Changes Affecting Corporate Tax
1. Possibilities for Making Use of Development Tax Reliefs to Increase
Starting from 2018, this type of tax relief will be available on two new legal grounds: investment of at least HUF 6 billion, and investment serving job creation at a value of at least HUF 3 billion.
The purpose of the amendment is to enable initial investments that comply with the above parameters and otherwise result in product diversification and/or new process innovation to apply for a development tax relief in addition to subsidies based on individual government decisions (IGD). In addition to the other development tax reliefs, the two new forms of investments should be able to benefit from the combined incentive effect of direct and indirect subsidies.
A further condition for applying the tax relief is that investments with the contents described above should be implemented by large enterprises, in the settlements of the Central Hungary region eligible for support, as defined in a Government Decree. The other substantial law conditions for the tax relief have not changed compared to previous rules. The new tax reliefs will be available for investments announced and commenced after the promulgation of the law based on a Government decision.
The amendment approved repeals the obligation of the minister in charge of taxation policy for disclosure on certain taxpayers applying for the development tax relief. At the same time, the proposed new Act on the Order of Taxation specifies the Subsidy Audit Office as the new organization in charge of this obligation.
2. Conditions for Fulfilling Tax Donation Offers to be Eased
Section 24/A (13)d) of the Corporate Tax Act currently in force requires that tax advances, tax supplements and tax (hereinafter collectively: tax) be paid before a tax donation can be made. NAV (Hungarian Tax and Customs Authority) has interpreted this rule up to recently in a way so that payment of the tax with a delay (that is, after the due date) offers sufficient legal grounds for refusing to transfer the tax donation.
The amendment approved amends regulations in this respect; if NAV rejects the transfer only with reference to the fact that the tax has not been paid by the due date, the taxpayer may request that the transfer be completed within a deadline of 15 days after receiving the decision on the rejection, after which the right to make a tax donation will lapse. NAV will carry out the taxpayer’s instruction if the tax is paid in full within 15 calendar days from the due date.
Though the amendment was tabled in the proposed amendment affecting sports businesses in a somewhat misleading manner, it should be stressed that it is not related only to donations for supporting team spectator sports but - given that it is a procedural provision with general contents - is also applicable to subsidies for motion pictures and performing arts.
Additional amendments to the Corporate Tax Act consist of the transposition of the current Act on the Order of Taxation’s procedural rules relevant for corporate tax into the substantial law rule and are addressed in a separate summary (LINK).
3. Amendments to Corporate Tax Approved Earlier in 2017
In addition to the changes made in the autumn, we would like to recall the amendments to the Corporate Tax Act approved earlier this year, presented in detail in an earlier post.
The amendment to the Corporate Tax Act made in the spring amended the following:
- the concept of reported participation, according to which the adjustments to the tax base related to it may be applied regardless of the rate of participation, in contrast with the current 10 percent limit;
- new items reducing the tax base were introduced: as of 30 June 2017, with regard to investments related to electric charging stations, and rental homes built by employers for their employees;
- based on the taxpayer’s choice, the item to increase the tax base in proportion with the participation in respect of a controlled non-resident company may be applied this year as well.
Amendments affecting KATA and KIVA and EVA
KATA (Fixed-rate tax of low tax-bracket enterprises)
According to the amendment adopted, as of February 2018, law firms may opt for the KATA tax regime in addition to individual entrepreneurs, sole traders, as well as limited partnerships (bt) and unlimited partnerships (kkt) having a private individual as a member.
Two favorable rules are added to the regulations on KIVA (small business tax)
On the one hand, the concept of loss carried forward will be extended, as the amount of a cash flow loss generated during the period of being subject to the KIVA regime and not charged earlier may be used for this purpose.
According to the other amendment affecting KIVA, earlier payments made in connection with the value of tangible assets and intellectual products not capitalised yet and the capitalised value of pilot development purchased or produced before 2017 as a KIVA subject shall be deemed to be payments made in the year2017 and may be accounted for as the same manner as such payments, to the extent they would have been chargeable on the basis of rules in force before 2017.
Amendments to KATA and KIVA Approved Earlier in 2017
The earlier tax package adopted in the spring contained the following provisions affecting KATA and KIVA:
- persons pursuing business activities in conjunction with day-course student status shall not be deemed to be full-time small taxpayers;
- the status of being subject to KATA will not be terminated as of the last day of the year if the tax debt, calculated on a net basis, does not exceed HUF 100,000, and if the debt is settled and payment is documented by the time that the decision obliging the taxpayer to pay the tax and terminating KATA status becomes final and conclusive, NAV will withdraw the decision;
- in connection with income statements by KATA subject taxpayers, it is now set out that the statement is deemed to be a tax return for the purposes of legal consequences;
- in connection with small taxpayer businesses, the concept of income was clarified: accordingly, subsidies received for development purposes shall not be deemed to be income (this provision may be applied retroactively to 1 January 2013);
- KATA status may be elected again after it has already been terminated once starting from the first day of the second year after termination;
- as regards taxpayers subject to the KIVA regime, the interim amendment stipulated that the obligations to prepare a report, deposit and disclose the report arises on the date of the day preceding the date of opting for KIVA status or, in the case of termination, the date of termination as the cut-off date.
Another important change is the reduction of the KIVA tax rate: as of 2018, the KIVA rate shall be reduced to 13 percent.
4. Changes in EVA (simplified business tax)
An administrative change affecting EVA taxpayers is that they are treated the same as taxpayers tax exempt as subjects in respect of the EU VAT number and the obligation to make aggregate reports. In respect of the provision of services performed abroad, they are deemed to be “standard” VAT subjects and are subject to the data provision obligations set out in the VAT Act in respect of invoices issued.
Amendments Affecting Local Taxes, with Special Regard to Local Business Tax
In addition to the changes in procedural law related to the reform of tax procedures, the rules for determining net sales revenue applicable to businesses keeping their books according to IFRS standards in general and for special taxpayer groups (credit institutions, financial enterprises, investment enterprises). According to the approved amendment, a new item to reduce net sales revenue is introduced to avoid double taxation.
The rules on switching to IFRS were supplemented to include special tax base adjustment items related to changes in the accounting policy. This amendment is also aimed at excluding double taxation and failure to tax.
In the future, taxpayers not eligible or not opting for tax exemption or tax relief under the Decree may submit their tax returns on building tax, land tax, the communal tax for private individuals and local business tax to the municipality tax authority also without a separate authorization granted in the competent municipality’s decree.
In respect of the change in the general concept of net sales revenue for the purposes of the local business tax, it should be highlighted that the failure to include a reference to energy tax is a consequence of this tax type being merged into excise tax, rather than a substantial change.
The change in local industry tax according to which revenue arising out of entry ticket and pass sales, advertising publication activities and sponsoring contracts shall not be deemed to be net sales revenue and therefore will not form a part of the tax base, has a favorable impact on sports businesses. According to the proposal, a business regulated by the Act on Sports is deemed to be a sports business. The net sales revenue reduction discussed here is deemed to be a de minimis operational subsidy, that is, a subsidy granted for the operation of sports facilities, based on the taxpayer’s choice.
Interim Amendments to Local Business Tax Approved Earlier in 2017
- a guarantee rule was introduced; according to this, for local taxes assessed for a fixed period of time, the municipality may raise the tax rate only after the third calendar year, if a significant amount of tax revenue is lost;
- another measure of guarantee significance is that the Act sets strict conditions for increases in the tax rate by municipalities;
- amounts declared and paid in advance for subsequent tax liabilities shall be deemed to be taxes moved up in time, and amounts thus paid may only be used to cover the tax liability later on (the taxpayer may give instructions on the liability for which the amount shall be used);
- from now on, it is possible to submit returns used to declare local business tax on a form stipulated in the Decree of the Ministry of Finance on the contents of declaration and report forms that may be used by municipality tax authorities may also be submitted in hardcopy, provided that the company is eligible for a tax benefit granted in a local tax decree and intends to exercise it; in addition to the annual local business tax return, it is possible to submit the return on topping up the tax advance via NAV as well;
- tax administration has changed to a single-window system also for local business taxpayers obliged to register as a company, as the data applicable to them is forwarded to municipalities by NAV. This simplification does not apply to the simplified tax assessment associated with KATA because the entity concerned must report this separately.
- according to the interim change, a solar power plant is also deemed to be a permanent establishment for the purposes of local business tax,
- it was clarified that revenue realized on real property rental is deemed to be revenue arising out of business activities for special taxpayers (associations, foundations, etc.).
Vehicle Tax
The changes on vehicle tax in the autumn tax package are associated with the changes in the Act on the Order of Taxation; the Act’s rules of jurisdiction and competence were transposed.
According to the spring amendment, municipalities shall be relieved from the obligation to adopt a decision in connection with tax-exempt vehicles and will have only a recording obligation in this respect.
Value Added Tax
The rules for the obligation to send invoice data in real time planned to be introduced from 1 July 2018 are planned to be restricted further. In addition to companies established in Hungary, the obligation to supply data on invoices with a VAT content of over HUF 100,000 affects companies that are only registered in Hungary for VAT purposes. The draft legislation will extend the obligation to provide data also to hardcopy invoices completed manually. It specifies a deadline of data supply within 5 days for paper-based invoices containing HUF 100,000 to HUF 500,000 of VAT, and of within one day for invoices with a VAT content of over HUF 500,000.
The sanction associated with failure to comply with this reporting obligation threatens with a fine of up to HUF 500,000 per invoice.
Additional changes to the VAT Act in this current tax package (moving specific tax liabilities into the substantial law rule) are reflections of the tax administration reform, and will, therefore, be reported in a separate summary.
Additional Changes Affecting Value Added Tax Approved Earlier and Taking Effect in 2018
The amendment in the spring of 2017 declared that so-called network service is not deemed to be internet access service, so the preferential VAT rate may not be applied to it;
• the minister in charge of tax policy was authorized to determine the rules for the production, tax administration identification, distribution and registration of invoices, simplified invoices and receipts in a decree;
• VAT rates will be changed as of 1 January 2018: the VAT rate applicable to fish for consumption purposes is reduced to 5 percent from 27 percent,
• while the VAT rate applicable to internet access services is reduced to 5 percent from 18 percent. The preferential 5-percent VAT rate shall be applied first to internet access services the accounting period of which commences after 31 December 2017 and the due date of payment of which as well as the date of issue of the invoice or receipt for which both fall on a date after 31 December 2017. In the event that the service is not provided with periodic accounting, the preferential rate shall first be applied to the tax liability that follows 31 December 2017.
According to an earlier amendment, food sales and non-alcoholic beverage sales prepared locally in restaurant catering shall be taxable with a VAT rate of 5 percent as of 1 January 2018.
Tourism Development Contribution
A new tax type, the tourism development contribution, was introduced in close conjunction with the above change, for the primary purpose of adjusting for the significant VAT reduction.
The rate of this public burden is 4 percent, to be calculated on the value of the services concerned excluding VAT. The tax shall be declared according to the rules of self-taxation in line with the frequency of VAT returns applicable, or by 25 February of the year that follows the year of providing the service for tax-exempt taxpayers. The contribution represents revenue for the central budget and is to be spent on tourism development tasks according to the proposal.
Public Health Care Product Tax
According to the approved amendment, a new possibility for reducing the tax payable will be introduced in public health care product tax in addition to the tax reliefs associated with the costs and expenses incurred in connection with the health conservation programmes known from earlier times. This newly introduced complex is extremely similar to the tax donation under the Corporate Tax Act.
Under the new rule, a part of the tax payable may be donated to finance the health conservation programme of a health care administrative body. A difference from the similar rules of the Corporate Tax Act is that the tax relief and the tax donation may be applied together, but they are available only up to 10 percent of the tax payable (even if combined).
The instruction on the donation cannot be modified once the tax return is submitted, and any adjustment to the tax payable as a consequence of a tax audit or self-check shall not affect the amount transferred.
Excise Tax
The rules on advance payments by the tax warehouse licensee have changed in excess of the technical adjustments associated with the comprehensive reform of tax administration, and there are new cases for exemption from the tax liability.
According to the proposal, tax warehouse licensees shall pay the tax advance by the 25th day of the given month. Other conditions for advance payments remained unchanged.
Under the new rules, tax warehouse licensees shall be relieved from tax payable in respect of products created by complete denaturalization, along with persons transporting products created by complete denaturalization in another Member State to within Hungary.
The rule under which the rules of the Act on the Order of Taxation applicable to tax penalties, default penalties, and tax mitigation may not be applied to excise procedures as a general rule remains in force.
The new excise regulations having taken effect in the course of the year were presented in detail in earlier posts.
Personal Income Tax
The changes to the Act on personal income taxation associated with the tax administration reform will be discussed in a separate newsletter, so this newsletter will cover only changes to procedural rules that were originally enshrined in substantial law.
According to the new regulations, employee tax assessment will cease to exist as of next year, and the earlier rule may not be applied even to the year 2017. This means that as of January 2018, employers may not prepare the personal income tax returns of their employees for them.
At the same time, the scope of persons entitled to a draft tax return will be extended; from now on, the tax authority will prepare the draft return for agricultural small producers and private individuals operating with a tax ID number obliged to pay VAT as well. The only persons left out of the scope of this regulation are individual entrepreneurs.
The definition of the scope of persons entitled to fulfill the tax declaration obligation by correcting and supplementing the draft tax return is a new element of the Personal Income Tax Act. This way, the legislator allows draft tax returns to be completed for persons who were excluded from the scope of people entitled to draft tax return production as well. However, the persons concerned are obliged to adjust and supplement the draft tax return with details that could not have been available to the tax authority at the time of preparing the draft return in the absence of control data.
There is a new rule for the draft tax return, according to which the tax authority prepares the draft tax return for non-resident private individuals, who may make a declaration by 30 April that they were not subject to a tax liability in Hungary in the tax year of earning income, having regard to his non-resident status.
Interim Changes Affecting Personal Income Tax:
- the spring tax package modified the taxation rules on housing support for mobility purposes (support for housing rental) that may be granted by employers exempt from tax favorably as regards both its conditions and its rate,
- the spring tax package eliminated the concept of tax compensation applicable in the case of using income proceeding from real property sale for beneficial housing purposes, in exchange, however, it offers an opportunity not to pay the tax on the amount of income proceeding from real property sale used for housing purposes if such use occurs prior to filing the tax return, and the tax becomes refundable within two years of the sale and purchase in the case of beneficial use after the tax return is filed;
- the concept of education in a schooling system was also determined, which has relevance for certain specific benefits;
- as regards revenue from joint property, it was stipulated that costs may be charged against such revenue on the basis of accounting documents issued to the name of any of the co-owners;
- the transfer of the right to medical practice is now tax exempt again for the original right-holder and continues to be deemed to be other income for the non-original right-holder, which may be reduced gradually subject to the time elapsed between the acquisition and the sale, but transfer becomes tax exempt after five years even in this case.
- for the purposes of cost accounting by private individuals pursuing individual activities and individual entrepreneurs, vehicles owned or leased under a closed end leasing arrangement by a close relative shall be treated the same way as the individual’s own vehicle, in addition to which, the method of certifying ownership of the individual’s own vehicle also changed;
- • the flat-rate taxation rules for Airbnb operators also changed favourably, as this method of taxation may be applied to a maximum of three homes/second homes in the ownership or usufruct of a private individual not having the purpose of commercial accommodation services instead of only one home/second home being eligible.
- According to an amendment adopted earlier, the amount of the family benefit due for two dependents will increase to HUF 116,670 in 2018 in contrast with this year’s HUF 100,000.
Simplified Employment
The limit for tax exemption for revenue earned in simplified employment by natural persons increased to 130 per cent of the minimum wage/guaranteed wage minimum determined as a daily wage.
Simplified Public Burden Contribution
As of 2018, the rate of the simplified public burden contribution will be reduced to 19.5 per cent in line with the change in the rate of the social contribution tax.
The new provision according to which revenue paid to professional athletes shall not be subject to the 19.5 per cent simplified public burden contribution is another preference in the line of preferences affecting sports businesses.
According to the interim amendment, taxation under the EKHO regime may not be applied to individual entrepreneurs who opt to be taxable under the KATA regime.
Changes to Social Security Legislation
The legislative package contains no significant changes in substantial law other than the changes to the Social Security Act associated with the tax administration reform.
As has already been announced, the rate of social contribution tax will be reduced to 19.5 per cent next year, whereas the minimum wage will be raised to HUF 138,000 and the guaranteed wage minimum to HUF 180,500.
In parallel with reducing the rate of the social contribution tax, the rate of the simplified public burden contribution is reduced to 19.5 per cent from the earlier 22%.
According to the interim amendments, the amount of health care service contribution will be raised to HUF 7,320 per month (HUF 244 per day) from HUF 7,110 per month (HUF 237 per day) as of 1 January 2018.
The 14 per cent health care contribution liability payable in connection with real property rental will also be eliminated.
Duties
In addition to the amendments called for by technical legal reasons stemming from the reform of tax administration, duty exemption was introduced concerning the procedure for the approval of the internal regulation under the Money Laundering Act.
In addition, the conditions for exemption from duty on the transfer of property against consideration, associated with the acquisition of arable land by a farmer against a consideration, have also changed. According to the amendment, duty exemption will be available on a broader scale than earlier, because the proposal suggests that transferring the use of land to certain persons (proprietary production entity or a close relative deemed to be a farmer) subject to certain conditions on participation and/or utilisation will not result in losing the tax exemption. As this duty exemption is conditional, satisfaction of the legal requirements must be declared to NAV before the payment order becomes final and conclusive. If the conditions are not fulfilled, the sanction is payment of double the duty.
According to an amendment made at the end of the year, if a private person acquired real estate, the sale price of housing property sold within three years of the date of acquiring real property after 1 January 2018 may be offset against the sale price of the property acquired to reduce the duty base in the case of an exchange of homes or purchase to substitute such exchange.
This favourable change represents a benefit in the rules for exchange of homes or purchases to substitute such exchange, and will also be applied as a rule for exemptions.
Interim Amendments Affecting Duties
- the benefit for the transfer of property against consideration in lieu of an exchange was extended. In the future, private individuals may avail themselves of this tax benefit also if they acquired the home from a person other than a private individual;
- in certain cases, the rules on paying supplementary duty stemming from failure to fulfil the conditions related to the preferential duty for real estate trading companies were eased;
- the rules for determining sales price were reformulated without resulting in substantial changes,
- entities registered abroad that are compatible with the concept of business entities for the purposes of the Act on Duties shall be deemed to be business entities regardless of the country of residence;
- duty exemption of the acquisition of real property for sports purposes and/or of land purchased for creating such real property shall be deemed to be a de minimis subsidy;
- issuing of copies of tax returns submitted in hardcopy and electronically shall be exempted from duty.
Advertising Tax
The proposal included no material changes in substantial law for other tax types (such as the advertising tax),so we merely recall the details already presented in connection with earlier changes. What should be highlighted out of the large interim amendments affecting advertising tax is that the publication of advertising for own purposes shall not be subject to a tax liability from now on, whereas in the case of publishing advertisements against a consideration, the publisher shall pay 7.5 per cent of advertising tax on the taxable net sales revenue in excess of HUF 100 million as of 1 July 2017, while the tax burden on the client remains 5 per cent. The exemption of the publisher up to HUF 100 million is a de minimis subsidy.
Transfer Pricing - Reporting by Country
In closing, this is to call attention again to another interim amendment of great importance. The rules on reporting by country have been discussed in detail by a number of posts, nevertheless we would like to highlight again that the ultimate Hungarian parent company or the Hungarian group member designated by the ultimate parent company of a multinational company realising a sales revenue of at least HUF 750 million at group level shall satisfy CbC reporting obligations by 31 December 2017, whereas the relevant deadline for Hungarian group member companies not falling in the above categories for various reasons shall be 31 December 2018.
The members of the group obliged to make the report having and having no reporting obligations all have a reporting obligation, to be satisfied by 31 December 2017 for the financial year for calendar year data provision commencing on 1 January 2016, to give an example.
The law threatens failure to meet these two obligations with severe sanctions.
