Income Tax in Hungary
Taxes on personal income:
Hungarian personal income tax (PIT) is assessed on the following:
· Domestic-source income.
· Foreign-source income, provided the individual is resident in Hungary.
Income derived from employment activity performed in Hungary can qualify as domestic-source income, even if it is paid from abroad. In the case of income paid from abroad, income tax can be due whether or not the income has been transferred (e.g. electronically, by bank-to-bank transfer) or brought into the country in cash.
Personal income tax (PIT) rate:
The PIT rate is 15% of taxable gross income.
The consolidated tax base is the taxable gross income received as income from dependent personal services, income from independent personal services, and all other income that is determined as 'other income' in the PIT Act, or for which the PIT Act contains no provision.
The gross income of employees includes all cash remuneration and most personal expenses paid by the employer (e.g. overseas allowances, insurance, pension, tax reimbursements, tax equalisation payments). Housing can still be provided tax-free by either the foreign or the Hungarian company if certain conditions are met.
Based on the general rule, benefits are taxable as part of the individual's aggregated tax base; however, there are more possibilities for companies to provide benefits in kind to individuals with employer taxation. The most significant 'fringe benefits' are the following: Széchenyi Recreational card (SZÉP as per its abbreviation in Hungarian) and cash payment up to HUF 100,000. Those benefits that have not qualified as fringe benefits as of 2017 (contrary to 2016) can be treated as 'other specific benefits' (e.g. Erzsébet meal voucher or electronic card, employer contributions to mutual private pension or health insurance funds). These benefits are taxable by the provider at different tax rates.
As a general rule, the 34.22% tax rate applies only up to HUF 450,000 (from public sector workers, this is HUF 200,000) per year for fringe benefits granted by employers (i.e. SZÉP card benefit up to the amounts determined in the PIT Act or cash payment up to HUF 100,000 and SZÉP card benefit together up to HUF 450,000), whereas the part exceeding this amount is subject to an increased tax rate of 40,71% (from 2018). It needs to be highlighted that the amount of the cash payment that exceeds HUF 100,000 qualifies as employment income.
Benefits provided by an employer qualify as 'other specific benefits' if the conditions of receiving the benefit are set in an internal policy available to all employees or if the same benefits are granted under the same terms and condition to all employees.
Fringe benefits are subject to 15% PIT and 14% healthcare tax; other specific benefits are subject to 15% PIT and 19,5% healthcare tax (as of2018). In both cases, the tax base is 1.18 times the fair market value of the benefits provided. There are some benefits that can be provided tax free, including the provision of tickets and passes granting entry to sporting event (specified as such in the act on sports), vouchers for cultural use, and subsidy for housing, with strict limitations in the law.
Stock option plans are more and more common in Hungary, mostly at local affiliates of international companies who expand their global plans to Hungary.
Income from stock options must be classified based on the relationship between the provider of the income and the recipient, or based on their relation to any other parties. In general, since the recipients would have an employment relationship with the Hungarian affiliate, the income would be classified as employment income even if the options were provided by their foreign mother company. Taxation of stock options cannot be qualified as non-cash benefits.
Income from stock options is not recognised at the time when the option is granted to the employee, but first when the individual exercises an option (transferable options may be taxed differently). The tax rate applicable is 15%. The income realised may also be subject to social security (both employee and employer) contributions or healthcare tax depending on the individual's social security positions, the provider, and the content of the plan.
Capital gains are subject to a tax rate of 15%. If certain conditions are not met, an additional 14% healthcare tax is also payable.
The income from capital gains should be reported in the annual tax return, and the taxes on capital gains income have to be paid when the annual tax returns are filed.
Dividend income is taxable at 15% PIT, and no tax base addition has to be applied. An additional 14% healthcare tax is payable on dividend income if certain conditions are not met.
Dividend income should be reported in the annual tax return, and the taxes on dividend income have to be paid when the annual tax returns are filed.
The tax on income from dividend income can be reduced by credit for foreign withholding taxes (WHTs) on dividends paid from double tax treaty (DTT) countries up to the rate stipulated in the treaty.
Interest income is also subject to tax at 15%.
In certain cases the tax rate is 0% on interest received from investments that have been kept for at least five years, and 10% on investments that have been kept for three years on a 'long-term investment account'. The qualifying criteria are stipulated in the law.
Interest income should be reported in the annual tax return, and the taxes on interest income have to be paid when the annual tax returns are filed.
The tax on income from interest income can be reduced by credit for foreign WHT on interest paid from DTT countries up to the rate stipulated in the treaty.
If a private individual who lets one's property does not qualify as a private entrepreneur, the rental income is taxable as part of the consolidated tax base. Private individuals are able to decrease the rental income they earn by the rental fees they pay for residential property in another municipality, provided that the rental period exceeds 90 calendar days and the costs of living are not reimbursed for them. Expenses supported by invoices can be deducted from the tax base, and, in this case, individuals can account depreciation against the rental income that they earn. Alternatively, a lump sum of 10% can be deducted.
Special rules for certain types of equity income:
Dividend, interest, or capital gains income from a 'company in a country with low tax rate', or interest income from a 'non-treaty country', are classified as 'other income' and thus part of gross consolidated income.
Individual – Residence:
An individual is regarded as resident in Hungary if one is a:
· Hungarian national
· European Economic Area (EEA) national with an EEA registration card issued in Hungary, and spends at least 183 days in Hungary in a calendar year, or
· third-country national permanently settled in Hungary or a stateless person.
Even if the above criteria are not met, an individual is regarded as tax resident in Hungary if:
· one's only permanent home is in Hungary,
· one's centre of vital interests is in Hungary, if one has no permanent home or has a number of permanent homes in one or more countries as well as Hungary, or
· one spends at least 183 days in Hungary in a calendar year, if one has no permanent home or a number of permanent homes in one or more countries as well as Hungary, and the centre of vital interests cannot be determined.
Regardless of the above, if a third-country national permanently settled (where the residence permit is issued to an individual whose entry and residence in Hungary was in the interest of the national economy for reasons related to the investments made by such person in Hungary) in Hungary spends less than 183 days in Hungary in any 12-month period, one qualifies as a non-Hungarian tax resident.
In Hungary the tax year is the calendar year. Generally, income is taxed in the year in which the payment or non-cash benefit is actually received.
Returns must be filed for each tax year by 20 May of the following year. In some cases, the taxpayer can request a quasi extension up to 20 November. However, it is necessary to send this request to the Hungarian tax authorities by 20 May.
All individuals must file separate returns (i.e. husbands and wives cannot file joint returns).
Hungary operates a system of self-assessment of tax. Consequently, individuals can prepare and file their tax returns themselves or review the draft tax returns prepared by the Hungarian tax authority and amend it if necessary.
The Hungarian tax authority prepares draft tax returns based on the date available for them. We note that these draft tax returns may not necessarily include all income that the persons concerned are required to declare. This is because the draft tax returns will be based on data (e.g. on wages paid by a Hungarian-based employer) that is reported to the tax authority during the year. However, not all items of income are subject to interim reporting. Consequently, the draft tax returns should be carefully reviewed and corrected or supplemented if necessary.
Payment of tax:
Under the general rules, income tax is withheld from salaries and most investment income received from Hungarian payers. For income from non-Hungarian sources, individuals must pay income tax themselves. Taxpayers with income that is not subject to withholding must generally make quarterly tax advance payments (for employment income). Payers are required to report total payments, including benefits and expenses paid or reimbursed (employment income), to the tax authority.
The taxable income and the tax liabilities should be determined and declared in Hungarian forints. There are specific rules to determine the Hungarian forint exchange rate against other currencies.
Late payment penalty is charged on overdue payments if the tax payments are made after the deadline. The annual rate of interest is twice the official rate of the National Bank of Hungary (currently 2 x 0.9% per annum). The late payment penalty is calculated by the Hungarian tax authority on a daily basis.
The tax authority may also levy a tax penalty on taxpayers who claimed any subsidies or tax refunds without eligibility. Penalties in these cases are levied based on the amounts claimed without eligibility.
Taxes on corporate income:
Resident taxpayers are subject to all-inclusive or unlimited CIT liability. Non-residents are subject to CIT on their income from their Hungarian branch’s business activities.
The CIT rate is 9% of a positive CIT base from 1 January 2017.
Minimum tax base:
If a company’s CIT base or the pre-tax profit, whichever is higher, is less than 2% of its total revenues reduced by the income of its foreign permanent establishments (PEs) (i.e. the ‘minimum tax base’), the company can choose to file a declaration and pay CIT according to the general provisions or to pay CIT on its minimum tax base.
Real estate holding companies:
The owner of a real estate holding company is subject to Hungarian CIT in the case of alienation or withdrawal of its shares in the real estate holding company.
The tax base of the owner of a real estate holding company in cases of share transfers and share capital decreases is the positive amount of the consideration minus the acquisition price of the shares less the costs of acquisition and of administration. The tax rate is 9%.
A company and its related parties are defined as real estate holding companies if at least 75% of the book value of their assets is domestic real estate and if they have a foreign shareholder that is not resident in a country that has a double tax treaty (DTT) with Hungary or the treaty allows capital gains to be taxed in Hungary.
Please note that the definition of the payer for CIT purposes is very different from the definition used for stamp duty purposes.
Energy suppliers’ income tax:
Mines, energy producers, and energy distribution system operators are subject to energy suppliers’ income tax. The scope of the definition of 'energy suppliers' also includes universal suppliers and authorised distributors of electricity and natural gas.
The base of energy suppliers’ income tax is similar to the CIT base, with certain additional adjustments. The tax rate is 31%.
If the energy supplier entity possesses a development tax incentive or a tax incentive in relation to investments aiming for energy efficiency, then it is possible to claim this tax incentive for up to 50% of energy suppliers’ income tax liability as well. Additionally, the settled amount of mining royalty can be claimed for up to HUF 1.5 billion from energy suppliers’ income tax liability.
From an accounting point of view, energy suppliers’ income tax falls under the same treatment as CIT.
Advertisement tax applies to certain advertising services, including advertising services made available over the internet. The tax applies in respect of advertisements that are published in Hungarian, or where the advertisement is not published in Hungarian but is available on a website/webpage that is mainly in Hungarian.
In the case of primary taxpayers (see below), the tax base is based on net sales revenue. Till an amending act in June 2017, the advertising tax rate was 0% of the tax base up to HUF 100 million, and 5.3% above HUF 100 million. The amending act set a unified tax rate of 0% in the period from 1 January 2017 to 30 June 2017; however, from 1 July 2017, it is increased to 7.5%, while the tax base up to HUF 100 million, under certain conditions, is tax free. Furthermore, the amending act stipulates that taxes declared and paid by the taxpayers for tax years ended before 30 June 2017 are considered overpayments defined by the Act on the Rules of Taxation; consequently, the taxpayers can request a claim on refund, also defined in the Act on the Rules of Taxation, from 1 July 2017.
The amending act discontinues the tax liability on self-promotion as, consequently, after the law came into force, advertisement tax liability arises only for publishing as business activity.
Primary and secondary taxpayers:
The company providing the advertising service is the primary taxpayer, and the rate above applies to the company's sales that are within the scope of the tax. The tax is not a withholding tax (WHT), and the customer is not obligated to withhold tax on payments made to the advertising service provider.
The person/company that orders and pays for the advertisement is considered to be the secondary taxpayer. Secondary tax obligation does not arise if:
· the secondary taxpayers are in possession of a declaration from the primary taxpayers stating that they are the primary taxpayers and that they will fulfil their obligations under the regulation
· the primary taxpayers apply for a registration to the database of the Hungarian tax authority, stating that they are primary taxpayers and that they fulfil their obligations on time or they do not have advertisement tax payment obligation in the tax year because they will not exceed the HUF 100 million threshold, or
· the secondary taxpayers notify the tax authority with the name of the primary taxpayer and the value of the services and they are able to prove that they requested the declaration but have not received it.
Otherwise, the secondary taxpayer is subject to a tax equivalent to 5% of the value of the advertising fee (provided that the secondary taxpayer spends at least HUF 2.5 million in a month for advertisement services). In addition, such advertisement expense would not be a deductible CIT expense for the secondary taxpayer when filing its CIT return (in cases when such yearly spending exceeds HUF 30 million).
The amended legislation makes it clear that for online advertisements, the person or organisation that has right of disposal over the advertising space qualifies as the publisher of the advertisement (i.e. the subject of the advertising tax). In addition, the obligation to determine the advertising tax base from the consolidated data of related companies no longer applies.
Furthermore, as of 1 January 2017, if a publisher of advertisements fails to comply with its obligation to make a declaration to the advertiser in relation to advertising tax, it must, on request, fulfil that obligation to the national tax authority. Failure to comply with such a request will attract a default fine of HUF 500,000. Repeated failure to comply in respect of the same advertiser will be subject to a further default fine of HUF 10 million, and any further instance of non-compliance will be subject to a fine equalling triple the amount of the previous fine. Failure to comply with the registration obligation will incur fines according to the same regime. Further, in the case of failure to file a return on advertisement taxes, the tax authority will levy a deemed tax of HUF 3 billion, which the taxpayer concerned may challenge by submitting contrary evidence within a statutory deadline of 30 days.
Local business tax (LBT):
All municipalities are entitled to levy LBT. LBT is deductible for Hungarian CIT purposes and is not normally treated as ‘income tax’ in the application of the tax treaties.
The LBT base is the net sales revenue reduced by the cost of goods sold, subcontractors’ work, the costs of materials, mediated services, and research and development (R&D) costs. However, taxpayers are only allowed to deduct from the LBT base part of the cost of goods sold and part of the value of mediated services as calculated based on brackets determined in relation to their annual sales revenues. In the case of related parties, an aggregated LBT base has to be determined if the ratio of the sum of the cost of goods sold and mediated services to the net sales revenue exceeds 50%. This ratio has to be examined separately at the level of each company, and only those related party tax bases that meet the 50% condition have to be aggregated.
As of 1 January 2017, when deducting the cost of goods sold and the value of intermediated services from their net sales revenue, companies that qualify as related parties under the Corporate Tax Act are only required to determine their local tax base from consolidated data if the related-party relationship was formed after 1 October 2016 as a result of a demerger.
General service fees, depreciation, and labour costs are typically not deductible for LBT purposes. 100% of royalty, interest, or dividend income and the LBT base of a foreign PE of a Hungarian company are exempt from LBT.
The amended rules allow credit institutions and financial enterprises that have opted for gross settlement when determining their net revenue to deduct from their LBT base the amount of purchased receivables accounted against expenditure on other financial services. The selected option can be applied retroactively to the LBT bases of tax years beginning in 2015 and 2016.
Furthermore, amendments have reduced the gap between the rules on adjustments to the LBT base (royalty, R&D) and the corporate tax base. As a result, effective from 1 July 2016, the definition of royalty was made narrower.
In addition, from 1 January 2017, only amounts deducted from the corporate tax base may also be deducted from the LBT base as direct cost of basic research, applied research, and experimental development. As for the definition of royalty, a transitional provision permits application of the previous rules until the tax year ending on or before 30 June 2021.
The LBT rate may differ from municipality to municipality but is capped at 2% by law.
Companies defined as such in the Accounting Act, except for small and medium-sized enterprises and branches, are also subject to innovation contribution. The tax base of the innovation contribution is the same as the LBT base. The tax rate is 0.3%.
The CIT base should be calculated by modifying the accounting pre-tax profit by adjustments and deductions as provided by the CDTA.
Inventories are generally valued at their historical cost unless their fair market value is significantly lower than their book value, in which case the fair market value should be recorded. Cost may be determined on the basis of first in first out (FIFO) or average cost.
Capital gains (losses) are treated as ordinary income (losses) for tax purposes. The gain on the sale of depreciable assets equals the sales revenue reduced by the net value of the asset for CIT purposes.
If a participation (of at least 10%) is registered within 75 days, or an intangible asset is registered within 60 days, of acquisition and held continuously for at least one year, capital gains from the sale or contribution in kind of the participation, or the intangible asset, are exempt from CIT in general. Any additional acquisitions in the case of a registered participation may also be registered, provided that the 10% participation was already registered.
Shareholders of a real estate holding company are also subject to CIT on their income from the alienation of the shares in the real estate holding company. Transfers of direct or indirect participations in companies that own real estate may be subject to CIT.
Except in the case of controlled foreign companies (CFCs) (see the Group taxation section), dividends received and accounted for as income in the given tax year are tax-free.
No specific provision exists in Hungary for interest income; consequently, interest income is taxable for CIT purposes.
Intellectual property (IP) related income:
The IP regime has recently changed in Hungary. In the transition period, both the old and new regime may be applicable, as follows:
· The old regime is applicable to IP acquired or produced till 1 January 2016.
· The new regime is applicable to IP acquired or produced after 30 June 2016.
· In the case of IP acquired or produced between 1 January 2016 and 30 June 2016, special rules apply.
· The old IP regime cannot be used after 30 June 2021.
Under the old IP regime, royalty includes the income derived from (i) the licensing of the use or exploitation of patents, industrial design, and know-how; (ii) the right of use of trademarks, trade names, and business secrets; (iii) permission to use copyrights and similar rights attached to protected work; and (iv) transfers of the property described above (except for trademarks, trade names, and business secrets).
Under the new IP regime, royalty includes the profit gained through (i) the licensing of the use or exploitation of patents, utility models, plant variety rights, supplementary protection certificates, patented topography of micro-electronic semiconductors or a copyrighted software, or from registration as an orphan medicinal product (together referred to as 'exclusive rights'); (ii) the sale of exclusive rights, or from their de-recognition as non-monetary, in-kind contribution; and (iii) the supply of goods and services connected to the value of exclusive rights.
50% of the gain (income in case of the old regime) arising from royalty is exempt from tax, but up to 50% of the profit before tax. Based on the new regime, further limitations apply (Nexus approach) to the IP asset related tax incentives if the IP asset is acquired from a related party or R&D services to produce the IP asset are rendered by a related party.
Gain on sale of a non-reported IP asset that is transferred to tied-up reserves and used within five years (three years in the case of the old regime) for the acquisition of another IP asset generating royalty income is exempt from tax.
Gain on sale of a reported IP asset is exempt from tax. The details of the exemption are described under Capital gains above.
50% of pre-tax profit may be assigned as development reserve. The maximum value of the reserve is HUF 500 million. In general, the period within which the development tax reserve can be released, consistently with the cost of investment, is four years.
Unrealised exchange gains/losses:
Tax deferral may be chosen for unrealised exchange gains/losses.
Taxpayers resident in Hungary and foreign entrepreneurs must calculate their CIT base exclusive of any income that is subject to taxation abroad if so prescribed by an international treaty. In any other case, a foreign tax credit is available for income taxes paid abroad.
In Hungary, there are no provisions under which income earned abroad may be tax deferred.
Corporations are residents for CIT purposes if they are incorporated in Hungary, although foreign corporations may also be deemed to be Hungarian residents for CIT purposes if their place of effective management is in Hungary. Tax residents also include the Hungarian trust asset (see Hungarian trust in the Other issues section for further information).
Foreign entities may carry out business through resident corporations or through branch offices (PEs for tax purposes). Commercial representative offices may be opened for auxiliary activities that do not create a taxable presence.
Permanent establishment (PE):
Hungary treats PEs as ‘distinct and separate enterprises’, and profit is attributed to a PE based on the principles set out in the Organisation for Economic Co-operation and Development (OECD) guidelines.
In the CIT Act, a PE is defined as fixed business premises (machinery or equipment) through which the entrepreneurial activity of an enterprise is partly or wholly carried on, regardless of the title of the taxpayer to those premises. A PE may consist of any of the following: a place of management; offices, including representative offices registered in Hungary; factories and workshops; and mines, crude oil or natural gas wells, quarries, or other places from which natural resources are extracted.
Construction sites (including assembly) and related supervisory activities constitute a PE if they last, in the aggregate, for at least three months in a calendar year. All activities carried out at the same construction site qualify together as a single PE, regardless of whether they are based on separate contracts or were ordered by different persons. Construction sites are defined as sites that represent a unit for economic, business, and geographical purposes.
PEs are also created by the direct utilisation of natural resources by a foreign person. A foreign person (except from real estate funds established in a European Economic Area [EEA] member state and not being subject to any tax that may be substituted for CIT) is deemed to have a PE in Hungary if it utilises natural resources or immovable property for consideration, including the alienation or capital contribution of any rights related to the immovable property or natural resources.
A non-resident enterprise is considered to have a PE with respect to activities undertaken on its behalf by another person if its agent is authorised to conclude contracts in Hungary on behalf of the non-resident entity and the agent regularly exercises this right or maintains a stock of goods and products from which it regularly makes deliveries in the name of the non-resident entity.
The insurance of risks occurring in Hungary and insured on behalf of the non-resident person by another person constitutes a PE of the foreign insurer, except for reinsurance activities.
Furthermore, as mentioned above, a foreign taxpayer must also be treated as having a PE if it has a Hungarian branch.
The definition of a PE does not include the following:
· Establishments used solely for the purpose of storing and presenting the goods or products of a non-resident person.
· The stockpiling of goods and products of a non-resident person solely for the purpose of storing, presenting, or processing by another person.
· Establishments used for collecting information, or purchasing goods and products, exclusively for the non-resident person.
· Establishments used for other activities of a preparatory or auxiliary nature.
· Activities of independent agents, provided they are acting in their ordinary course of business.
Note that a different definition of a PE is applicable for LBTs, and no definition is available for special taxes.
CIT must be calculated by reference to the accounting year, which is either the calendar year or, for group companies, the group’s accounting year.
Returns must be lodged by the last day of the fifth month following the last day of the accounting year (31 May for a calendar year taxpayer). The tax payable is determined by self-assessment.
Tax returns may be submitted either electronically or in paper format. However, those who are legally obligated to submit monthly tax and contribution returns (e.g. employers and payers) may only submit tax returns electronically.
From 1 January 2017, entities subject to LBT may file their tax returns with the competent local municipality through the national tax authority. The national tax authority will forward tax returns to the competent local tax authorities in an electronic format only.
Payment of tax:
CIT instalments must generally be reported and paid quarterly or monthly (above HUF 5 million tax payable). The final (‘top-up’) payment is due by the last day of the fifth month following the last day of the accounting year (31 May for a calendar year taxpayer). In the case of taxpayers with net sales revenues of over HUF 100 million, 100% of the expected final payment is due by the 20th day of the last month of the accounting year. However, a late payment penalty is only levied if the company fails to pay at least 90% of the expected final payment by the above deadline. The late payment penalty is 20% of the difference between the tax advances paid (including the top-up payment) and 90% of the actual CIT liability.
Tax audit process:
Generally, the tax authority selects the taxpayers subject to tax audit based on certain criteria, which are communicated to the public, and an elaborate risk assessment model. Tax audits can vary in the following ways: the tax authority can (i) re-audit tax returns, (ii) monitor the redemption of government guarantees, (iii) audit the fulfilment of certain tax obligations, (iv) gather data and information, (v) monitor compliance with duty payment obligations, or (vi) re-audit previously audited tax periods.
As of 1 July 2016, a new type of tax audit was introduced: binding rulings are now fact-checked to find out whether the events underlying a binding ruling actually occurred, and, if so, whether the ruling in question is binding on the tax authority.
A tax audit period can cover any years that are not lapsed (five years after the last day of the calendar year in which the taxes should have been declared or reported, or paid in the absence of a tax return or declaration) or not closed by a re-audit of tax returns. The tax audit starts when a company receives the notice of audit and finishes when that company receives the report containing the tax authority’s findings. The deadline for the completion of the tax audit is between 30 and 90 days, although, in special cases (e.g. related tax audit, request for assistance from foreign tax authorities), it can last over a year.
Once the tax authority has completed the audit process, it issues its minutes. The minutes detail all the findings of facts of the audit and serves as the background of the tax assessment, and the basis on which the tax authority will pass its first-instance resolution. Upon receipt of the minutes, the taxpayer has the opportunity to submit its remarks to the minutes and raise any disagreement with the findings of the audit.
In case of a dispute, the tax assessment of the tax authority may be appealed and challenged before the second-instance tax authority, which has the right to annul the first-instance resolution and decide on the merits of the case, or to instruct the first-instance tax authority to carry out a new audit if the facts and circumstances have not been appropriately and fully developed.
The decision of the second-instance tax authority is final and binding. Following the receipt of this decision, the company may appeal to the court. The court may uphold, amend, or annul the Resolution of Second Instance and, if it is necessary, may order a new process in relation to the tax audit.
The superior tax authority or the minister in charge of taxation (minister appointed for the supervision of the tax authority, i.e. Minister of Ministry for National Economy in Hungary) may take regulatory action on request by the taxpayer. The superior tax authority or the minister can also amend or annul the unlawful resolution, and, if it is necessary, a new procedure can be ordered.
Statute of limitations:
In general, the statute of limitations is five years from the end of the calendar year in which the tax return should be filed. Self-revision interrupts the term of limitation.
Topics of focus for tax authorities:
The tax authority will take more stringent measures against ‘aggressive tax planning’ (tax planning that takes advantage of unintended administrative or legal loopholes) using its international experience and cooperation agreements.
Generally, the following categories of taxpayers may expect to be scheduled for tax audits:
· Taxpayers that have significant tax base decreasing items, tax allowances, and subsidies related to investments in relation to royalty.
· Taxpayers that deduct R&D expenses.
· Large taxpayers’ transfer pricing documentations.
· Taxpayers whose main activity is selling used cars.
· Taxpayers that provide accommodation or real estate services.
· Taxpayers that provide training services.
The tax authority will also pay more attention to the actual content of transactions conducted between related parties and to the methods companies use to determine the arm’s-length price.
Special taxpayer categories:
From 1 July 2016, the total tax difference charged to taxpayers classified as ‘reliable’ has to be reduced by the total tax difference credited to these taxpayers during the current year and the preceding five years. ‘Reliable’ taxpayers receive benefits, while ‘risky’ taxpayers fall under stricter rules.
The criteria for classifying taxpayers as reliable or high-risk has changed, along with the related legal consequences.
The tax authority classifies a taxpayer as ‘reliable’ if all criteria defined are met, including:
· at least three years of continuous operation (or being VAT-registered)
· no more than HUF 500,000 net tax debt
· not being classified as a risky taxpayer, and
· the balance of the taxpayer’s total tax liability is positive.
Further conditions are that in the year in question and in the preceding five years:
· the tax difference on the taxpayer’s expense should not be more than 3% of the total calculated tax liability of the year in question
· the taxpayer is not under foreclosure procedure
· the taxpayer is not under bankruptcy or under liquidation procedure, forced cancellation, or enhanced regulatory supervision by the tax authority, and
· the taxpayer’s tax number is not under suspension or cancellation procedure.
Furthermore, the taxpayer cannot be classified as reliable if the sum of the default penalties in the previous two years before the year in question is more than 1% of the total calculated tax liability of the year in question.
The tax authority classifies as ‘risky’ those taxpayers that are not under liquidation or forced cancellation, but are publicly listed due to a high tax deficit, tax debt, or employing an unreported workforce, or if the tax authority has had to apply business closure measures against the taxpayer repeatedly within a year, or the taxpayer’s seat is located at a premise of seat service. The classification of a risky taxpayer lasts for one year, but will be cancelled in the subsequent quarter if the taxpayer settles its tax deficit or the tax debt and the related penalty and default.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.