For taxpayers whose tax year corresponds to the calendar year, the deadline for publishing their financial statements for the financial year 2020 and, at the same time, for submitting their tax returns for annual taxes (corporate income tax, innovation contribution, and local business tax) is 31 May 2021. Accordingly, a number of companies are checking and finalising their year-end tax calculations as we speak in order to complete their audits and publish their financial statements. This is particularly important for companies where the parent company is foreign and the Hungarian company is also consolidated, and so the financial statements need to be prepared much earlier than the May deadline.
Below we would like to draw your attention to the typical areas of annual taxes and tax savings opportunities that are worth considering.
1. Development reserve
Pursuant to the general rules effective as of the first day of the tax year 2020, the amount of the development reserve set aside for future investment projects (transferred from the profit reserve to the tied-up reserve and recognised there at the last day of the tax year) may, at the taxpayer's discretion, be deducted from any positive pre-tax profit in an amount of (1) up to 50 per cent of the pre-tax profit and (2) up to a limit of HUF 10 billion.
However, as part of the measures implemented to protect the economy in response to the COVID-19 pandemic, the rules pertaining to the development reserve were amended during 2020 as follows:
- The cap for using the recognised development reserve was increased to match the amount of any positive pre-tax profit, with the limit of HUF 10 billion still in place.
- Pursuant to the transitional provisions, the increased cap is first applicable to tax years beginning in 2020.
- Another transitional provision permits the retrospective application of the more favourable rules for the year 2019 (in line with the general rules of tax audits and self-revisions).
2. CIT benefit relating to e-mobility
In general, electric vehicles are subject to favourable tax rules, including:
- exemption from vehicle tax,
- exemption from registration tax upon first registration,
- exemption from property transfer tax.
In addition to the above, electric vehicles also enjoy tax benefits in relation to corporate income tax. The tax benefit for investments and improvements serving energy efficiency purposes can be claimed on the purchase of electric vehicles, provided that certain conditions are fulfilled. (Please note that this type of tax benefit cannot be claimed alongside the development tax benefit.)
It is important to emphasise that, under the amendment to the CIT Act effective as of 27 December 2020, the tax benefit for investments serving energy efficiency purposes does not apply to electric (hybrid) passenger cars. Exceptions to this rule include passenger cars with large cargo space, for which the tax benefit continues to be available.
Pursuant to the government decree which sets out the detailed rules of the tax benefit, the date of commencement of the investment project is the date when the first tangible asset serving the purpose of the investment project is ordered or the date of any commitment which renders the investment project irreversible. Accordingly, in the case of purchases of electric (hybrid) passenger cars without large cargo space, the tax benefit can be claimed if the purchase commitment was entered into before 27 December 2020.
What exactly does a passenger car with large cargo space mean? A multi-purpose motor vehicle with a total weight of up to 2500 kg with cargo space that is suitable for carrying more than two passengers, where the cargo space behind the partition can be transformed any time to allow for freight transportation by simply releasing the seats by hand, including cases where the rear seats are removed by way of an irreversible engineering modification.
In terms of the regulations pertaining to royalties, the amendment to the CIT Act effective as of 16 July 2016 is regarded as a milestone in that it amended (narrowed) the definitions of royalty and reported intangible assets.
The following items adjusting the CIT base apply to royalties as defined in the version of the CIT Act effective as of 16 July 2016:
- 50 per cent of royalty profit up to half of the pre-tax profit (decreases the tax base; an item that increases the tax base may arise in case of a loss in the subsequent year),
- the amount of profit on the derecognition of intangible assets on which royalties are earned (with the exception of reported intangible assets) which is transferred to the tied-up reserve (decreases the tax base),
- profit (decreases the tax base) or loss (increases the tax base) on the derecognition of reported intangible assets.
However, based on the transitional provisions of the CIT Act, the last time when the "old rules" are applicable to intangible assets acquired, produced or reported before 30 June 2016 will be in connection with the tax base for the tax year ended before 30 June 2021, i.e. in the tax return for the tax year 2020 for taxpayers whose tax year corresponds to the calendar year (the possibility of multiple deductions).
In addition to corporate income tax, the local business tax scheme also provides tax benefits for royalties regulated by the CIT Act. The LBT base is the adjusted revenue, which is the revenue as defined in the Accounting Act reduced by, amongst others, royalty payments recognised as revenue.
Since the tax base for innovation contribution purposes is equal to the local business tax base, the above deduction of royalties from the revenue can also be applied in respect of the innovation contribution.
4. Tax liabilities of permanent establishments
The definition of a permanent establishment under the CIT Act was amended as of 1 January 2021 and, as a result, there are now more circumstances that give rise to tax liabilities in Hungary for foreign persons.
- As of 2021, a permanent establishment is created even in cases where, in the absence of a fixed place of business, an entity's presence in Hungary is limited to the provision of services by employees or natural persons, provided that the duration of such services exceeds 183 days ("permanent establishment for services").
- Furthermore, foreign persons are to be considered as having a permanent establishment in all cases where the definition of a permanent establishment under a treaty is met. This applies even if a permanent establishment would not otherwise be created under the CIT Act.
5. Tax liabilities of controlled foreign companies
As a result of the harmonisation of law within the EU, the rules for controlled foreign companies became stricter as of 1 January 2021. The exemptions from being classified as a controlled foreign company cannot be applied to foreign persons and permanent establishments in non-cooperative jurisdictions.
6. Dividend payment
As a general rule, the corporate income tax base is reduced by the amount of dividend and profit share received (due) as recognised by the taxpayer during the tax year. If the taxpayer's dividend income for the tax year comes from a controlled foreign company, then the tax base may be reduced only if additional criteria are fulfilled.
7. CIT pledge
Taxpayers making a pledge from the payable amount of corporate income tax (tax advance or year-end tax liability) for eligible purposes (supporting motion picture productions or spectator team sports) are entitled to a tax refund of a specific amount. The conditions for doing so are precisely defined by the law.
The key advantage of the pledge over direct support is that it results in a higher rate of effective tax savings. The refund received on the basis of the pledged amount will qualify as non-taxable income in the subsequent year, which means that, unlike the previous support scheme, such a pledge does not affect profits in the current year in any form and will improve profits in the subsequent year.
Our calculator allows you to easily calculate the amount of tax savings you could achieve by making a pledge from your year-end corporate income tax liability instead of supporting sports directly.
Taxpayers may make a pledge from the annual CIT liability for 2020 for up to 80 per cent of the calculated tax liability when submitting their tax return.
Taxpayers directly supporting the spectator team sports specified in the relevant government decree (football, handball, basketball, water polo, ice hockey and volleyball) by means of non-repayable support are entitled to a corporate income tax benefit if the statutory requirements are fulfilled. In addition, such support is treated as an eligible cost for corporate income tax purposes. When taking into account supplementary sports development support as well, the maximum tax savings amount to 2.25% of the amount of the support.
A number of tax savings opportunities are available to companies in connection with annual taxes. It's worth looking into the tax benefits that are available to entities in the areas of CIT and LBT as well.
Our experience suggests that taxpayers often fail to pay enough attention to compulsory tax audits relating to the tax benefits claimed. As these are predictable, entities are advised to prepare for them and to properly design their record-keeping processes so that the tax audits relating to tax benefits do not place an additional burden on the company.