processes and the purchase of facilities to be closed. For this reason, proper documentation of the investments and the separation of the investment eligible for the allowance will be particularly important. 

Another favourable change is that from 1 January 2020, announced and commenced investment projects will no longer have to satisfy the headcount and wage cost conditions. Accordingly, in contrast to current regulation, from next year, the enterprise carrying out the investment will not have to extend its headcount and increase its wage cost relative to the year preceding the investment and only the parameters defined in the SME Act will have to be fulfilled in terms of headcount. 

The above-mentioned tax allowance may not only be applied in the taxpayer's standard tax return but also by way of self-revision

Other corporate tax allowances

Change concerning energy efficiency investments

The rules of cost accounting are changing favourably in the case of energy efficiency investments as, in the future, tangible and intangible assets supporting the reaching of higher level of energy efficiency will also be accountable as expense. The wording of the current regulation is stricter than that of the proposed legislation as the Act on Corporate Tax currently in force regards the acquisition value of the tangible and intangible assets directly related to the reaching of higher level of energy efficiency and the increase in value as eligible expenses. 

Extended spectator team sport sponsoring opportunities

The value limit relating to the support granted for the operating costs of real estates used for sport purposes changes. The new rules will apply first based on the sports development program submitted for the 2020-2021 sponsoring period. According to the draft, the sponsorship certificate may be issued for maximum 80 percent of the operating costs of real estates used for sport purposes up to an amount of 600 million forint per real estate and sponsoring period unlike in the current regulation according to which the sponsorship certificate can be issued for up to 50 percent of the operating loss of real estates used for sport purposes but up to 300 million forints per real estate and sponsoring period. 

Administrative burden to be reduced and top-up obligation to be eliminated – rules relating to tax donation and growth tax credit changing

The tax advance top-up obligation will already be eliminated this year in corporate tax, innovation contribution and the income tax of energy suppliers. The administrative burden reducing impact of this measure is, however, overshadowed to some extent by the circumstance that the top-up obligation will remain in place in local business tax, which is necessary in order to maintain the liquidity of municipalities. 

The corporate tax top-up obligation also affects the rules of tax donation and growth tax credit

In relation to tax donation, we have to point out that from next year, companies will only have the chance to donate the relevant part of their corporate tax at the due date of tax advance payment and in their annual tax returns. This year, companies may still choose to apply tax advance top-up and therefore, tax donations may also still be made at the time of topping up in 2019. 

Other changes in corporate tax

From the changes concerning taxpayer groups, we need to draw attention to the following simplifications and specifications supporting legal compliance: 

  • the member's declaration in lieu of tax return will be eliminated, however, group members will still have to make declarations to the group representative; 
  • group members will not have to keep their records in the same currency; 
  • the rules relating to determining the ratio of voting rights will be specified (close relatives will have to be considered on an aggregate basis; the 75 percent voting right will also relate to future group members; the method of calculating indirect voting rights will be defined etc.);
  • companies commencing operation during the year may also become group members; 
  • the rules relating to the application of tax allowances by group members and to income-profit minimum will be specified; 
  • the rules relating to interest deductibility and tax donation will be simplified. 

In addition, we also have to mention the following measures: 

  • the introduction of divestiture rules and tax evasion curbing rules relating to hybrid structures due to harmonization with EU law, 
  • trust foundations will qualify as corporate taxpayers and will have to assess tax liability according to the rules applying to domestic economic associations. 

VAT – tax rate cut, administrative changes, tax base reduction and special tax refund procedure

VAT on accommodation service to be reduced but subject to tourism development contribution payment obligation

Hotels and airbnb providers will both benefit from the cutting of the VAT on the provision of commercial accommodation services from 18 to 5 percent. 

Simultaneously with the VAT rate cut, the scope of the tourism development contribution was extended. In the future, 4 percent contribution payment obligation will apply on the consideration without VAT of commercial accommodation. 

A substantial part of the changes concerning VAT comes from Hungary's legal harmonization obligation and for this reason, companies will have to prepare for changes of greater to lesser extent in the VAT treatment of cross-border transactions, above all, 

  • tax-exempt intra-Community supplies, 
  • chain transactions, 
  • call-off stocks and 
  • export- import transactions and closely related services. 

Tax exemption of intra-Community supplies will depend on A60-s

In the case of tax-exempt intra-Community supplies, tax exemption will not be applicable in the future if the taxpayer fails to indicate the supply properly in its recapitulative statement. The other conditions of exemption will remain basically unchanged. We have to point out that incorrect filling out of the recapitulative statement does not, in itself, imply loss of the exemption as the seller of the goods may excuse the failure with proper reasoning. 

New rule and strict administration for call-off stocks

The rules relating to call-off stocks represented and will continue to represent simplification in terms of announcement, return filing and reporting obligations in the case of cross-border transactions. 

The conditions of applying this simplification are 

  • for the seller not to have an establishment in the country of destination; 
  • for the buyer to have a tax number communicated to the seller, 
  • and for the transaction to be properly identified in the recapitulative statement and the call-off stock record also. 

An important change is that the simplification of call-off stock may only be applied if the stocks are drawn down within 12 months. If this is not the case, the seller will be deemed to carry out a movement of own stocks upon the expiry of the 12-month period as a fictitious date of supply for VAT purposes and VAT-registration and other administrative obligations will arise in the country of destination. 

Rules relating to the middle player in chain sales

The rules relating to the middle player in chain sales remain basically unchanged, however, special rules will apply in the future to the cases in which the middle buyer has a tax number in the seller's country and provides the tax number to the seller. In this case (unlike in standard cases9, the supply to the middle buyer cannot be exempt from tax but will be taxed at the tax rate of the country of dispatch. Thus, the middle buyer will conduct the supply as a seller towards its buyer in the other member state. 

Certification of tax exemption of exports and services directly relating to exports will change

According to the proposal, in the future, tax exemption may be applied in the case of exports not only based on exit certificates but also on the basis of a certificate issued by the exiting customs authority provided that the other conditions of tax exemption are fulfilled. 

Services relating to exportation, importation

Uncertainties of interpretation of law arising this year mostly in transportation will be clarified by the change that closely related services not only in the case of exportation but also for importation will enjoy tax exemption, which means that only the direct subcontractor of the importer will be allowed to issue invoices without tax and performance of further subcontractors will be subject to tax. 

Deduction of import VAT

In the cases when the customs authority does not make a resolution on the release of the goods for free circulation, the right of tax deduction may also be exercised based on the customs authority's notice. 

VAT on irrecoverable receivables may be reclaimed

The definition of irrecoverable receivables for VAT purposes and the regulation at the level of law of the relating subsequent tax base adjustment opportunity can be regarded as a substantial change from which many companies with material receivables may benefit. In the future, if performance took place and the statutory conditions for permanent financial non-settlement are satisfied, subsequent invoice correction will be possible. The issuer and the recipient of the invoice will both have to fulfil a number of conditions for subsequent tax base reduction and tax base reduction will also come with extra administration. 

The regulation of the VAT Act to be introduced is contradictory in the sense that the tax base may be reduced subsequently in the case of transactions performed in 2016 and subsequent years. As a result, the direct effect of the EU Directive may be the solution in respect of receivables relating to earlier periods. 

Special tax refund

In line with a recent decision of the European Court of Justice, the taxpayer will be released from the risk of VAT paid by it earlier to the seller that was charged to it by error if it is unable to reclaim such VAT for reasons beyond its control, for example because the issuer of the invoice ceased in the meantime. The VAT charged to the taxpayer this way may, in the future, be reclaimed directly from the tax authority based on the proposed legislation. 

Relaxation of EKAER rules

A favourable change and an opportunity to avoid serious penalties for those entities who fail to comply with their obligations due to administrative errors and have no intention to evade tax are: 

  • the introduction of self-correction (in a rather narrow circle and subject to strict conditions) and 
  • the re-regulation of penalty imposing based on accountability. 

According to the draft legislation, there will be an opportunity to subsequently change already closed EKAER reports. Self-correction will only apply to changeable data and subsequent amendment will only be possible within 3 working days of the expiry of the EKAER number or closing but until the start of the tax authority audit at the latest. Irrespective of accountability, the fee of self-correction will 10,000 forints per data to be amended. 

A substantial and favourable change is the provision, which states that, in contrast to the general penalty approach, in the case of failure of EKAER announcement or the announcement of false or untrue content no default penalty may be imposed in the future if it is proven that the taxpayer proceeded as expected under the given circumstances. As to expected conduct, the burden of proof lies with the taxpayer. This provision makes it clear that the EKAER penalty is not an objective sanction as, in the absence of accountability, there is no legal ground for imposing penalty. 

The above-described legislative step is clearly welcome as it represents a clear line drawn by the legislator between tax evaders (distributors of goods of uncertified origin) and entities failing to comply in good faith which distinction is now finally expressed in the regulation of penalty imposing. 

Zero percent advertisement tax from 1 July 2019

The rate of advertisement tax will be cut temporarily to 0 percent from 1 July 2019. Based on the proposal, it will, of course, not be possible to apply the highly discriminative sanctions against the companies failing to comply with the registration obligation and to assess deemed tax either. The 0 percent advertisement tax will obviously also come with the elimination of the tax obligation of entities ordering advertisement

Personal income tax for mothers of at least four children, tax exemption of sports events

The draft legislation grants a tax base allowance preceding all other allowances to mothers who had or adopted at least four children and are raising or raised them in their household in respect of their income from employment/independent activity. 

In addition, a new tax exemption title will be introduced: according to the proposal, no personal income tax will be payable on a certain part of the income paid to persons and athletes performing tasks in relation to events qualified as special international sports events. 

Contribution consolidation

According to the announcement of the Minister of Finance, pension contribution, in-kind health insurance contribution, monetary health insurance contribution and labour market contribution will be consolidated and will have to be recognized as a single tax type from next year. 

Simplified contribution to public revenues (EKHO)

In relation to the social contribution tax rate cut, the rate of EKHO payable by the payer will also be reduced to 17.5 percent. 

The draft would allow for persons employed by international sports associations to opt for tax payment under the EKHO regime, i.e. to pay 15 percent public burden on up to a limit amount of 250 million forints. 

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