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Tax changes in 2021 – How to pay tax in 2021

A number of tax changes entered into force in January in terms of NAV online invoicing, VAT, tax planning, corporate tax, personal income tax, small business tax (kiva),fixed-rate tax of low tax-bracket enterprises (kata),social contribution tax and local business tax, and companies have a lot to pay attention to.

NAV online invoice reporting starting from 2021 

According to the changes concerning NAV online invoice reporting effective as of 2021, the invoice reporting obligation is extended to all transactions of nearly all Hungarian companies. Starting from 4 January 2021, all invoices where the place of supply is Hungary, regardless of their value, must be reported in line with the 3.0 XSD schema defined by NAV, including:

  • invoices issued with respect to intra-Community supplies of goods and services;
  • invoices issued with respect to exports of goods and services to third countries outside the EU;
  • invoices issued to individuals.

As of 2021, the tax authority will see intra-Community transactions at the invoice level as well. All of this significantly improves the efficiency of the risk assessment methodology applied by the tax authority.

Distance selling transactions (from Hungary to another Member State or from another Member State to Hungary) subject to the 27% domestic VAT rate will also be subject to the online reporting requirement as of 1 January 2021. Starting from 1 July 2021, such taxpayers will have the opportunity to register in the so-called OSS (one-stop shop) system, allowing them to be exempted from the online reporting obligation.

The tax authority has announced a moratorium for Online invoice reporting, as part of which, in certain cases, NAV will not apply sanctions until 31 March 2021. The requirement for eligibility is that taxpayers must register in the NAV Online Invoice system no later than the date when the first invoice subject to the reporting obligation is issued. 

VAT – eVAT, e-commerce, bad debts, VAT on residential properties, labor hire

1. Draft VAT return

Starting from 2021, NAV will see all outgoing transactions and domestic purchases of companies, and based on these, NAV will prepare draft VAT returns (eVAT) for companies after 1 July 2021. The proposed VAT return is not always comprehensive and is prepared using the data available in the tax authority's records. As a result, the draft return will not automatically become a valid tax return. Taxpayers can make declarations as to the content of their tax return, as well as the right to deduct tax and the exercise of such right, by amending, making additions to and accepting the draft return and by filing their tax return. 

Draft VAT returns do not include imports or intra-Community purchases of goods and services, so taxpayers conducting transactions such as these should pay particularly close attention to their draft VAT returns, and additions will most likely be necessary.

Companies are advised to consider how they would compare their currently available records necessary for preparing their VAT returns with a different set of data provided by NAV. 

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2. E-commerce

Having regard to changes in the VAT regulations of the European Union on e-commerce, Hungarian regulations on distance selling and the import of low value goods will also be amended in 2021 (as of 1 July 2021).

Member States have previously applied different thresholds to distance selling (EUR 35,000 in the case of Hungary). A fixed threshold of EUR 10,000 will be introduced in all Member States as of 1 July 2021. Sellers are entitled to either apply the VAT rate of their own state up to this threshold or may voluntarily adopt the VAT rate of the destination country; however, above the threshold, the VAT rate of the state where the final consumer is registered for tax purposes will be applicable to the supply. The implementation of the OSS system eliminates the requirement of registering in the target country. Webshops will be able to comply with their obligation to issue invoices in accordance with the rules of the country where they are registered.

Another important change occurring in 2021 is that platforms facilitating electronic commerce will also become subject to VAT as an assumed seller.

The VAT exemption of import deliveries with a value not exceeding EUR 22 will also be abolished. This means that, as of 1 July 2021, all goods ordered from "third countries" (from foreign countries other than EU Member States) will be subject to value added tax.

3. VAT refunds on bad debt

The rules on VAT refunds on bad debt are becoming more lenient. Subject to certain conditions, business entities and individuals will also be entitled to claim VAT refunds. In cases where the consideration received is not enough for a taxpayer selling goods or services to recover the amount of tax payable, the VAT can be claimed directly from the tax authority

4. Establishing a VAT group

In terms of VAT groups, taxpayers may indicate the date at which they would like the VAT group to be established in the request for establishing a VAT group.

5. VAT on residential properties

The regulator has also brought back the 5 percent VAT on newly built residential properties, extending the temporal scope of the discounted VAT rate until 31 December 2022

6. Reverse taxation of labor hire 

The general reverse taxation rule applicable to labor hire arrangements will be discontinued. 

BREXIT – re-introduction of import VAT and mandatory financial representation

As a result of Brexit, the UK has become a third country for VAT and customs purposes as of 2021, which means that the practice of the free movement of goods and persons has been abolished. Based on the free trade agreement, a zero percent customs rate may be applied, while imports will continue to be subject to import VAT. Importers should familiarize themselves with modern solutions for managing import VAT. 

Despite the agreement, entities registered in the UK that do not possess an EU VAT number will need to appoint a financial representative to deal with customs formalities and tax liabilities.

DAC6: Mandatory disclosure of aggressive tax planning arrangements

The mandatory disclosure of aggressive tax planning arrangements was put into practice as of 1 January 2021. The DAC6 reporting obligation applies to tax arrangements dated after 25 June 2018. As a general rule, disclosures for transactions conducted after 1 January 2021 must be made within 30 days from execution. 

Corporate tax

1. Creating development provisions, tax discount for investments serving energy efficiency purposes, and supporting spectator team sports

An important change in the corporate tax discount system is that, effective 1 January 2021, the scope of options for creating development provisions will be extended. The HUF 10 billion limit for amounts transferred from the profit reserve to the tied-up reserve has been abolished.

In 2021, when purchasing passenger cars and electric passenger cars, the tax discount for investments serving energy efficiency purposes will no longer be available. 

The grant budget for supporting spectator team sports may not exceed HUF 100,000,000,000. 

2. Stricter rules for branch offices

The rules of the Corporate Tax Act on branch offices have become more stringent as of 1 January 2021. A supply of services will create a branch office even in the absence of a physical location, provided that the duration of the services supplied by employees or natural persons who are otherwise contracted exceeds 183 days. In the case of an agreement, the definition of the site in it will be authoritative.

3. Stricter rules for controlled foreign companies (CFCs)

Among controlled foreign companies, foreign persons from non-cooperating (so-called blacklisted) states will not be able to apply the relevant exemption rules. However, the portion of the dividends and capital gains related to actual legal transactions will be exempted from corporate tax. 

4. Exit tax

A new clarification concerning the exit tax introduced in 2019 is that the payment of exit tax in instalments will be applicable not only when the principal place of business is being relocated, but also in the case of the relocation of assets or business activities performed by domestic branch offices. 

5. Corporate tax adjustments relating to dividends

The tax base correction rules concerning dividends have been abolished by the legislation. From now on, the amount of unpaid dividends will increase the profit reserve, and no tax base correction items will be required for tax neutrality. 

6. Advertising tax

No advertising tax will be payable in 2021, either, having regard to the fact that the payment of advertising tax has been suspended for the period between 1 July 2019 and 31 December 2022. 

Changes relating to personal income tax

1. The system of personal income tax discounts

The personal income tax discount system has become more uniform as of 1 January 2021 and the discount provided to people living with severe disabilities has been transformed from a tax discount into a tax base discount. 

2. Cafeteria

As of 2021, the scope of SZÉP Card benefit options will be widened in the public sector as well. The recreational threshold is now uniform, meaning that, as from 2021, the HUF 450 thousand upper limit, currently applicable to private employers, will apply to employees in the public sector as well. The increased SZÉP Card thresholds, which were introduced in 2020 due to the pandemic, and the social contribution tax exemption will be applicable until 30 June 2021.

3. Tax exemption of epidemiological screening

Epidemiological screening paid for by employers on behalf of employees will be exempted from tax in 2021. This tax exemption is available retrospectively as well, regardless of the date of such tests. 

4. Employee housing support tax exemption

As part of the Home Creation Action Plan, home renovation support for families raising children will be tax-exempt as of 1 January 2021.

5. The rules on the simplified taxation of foreign performing artists are also changing

For movie productions, simplified taxation may be selected by foreign actors and crew members who are registered with the National Film Office however, in the future the simplification can be applied not only in the case of a temporary stay in Hungary. Besides that, the rules on the simplified employment of extras have also been amended.

KIVA – limits have become more favorable and the tax rate has been reduced to 11 percent 

The upper threshold for the income/balance sheet total for adopting small business tax (kiva) has increased to HUF 3 billion, while the exit threshold has been raised to HUF 6 billion as of 2021. In addition, the kiva tax rate has been reduced from 12 percent to 11 percent.

Due to its simplicity, this tax type has already been a favorable option for businesses with higher staff costs or, under certain conditions, companies with a need for investment. 

KATA – increasing the scope of the 40 percent "punitive" tax rate

Starting from 2021, a 40 percent tax is payable when crossing the annual income limit of HUF 12 million in cases where the sum of the amounts invoiced by a KATA taxpayer to an (unaffiliated) business partner exceeds HUF 3 million and in the case of transactions between affiliates, regardless of the amount. 

In the case of domestic parties, the excess tax would be payable not by the taxpayer subject to KATA, but instead by the business partner receiving the invoice. If a KATA taxpayer receives income from a foreign affiliate or, in the case of income exceeding HUF 3 million, from a foreign customer, then the 40 percent tax will be payable by the KATA taxpayer; however, the tax base will be equal to 71.42% of the portion of the income that is in excess of HUF 3 million.

The social contribution tax rate remains at 15.5 percent 

The social contribution tax rate was reduced to 15.5 percent as of 1 July 2020, and this tax rate will be applicable in 2021 as well.

Changes to the base of the vocational training contribution effective as of 2021

As of 2021, in addition to income from independent and dependent personal services, vocational training contribution will also be payable on other types of income subject to social contribution tax. 

Expected, the 1.5 percent vocational training contribution on SZÉP Card benefits will be payable only after 1 July 2021, (clarification is expected due to conflicting interpretations of the legislation).

Changes to the definition of taxable income for social security contribution purposes

Starting from 1 January 2021, taxable income for social security contribution purposes is also defined for cases where personal income tax is paid outside Hungary and the work is carried out on the basis of an engagement contract that is subject to a foreign jurisdiction or the work is carried out on the basis of any other type of work-related legal relationship. According to the new definition, if the personal income tax liability arises outside Hungary, the contributions and the social contribution tax will be payable in Hungary nonetheless, so the contribution or tax is based on the basic salary or income, if it is lower than the basic salary.

Local business tax – one-stop shop for tax returns and stricter allocation rules

As of 2021, it will be sufficient for taxpayers to file a single local income tax return with NAV. Furthermore, starting from 2021, data reporting, registration and change reporting forms in connection with local business tax have been consolidated. Pursuant to Government Decree No. 639/2020, local business tax will be reduced to 1 percent for some companies. 

A relief for construction companies is that, as of next year, construction activities shorter than 180 days will no longer be subject to local business tax on temporary activities.

Starting from 2021, companies involved in motor vehicle rental and leasing will be required to recognize asset values in proportion to the staff costs incurred at their registered office and branch offices. The transfer price adjustment rules for affiliated companies are also incorporated into the local tax law.

Changes concerning tax procedure

Automatic payment assistance

As of 1 January 2021, the upper limit for automatic payment assistance will be doubled in the case of both reliable taxpayers and individuals, which will allow the discount to be applied to a wider range of taxpayers. 

The classification rules will become more favorable for group taxpayers since a group will not lose its reliable taxpayer classification when a newly-founded company is added to the group. 

Changes to the Electronic Public Road Trade Control System (EKAER) – considerable simplification

The EKAER obligation will be abolished for most goods since the EKAER obligation only pertains to the trade of risky goods (designated as "subject to the reporting obligation" starting from 2021). The 40 percent default fine may be levied only if the taxpayer fails to comply with its reporting obligation relating to EKAER or reports incorrect quantities or amounts in the EKAER system. Taxpayers involved in the trade of goods subject to the reporting obligation should expect to be under increased scrutiny by NAV.

Social security – minor changes starting from 2021

1. Health care contribution

The rate of the health care contribution rises: as of 1 January 2021, an amount of HUF 8,000 per month will be payable by those affected, the new daily amount being HUF 270.

2. Changes to the pregnancy confinement benefit in 2021

Changes concerning other tax types

Tourism development contributions will not be payable on mediated services. 

Starting from 2021, the taxation duties related to domestic motor vehicles will be handled by NAV, and vehicle tax revenues will also be payable to NAV. The tax will be payable in two equal installments until 15 March (as an exception, the deadline for 2021 will be 15 April) and 15 September.

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