1.Administrative burden to be reduced and top-up obligation to be eliminated – rules relating to tax donation and growth tax credit are 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 (furthermore, regarding advertisement tax, it will also be necessary to apply the tax advance top-up obligation). 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 with regard to domestic and foreign businesses that generated a net sales revenues of 100 million forints in the preceding tax year, which is necessary in order to maintain the liquidity of municipalities.
It is important, that regarding taxpayers choosing a different business year, it will be still necessary to apply the top-up obligation to the business year starting in 2018.
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. Companies, where the 20th day of the last month in their tax year of 2019 is not earlier than the date on which the amending act takes effect, may (at their own choice) still apply top-up by lodging a separate statement. Thus, it is also possible to make a tax donation in 2019. This change does not affect this year’s rules of tax donation to be paid from tax advances or from tax payable at the end of the year However, effective from next year, the value limit of tax advance donation will change favourable: it increases from the current 50% to 80%. It is, however, uncertain, how this change will show up in the financing of beneficiaries.
2. SME investment incentive in corporate tax
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.
It is also a favourable change that regarding investments that will be reported and commenced from 1 January 2020, there will be no need to comply with staffing and labour cost growth conditions, namely because to previous legislative requirement imposing such conditions was replaced by a provision requiring that the same staffing level is maintained. On one hand this means that regarding staffing conditions, it is necessary to comply with parameters imposed in the SME Act and, on the other hand, that during four tax years following the year in which the tax advantage was enjoyed for the first time, the number of staff employed cannot be lower than the number of staff employed over a 3-year period before the commencement of the investment.
As a condition for development tax advantage, the requirement to maintain the same staffing level is available not only to SMEs, but also applies to investments with a present value of 1 billion forints that were commissioned on municipality premises and, finally, to investments with a present value of 6 and 3 billion forints resulting in product diversification or new procedural innovation.
The above-mentioned tax allowance may not only be applied in the taxpayer's standard tax return but also by way of self-revision.
3.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.
4.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. 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.
5.Changing transfer price rules
Following 1 January 2020, transfer price rules will need to be applied even if capital is increased as a result of contribution provided by such a person that, prior to such contribution, did not have majority ownership in the company receiving the contribution but acquires majority ownership as a result of the contribution transaction. Regarding withdrawal following the repurchasing of one’s own holding, or the transfer of such holding free of charge, the amendment also requires the application of transfer price rules.
The rate of advertisement tax has been cut temporarily to 0 percent from 1 July 2019 despite the latest rule of ECJ. 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.
During 2019, on an interim basis, the 0% tax rate would need to be applied
- to the proportional part of the tax base in the tax year calculated on the basis of calendar days (days remaining after 1 July 2019 until the end of the year / calendar days of the fully tax year),or - at the choice of the taxpayer -
- to the difference between the tax base part of the first six-month period assessed on the basis of accounting closure and the full tax base, and
- it will only be necessary to pay half of the advertisement tax advance, the date for the payment of tax advance may be chosen by the taxpayer (the 20th day of either the seventh or the tenth month).
In the context of the temporary suspension of the advertisement tax during the period from 1 July 2019 to 31 December 2022, it was also declared that during the suspension period advertising expenses can continue to be readily accounted for as costs for corporate tax purposes.
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, that is going forward a corporate taxpayer group can be established even if one member keeps their records in EUR, whilst the other in Hungarian forints;
- 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.
According to a specific amendment introduced to the Act on the Rules of Taxation (that, however, directly concerns taxpayer groups),in case any member of such group fails to fully comply with legislative requirements, the tax authority will not eliminate the specific taxpayer group, only the group membership of the affected group member.
8.Changes affecting other companies - trust (asset management) foundations, a restriction on capital withdrawal
- Resulting from the obligation imposed by the EU to harmonise legislation, they concern rules designed to restrict tax evasion arising from capital withdrawal and hybrid structures. Subject to certain facts and conditions (e.g. the transfer, relocation of management abroad; the transfer of assets between individual business establishments/sites and the registered office) an exit tax will be introduced effective from 2020. The basis of this tax will be the difference between the market value and the calculated book/carrying value of the assets/activities transferred; provided no other obligation to adjust the tax base exists; in case an obligation to pay tax arises, it will be possible to pay in instalments over a 5-year period. The tougher rules concerning hybrid structures are primarily designed to prevent multiple corporate tax reductions arising from the different legal assessment of financial assets, payments-disbursements or business organisations and also from differences in the allocation of payments-disbursements, together with aggressive tax planning structures designed to produce such outcomes.
- Trust foundations will be regarded as taxable persons, their tax payment obligation will need to be specified on the basis of provisions concerning assets managed under a fiduciary trust management agreement. Subject to compliance with certain conditions (e.g. both the settlor and the beneficiary are private persons, during the specific tax year they generated incomes only from invested financial assets, receivables, securities or funds),the assets managed under a fiduciary trust management agreement and the trust foundation will be exempted from the obligation to pay corporate tax. In case tax exemption was granted, the trust fund does not even need to lodge a tax return, only make a declaration using a tax return replacement form. These rules can already be applied from the tax year of 2019, provided the affected taxable persons meet these conditions.
- Another amendment introduced to the Act on the Rules of Taxation also affects taxable persons that must pay corporate tax. More specifically, records concerning income or tax obligations imposed on trust funds covered by treaties on the avoidance of double taxation must be retained and preserved for a period of 10 years.
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 legislation. This measure boosts employment and is an incentive for investments at the same time.
There is a new rule taking effect this year, namely that one cannot opt for becoming a small business taxable person, provided they have a controlled foreign company, or their financing costs exceed a certain level (so far, these circumstances worked only as a reason for the elimination of the small business taxable person status).
Effective from 1 January 2020 a new condition will be imposed on the reduction of the tax base by dividend income received (due) from abroad, namely that the assessing company (including the trust fund) does not recognise the dividend amount as cost charged to profit before taxation.
Simplified entrepreneurial tax (EVA) - taxpayers should choose from small taxpayers' itemized lump sum tax, small business tax and corporate tax from next year
In relation to the 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 (kiva) 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.
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 is reduced to 17.5 percent from 1 July.
The expected impacts of the social contribution tax cut were discussed here.
Local business tax - widening opportunities for one-stop administration
1.The local business tax return to be forwarded by the tax authority (NAV)
Effective from 1 January 2020 the tax authority (NAV) will forward only proper tax returns to municipality tax authorities. In case the taxpayer fails to correct the mistakes automatically reported by the tax return completion application, the state tax authority will not forward the tax return and the taxpayer can only lodge it with the municipality tax authority.
Effective from 2 January 2020, sports businesses will only be able to lodge their local business tax return (electronically) with the state tax authority.
2.Tax data to be forwarded by the tax authority (NAV),reporting / change reporting obligation to be simplified
Effective from 1 July 2019 - as a matter of principle - tax data available to the state tax authority with respect to local business tax and tourism tax obligations (including changed and reported tax data) will be forwarded to the municipality tax authority (having competence for such taxes on the basis of the registered offices/business establishments, sites of the affected companies) by the state tax authority, that is the taxpayers will not need to report such data to the municipality.
Effective from 1 January 2020, it will also be possible for taxpayers to report their representative authorised to act before the municipality tax authority in local business tax matters to the affected municipality through the state tax authority.
3.The tax exemption of foundations
In the definitions part of the amendment to the act it is stipulated that in the context of applying of the local tax act, effective from 1 January 2020 only foundations with a non-profit status can be granted local tax exemption (including foundations that were registered in another EEA state, provided the affected foundation proves compliance with conditions necessary for their classification as a non-profit organisation, within the meaning of the Civil Act).
VAT – tax rate cut, administrative changes, tax base reduction and special tax refund procedure
1.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.
2.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.
3.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.
4. 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 cases),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.
5.Certification of tax exemption of exports and services directly relating to exports will change
According to the legislation, 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.
6.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.
7.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.
8.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.
9.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 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 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 5,000 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.
Personal income tax changes
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 from 1st January 2020.
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.
Having regard to the purchasing spree affecting government bonds, we cannot proceed without mentioning that regarding government bonds issued by the Hungarian State after 1 July 2019 and distributed for residential clients, no interest income is generated.
Furthermore, the amount of the baby expecting interest support and the ‘having children support’ also enjoy tax exemption, just like the passenger car purchasing support of large families (HUF 2.5 million, not to exceed 50% of the gross purchase price).
Regarding the transfer of agricultural land, the case where agricultural land that was previously held commonly and undivided is transferred to a co-owner will also be exempt from taxation.
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 legislation allows 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.
According to the amendment, effective from 1 January 2020 the exemption from duties applicable to foundations will be extended to foreign foundations, provided they meet the conditions imposed in the Civil Act. The exemption of duties will be applicable in the course of acquiring of assets by foreign foundations in Hungary and in administrative and judicial proceedings instigated by such foundations in Hungary. However, a further condition to the exemption from duties is that in the tax year preceding the specific proceedings, the affected foreign foundation cannot have a tax payment obligation that can be compared to Hungarian corporate tax.
Financial transaction duty
According to the act, postal cheque payments under the value of 20 thousand forints were exempted from this duty following promulgation. Above this value limit, the duty will be capped at 6 thousand forints.
According to the act, payment transactions effected to the debit of accounts kept with the state treasury will also be exempted from this duty. Effective from 1 January 2020, further items to be exempted from the financial transaction duty will include transactions effected between the payment accounts of natural persons and the accounts maintained by the treasury for government bond distribution purposes, including also postal cheque payments effected by natural persons for the same purpose.