Special tax of pharmaceutical producers
As is well known, the Government decided to introduce a special tax on pharmaceutical companies for the tax years 2022-2024 to increase the income of the utility protection fund (“rezsivédelmi alap”) in the central budget. The special tax is based on the net sales revenue as determined in the tax year's financial statements under the Act on Local Taxes. The applicable tax rates are summarised in the table below.
|Net revenue band||to 31 December 2023|
from 1 January 2024
|up to HUF 50 billion||1%||0.5%|
|above HUF 50 billion, up to HUF 150 billion||3%||1.5%|
|above HUF 150 billion||8%||4%|
Extra profit tax of pharmaceutical producers – significant reduction potential for R&D activity and investment in tangible assets
Government Decree 317/2023 (17 July 2023) was published in the Official Journal of Hungary on 17 July 2023, amending the effective Government Decree on extra-profit taxes in several points. One significant change is that pharmaceutical companies may reduce their special tax liability for the tax year 2024 :
- by the cost of investment projects aimed at the purchase or production of tangible assets in Hungary.
- if the above investment project is not completed in the current year, by the increase in the cost of the investment during the tax year; and
- by the direct costs of basic research, applied research and experimental development in the health sector carried out within the scope of the company's own activities under the CIT Act during the tax year (including the costs of approved Phase I to III clinical trials and the costs of clinical research contracted to Hungary).
The combined amount of the above deductions may not exceed 50% of the amount of the special tax payable for the tax year, calculated without the deduction. This reduction may be applied for the first time by pharmaceutical companies in assessing their tax liability for the tax year 2024.
Liabilities of pharmaceutical distributors
It is important to highlight that, in addition to the above, the holder of the marketing authorisation or the distributor in Hungary is liable to pay the tax on all publicly funded medicinal products and formulae distributed in pharmacies. The tax liability is 20%, but in certain cases, i.e. for medicines with a producer price of more than HUF 10,000, the tax rate is 40% due to the changes to the extra profit tax that came into force on 1 June 2023 (before that, the extra profit tax rate for medicines in that group was 28%).
How does R&D activity reduce the special tax for pharmaceutical distributors?
A significant change is that under the government decree published on Monday, taxpayers subject to the 40% rate may reduce their tax liability in the 2023 and 2024 tax years by the cost of the investments detailed above and the direct costs of R&D activities (including the costs of clinical trials and contracted clinical research) in the preceding tax year.
The total amount of the deduction may again be up to 50% of the amount of the payment obligation at the 40% rate, but the payment obligation so calculated may not be less than the payment obligation that would have arisen if the rate had been 20%.
This reduction may be applied for the first time to the liability due by 20 July 2023 and for the last time to the liability due by 20 March 2025. If the reduction is not fully used for the liability due by 20 July 2023, it may be applied to subsequent liabilities.