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Articles by: Grant Thornton Hungary

How much is my business really worth?

According to the classic approach, the value of a product or service is the amount that the market is willing to pay for it. In essence, this is also true for businesses, with the adjustment that in this case, the level of demand and the price offered are not determined by the benefit provided by the product or service, but essentially by the trust in the company’s future, its ability to create value, work profitably and grow. Translated into the language of numbers, these capabilities, represent the company’s future cash flow (apart from other values).

After the above textbook-like introduction, let us see how all of this looks like in real life? What are the main indicators that can serve as a good starting point for estimating the value of my business? What do the terms normalised EBITDA, net borrowings or reference working capital mean? If we are not aware of what is behind these few financial indicators, we are like the captain of the ship who asked his engineer:

“How much?”

“24,” the engineer answered.

“What is 24?”, the captain asked.

“Why, what is how much?!”, the engineer replied back.

Therefore, we should be aware what the different indicators – which determine value of the company – mean, how we calculate them, and what opportunities we have to maximise the value of the business offered for sale. When going into the negotiations, we should be prepared that the buyer and its advisers will contest the financial indicators underlying the value in every possible way during the due diligence procedure, in order to lower the purchase price. Therefore, it is very important that we understand these indicators, know at least their approximate meaning, and communicate them in the appropriate way to the buyer (we can leave detailed knowledge to our financial advisers).

In business, the simplest and most commonly used method of valuation is linked to normalised EBITDA (Earnings Before Interest, Tax, Depreciation and amortisation) as a financial indicator:

  1. The company’s annual normalised EBITDA and a market multiplier characteristic of the given industry and geographical location can be used for a first approach to determine the value of the business. This brings us to the so-called “cash-free debt-free” company value.
  2. The company value estimated in accordance with the above needs to be corrected by the balance of the company’s borrowings and liquid assets (net borrowings) in order to calculate the value of the company’s equity.
  3. Finally, the purchase price will also reflect the company’s working capital position. In order to maintain the EBITDA serving as the basis of the valuation also in the future, the company must continuously provide working capital.

To sum up, we can calculate a company’s purchase price as follows:

 

Purchase price = Cash-free debt-free company value -/+ Net borrowings +/- Working capital position

 

Next, let us consider what these elements mean exactly and how can we calculate them?

 

Cash-free debt free company value

Calculation: annual normalised EBITDA x market coefficient.

At least two questions may arise concerning normalised EBITDA:

  1. What method should we use to calculate it,
  2. What period should the EBITDA value be based on?

 

I. The starting point for normalised EBITDA is the reported EBITDA (as presented in the annual profit and loss account), which we modify by the following       items, among other things:

  • one-off, non-recurring expenses, revenues (e.g. grants, sale of tangible assets, etc.);
  • non-business related expenses/revenues (e.g. owner’s personnel costs);
  • transaction related expenses (legal fees, consultancy fees, bank charges);
  • items not posted for accounting (e.g. employee benefits outside the accounts and the public charges on these).

 

II. Which period should we use for the EBITDA?

The decision on this depends on the agreement of the parties. In “peacetime” (i.e.pre-Covid), the reference period was the past 12 months in case of approximately 2/3 of the transactions, while in the the remaining 1/3 of the cases some other period (e.g. the past six months annualized, or the past 6 months and the planned next 6 months, or the planned next 12 months) was used. The current business outlook predominantly considers the effect of Covid as a one-off factor, i.e. the pre-Covid EBITDA values are used for the determination of the normalised EBITDA.

The Seller’s aim: to show as high a normalised EBITDA as possible (highlighting costs, expenses), and choosing the period in such a way that we receive the highest possible EBITDA value.

 

Net borrowings

Calculation: financial debts – liquid assets and cash equivalents

Financial debts include, among other things:

a. accepted financial debt items: bank loans, leasing, accrued interests, prepayment and loan cancellation charges, corporate income tax,                    dividends payable, suppliers for projects;

b. generally accepted debt-like items: the costs of the proposed company sale transaction, loans received from affiliated parties, costs related to          the change of owner, overdue trade payables;

c. debt-like items may also include: employee bonuses, deferred investments, liabilities arising from disputes, derivative transactions.

The inclusion of the items listed in points b and c is not always clear, and is subject to the agreement of the parties. Obviously, the buyer will want to make this list as short as possible.

Items to be taken into consideration for the calculation of liquid assets and cash equivalents (non-exhaustive list):

a. accepted items: balances freely available in bank accounts, cash on hand, liquid securities (e.g. government bonds) and interest accrued on              these, loans granted (e.g. to employees, affiliated parties), deposits given related to real property leases;

b. cash equivalents may include, for example, investment brought forward;

BUT they should not include liquid assets that are not freely available (“trapped cash”), which the buyer cannot use without restrictions for various reasons (e.g. prompt collection order given to banks as collateral, dividend payment limit, other tax-related restrictions).

The Seller’s aim: keeping the financial debt as low as possible, and the balance of liquid assets and cash equivalents as high as possible.

 

Working capital position

Calculation: working capital balance at the time of closing (when the possession of the company is transferred) – reference working capital.

Experience has shown that one of the most controversial areas of the negotiations is the determination of the working capital position. The purpose of determining the value of the reference working capital is to know the average value of the capital required for the company’s ongoing business activities.

Working capital at the time of closing includes, among other things:

a. accepted working capital items (to be taken into account as positive for assets and as negative for liabilities): inventories, trade receivables,            trade payables (but excluding suppliers for project or overdue overdue trade payables), accrued incomes (except interests), other                                receivables/other short-term liabilities (e.g. VAT, public charges, but the corporate income tax is part of the net borrowings (!)), deferred expenses      (except interests), provisions;

b. generally accepted working capital items: among other things, deferred revenues (e.g. the accounting of grants).

 

The calculation of the reference working capital:

a. It is very important that, in order to ensure comparability, the elements of the reference working capital should be identical in their content to the      elements of the working capital at the time of closing.

b. The reference period for the working capital is the most frequent subject of debates in the course of transaction negotiations. Most often (if the         company is able to extract monthly data), the average working capital for 12 months is calculated – this method represents about 2/3 of the               transactions, while in the remaining 1/3 of the cases, the parties calculate on the basis of some other reference period. In general, the EBITDA             period is taken into consideration also when selecting the reference working capital period.

The Seller’s aim: to show as high a working capital as possible and the lowest possible reference working capital value (choosing the period in the most advantageous way).

 

Overall we can conclude that sellers need comprehensive and thorough knowledge to maximise the value of their company. An in-depth knowledge of financial indicators and concepts is essential in the course of the negotiations, which is why it is worth asking for the involvement of experienced consultants with appropriate references when preparing to part with the results of what is often a whole life’s work. It is worth reviewing these issues already at the beginning of the process or – in case we are in the position of the buyer – we can use the results of the financial due diligence to discover the factors that can influence the amount of the purchase price to be paid favourably.

The VAT rules for distance selling will be radically transformed

The VAT rules for distance selling will be radically transformed from 1 July 2021: which option to choose?

The European Union’s e-commerce package, also implemented by the Hungarian VAT Act, sets new rules for intra-Community distance selling to non-taxable persons from 1 July 2021, introduces the taxation of low-value import consignments, in some cases imposes a tax obligations on electronic platforms, and also extends the applicability of the one-stop shop system. Due to their nature, the new rules will have a significant impact on the day-to-day operations of webshops.

In view of the fact that the online selling of goods has gained a great deal of significance recently, in this newsletter, we will examine the VAT treatment of intra-Community distance selling transactions (hereinafter referred to as distance selling), without the claim to be exhaustive. Our aim is to present the rules entering into force on 1 July 2021 and the possibilities inherent in them.

What is intra-Community distance selling?

Intra-Community distance selling means that the goods are sold to a non-taxable person or to a customer not required to pay VAT (typically a private individual), where the seller supplies the goods from one EU Member State to another. In addition, the goods sold are neither new means of transport, nor goods supplied that require assembly or installation. Such sales are most often carried out via webshops.

Three options for taxation

Basically, distance selling as described above can be taxed in three different ways, depending on the value of the transaction and the choice of the seller.

  1. Distance selling may be subject to tax in the country of destination, i.e. according to the rules of the EU Member State to which the product is supplied. Unless the supplier of the goods decides otherwise, this provision applies. The disadvantage is that in this case the supplier must establish and maintain VAT registration in the country of destination, and must issue invoices and supporting documents in accordance with the invoicing rules of this country. This could entail considerable administrative burdens and/or costs. The advantage of this option is that it is not the Hungarian VAT that has to be paid after the transaction, and given that the general VAT rate is the highest among EU Member States in Hungary, the gross price of the product may thus be lower. Overall, this method of taxation is recommended when, in addition to distance selling, the company also has other transactions that justify the maintenance of the foreign VAT registration.
  2. If the taxable person has an establishment for VAT purposes only in Hungary and engages in distance selling from there to other EU Member States, and further, the total combined value of the distance selling to non-taxable persons in other EU Member States in the given and in the previous year is less than EUR 10,000 (EUR 3,139,600), then the taxable person may decide to remain subject to the Hungarian VAT Act. In other words, such sellers determine the VAT according to the Hungarian rules, issue their invoices in accordance with the Hungarian rules, and include these transactions in their Hungarian tax returns. This is preferable from an administrative point of view, but given the high rate of the general VAT in Hungary, it may be disadvantageous from a price competition point of view.
  3. Taxation according to the country of destination via a one-stop shop (“OSS”) system. In this case, the principle of country of destination applies, which means that the tax is to be paid according to the rules of the Member State in which the transport ends (the VAT rate of the country of destination applies). However, in the case of OSS registration, the taxable person must include the VAT on distance selling in its tax returns and pay the VAT in the Member State in which it is registered in the OSS system (in this case, in Hungary). The tax returns must be filed electronically on the OSS portal, and the Hungarian tax authority will transfer the tax indicated in the tax returns and paid to it to the tax authority of the country of destination via the OSS interface. This means that establishing and maintaining VAT registration abroad is not necessary.

However, it is important to emphasise that the VAT returns filing and payment obligation can only be performed via the OSS in case of distance selling to such EU countries where the supplier does not have an establishment for VAT purposes.

The advantages of OSS registration

Reduced administrative burdens:

  • There is no need for VAT registration and the related administration in all countries of destination of the distance selling.
  • The taxpayer can fulfil its VAT returns obligation by way of filing a single VAT return for all countries of destination where it has no establishment for VAT purposes. This means that there is no need to complete and file VAT returns in several different Member States, each in a different way and on a different form.
  • Also, there is no need to issue the invoices and other documents according to the specific rules of each country of destination. It is sufficient to invoice in compliance with the rules of the country of OSS registration.

Reduced costs:

  • It is no longer necessary to employ and pay for experts proficient in the tax rules of all countries of destinations. It is sufficient to make use of professional assistance in the country of the OSS registration.
  • The VAT can also be paid by way of a single bank transfer to the tax authority of the country of OSS registration, and it is not necessary to use separate bank transfers to the tax authorities of each country of destination separately, nor to pay the costs of such transfers.

Increasing competitiveness:

  • The VAT rate of the country of destination is always applicable, which means that the VAT charged would not result in a competitive disadvantage for distance sellers in comparison with local businesses.

Which method is worth choosing?

In the foregoing, we have provided a general presentation of the different tax methods and their specificities. However, the best choice for a supplier, such as the operator of a webshop, should always be based on the specific characteristics of the transaction. Our tax group is pleased to be at your disposal in determining and introducing the most advantageous arrangement for you.

Continuing tax reliefs for the second half of 2021

Government Decree 318/2021 (VI. 9.) was promulgated on 9 June 2021, which introduces the option to pay taxes in instalments without a surcharge, and also extends the preferential measures introduced in the first half of the year due to the coronavirus pandemic. The decree entered into force on the day after its promulgation, on 10 June 2021.

The possibility for a surcharge-free delay of payment and for tax reduction

Based on the request of the taxpayer or the person liable to pay the tax submitted by 31 December 2021, the tax authority shall grant, on one occasion, for a maximum tax amount of five million Hungarian forints, free of any surcharges, either a payment delay of maximum six months or the option of paying the tax in instalments over a maximum period of twelve months, provided that, simultaneously with the application, the taxpayer documents as likely that the payment difficulty is attributable to the state of alarm.

Further, at the request of a non-natural person taxpayer or the person liable to pay the tax, submitted by 31 December 2021, the tax authority shall reduce the amount of the tax owed, on one occasion, by a maximum of 20% or HUF 5 million, whichever is less, if the payment of the tax owed would render the operations of the applicant untenable for reasons attributable to the state of alarm. The tax reduction may only be requested for one tax type.

The administrative deadline for these new tax reliefs is 15 days.

Tourism development contribution

The relief period related to the tourism development contribution has also been extended, which means that the tourism development contribution does apply for the period between 1 January 2021 to 31 December 2021, and therefore, there is no need to determine the tourism development contribution, file returns or pay the contribution for this period.

Social contribution tax

No social contribution tax is payable on business gifts and entertainment, if such benefit is provided in the period between 10 June 2021 and 31 December 2021.

Further, in the case of employments established between 10 June 2021 and 31 December 2021, such persons shall also be considered as entering the labour market who, based on the information available to the national tax and customs authorities, worked in employment, as sole traders or members of a company and had a social insurance obligation for up to 92 days during the 183 days before the first day of the month in which they start their present, favourable employment.

SZÉP Card

The favourable rules introduced for Széchenyi Recreation (“SZÉP”) Card at the beginning of the year are extended to the second half of the year as well.

Therefore, in 2021, amounts transferred to the employee’s Széchenyi Recreational Card will be considered as non-wage benefits up to the following amounts:

•          HUF 400 thousand per year in case of benefits to the accommodation services sub-account;

•          HUF 265 thousand per year in case of benefits to the restaurant services sub-account;

•          HUF 135 thousand per year in case of benefits to the leisure services sub-account.

up to an amount, it constitutes a non-payment benefit.

In 2021, the annual amount of the recreational allocation (which is the other type of non-wage benefit) will continue as follows:

•          HUF 400 thousand per year in the case of a publicly funded employers;

•          HUF 800 thousand forints per year in case of all other employers.

With respect to benefits provided in 2021, there is no social contribution tax payment obligation for amounts transferred as non-wage benefit to employees’ Széchenyi Recreation Card accounts.

We hope that you found our summary useful. If you have any further questions in connection with the above topics, please do not hesitate to contact us.

Package amending the spring tax act submitted for debate in Parliament

As previously discussed in our newsletter on the new rules of personal income tax applicable to cryptocurrencies, the spring tax act amendment package (Bill no. T/16208) was submitted for its parliamentary debate on 11 May 2021.  It should be pointed out that, in addition to the new personal income tax rules mentioned above, the tax package discontinues the vocational training contribution and integrates it into the social contribution tax, while reducing the total combined rate of these two taxes to from 17% to 15%. The tax package also introduces a number of minor changes and clarifications, and in the following, we will provide a comprehensive overview of its main elements:

Personal income tax

Flat-rate tax for sole traders

The bill sets out to simplify the rules on the flat-rate taxation of sole traders. A rule that ensures regular valorization, following the change in the annual minimum wage, is introduced in order to determine the income limit for choosing the method of taxation. As the income limit for choosing the flat-rate tax, the bill sets ten times the annual minimum wage as the general rule, and fifty times the annual minimum wage in case of sole traders engaged exclusively in retail activities. The system of flat-rate cost ratios required to establish income will be simplified: as a general rule, sole traders may determine their income by deducting a 40 percent cost ratio, which is 80 percent in case of sole traders engaged in retail and certain other business activities, as listed in the law, and 90 percent in case of sole traders deriving their income from retail activities in the entire tax year and primary agricultural producers. Further, income that is less than half the annual minimum wage, determined with the application of the flat-rate cost ratio, will be exempted from the personal income tax.

Income from a transactions with crypto-assets

As discussed in detail in our earlier newsletter, from 2022, the method of determining the income from transactions with crypto-assets will follow a logic similar to the determination of income from controlled capital market transactions, rather than being taxed as “other income” under the current rules. As a transitional rule, if the private individual has not declared income from the transfer or assignment of crypt assets before 2022, he or she may elect to apply the new rules on all transactions involving crypto assets, provided that the profit from the abovementioned transactions must be taken into consideration as transactional profit for 2022.

Tax credit for mothers of four or more children

The bill simplifies the rules whereby mothers of four or more children no longer need to submit a new declaration annually to employers and other payers of regular incomes with respect to data that are certainly not going to change.

Corporate income tax (CIT)

The CIT obligation of hybrid entities

According to the proposed new rules, from 1 January 2022, hybrid entities registered or having a permanent establishment in Hungary would be considered as resident in Hungary for tax purposes if a non-resident entity subject to such a tax jurisdiction has majority ownership in them where the given hybrid entity is a considered a subject of corporate income tax or its equivalent under the rules of that tax jurisdiction. Investment funds and forms of collective investment subject to investor protection regulations in Hungary are exempted from this rule.

The hybrid business entity, which is a resident taxpayer in Hungary, is obliged to pay CIT after its income not taxed under the tax legislation of Hungary or another country.

Corporate income tax groups

According to the proposed new rules, non-profit companies, public-interest pensioners’ cooperatives and school cooperatives may not be members of corporate income tax groups. However, under a transitional provision, they can still maintain their membership in corporate income groups until the end of the current tax year.

Public-interest trust foundations performing public tasks

According to the bill, non-repayable grants, subsidies, the book value of assets transferred without consideration, and the cost price of services provided without consideration in the tax year in the framework of the provision of assets by the founder or joiner, and further in the interest of supporting its publicly useful activities, are to be considered as costs incurred in the interest of the business activity, and as such they do not increase the tax base In addition, 20 percent  of these – 40 percent in the case of the provision of assets by founders or joiners – reduce the corporate income tax base, up to a maximum of the amount of pre-tax profits, in possession of the appropriate certificate.

Value-added tax (VAT)

Data disclosure obligation of payment service providers

In order to improve the control of cross-border e-commerce transactions, the bill imposes a registration and data disclosure obligation on payment service providers concerning cross-border payments made in connection with payment services performed by them. According to the bill, payment service providers must submit electronic reports in each calendar quarter in which the number of cross-border payments made for the same beneficiary in the given calendar quarter exceeded 25.

The refunding of the VAT content of irrecoverable claims

Subjects of VAT may, by way of a written application, request the tax authority to refund the VAT content of the amounts recognised by them as irrecoverable claims, provided that the limitation period calculated for the transaction on which the claim is based had already elapsed when the claim became irrecoverable. Such an application may be submitted within a limitation period of one year from the date on which the claim became irrecoverable, provided that the relevant statutory conditions are otherwise fulfilled. The amendment also provides that in case a part or the whole of the consideration accounted as irrecoverable claim is eventually paid to the supplier of the goods or services after the refunding of the VAT, then such amount is to be included in the tax returns submitted for the relevant period of the payment as a tax base increasing item

An application for the refunding of the VAT paid may be submitted if the grounds for the accounting of the relevant amount as an irrecoverable claim occurred after the amendment entered into effect. If the grounds occurred before that date, but less than 1 year has elapsed since, the tax subject will have 180 days from the effective date of the amendment to submit the application. The tax authority will make a decision on the application within 6 months.

The bill repeals the following grounds of exclusion for the debtor as a conditions of reduction of the tax base on account of an irrecoverable claim:

  • the buyer was subject to insolvency proceedings on the date of performance of the original transaction;
  • the buyer’s tax number was cancelled at the time;
  • the buyer was included in the database of persons with a large tax arrears or tax debts on the date of performance of the original transaction or within the previous year;
  • the seller received a letter of warning from the tax authority by the date of performance of the original transaction.

Following the entry into force of the amendment, the above circumstances will not automatically exclude the enforceability of the tax base reduction; however, when auditing the reduction of the tax base and the amount of the payable tax, the tax authority will consider and evaluate these circumstances, in line with the principle of the proper exercise of law. The amended procedure may also apply to transactions the date of performance of which falls after 31 December 2015.

VAT refunds for foreign travellers

In addition to the paper-based procedure, the bill provides for the possibility of electronic certification related to VAT refund rules for foreign travellers. From the day following the promulgation of the amended Act, the export of the goods can also be verified by authenticating the invoice with a digital stamp.

Local taxes

Under the current rules, an exemption from the tourism tax is granted to individuals who spend at least one night on the territory of the municipality due to performing a public service obligation. According to the bill, the concept of public service obligation will be extended to include, in addition to state employees and public servants, also those with healthcare service status.

Special tax on financial institutions

As from 1 January 2022, the special tax obligation for venture capital fund managers, stock exchange providers and commodity exchange providers will be abolished. Venture capital fund managers and commodity exchange providers with a financial year different from the calendar year may first apply the tax exemption to their tax year starting in 2022.

Income tax of energy suppliers

According to the bill, the amount of assets or donations provided for public-interest trust foundations performing public tasks would not increase the base of the income tax of energy suppliers (similarly to the new CIT rules).

The negative income tax base (for first time for the 2020 tax year) can be deferred and used, subject to the taxpayer’s decision, for reducing the positive tax base in the next five tax years, provided that the principles of the proper exercise of law were observed in the creation of the negative tax base. The use may not exceed 50% of the taxable amount calculated for the tax year, excluding the negative tax base.

Duties and fees

The exemption of public-interest trust foundations performing public tasks

Public-interest trust foundations performing public tasks are granted a personal exemption from duties and fees, provided that they had no corporate income tax liability in the previous tax year.

The family housing benefit (CSOK) scheme

Under the proposed new rules, in case of the prior use of CSOK, the property transfer tax would be levied after all on the acquirer if the CSOK is repaid in full by before the expiry of the deadline and without fulfilling the undertaking to have children for any reason, or such undertaking is not fulfilled by the expiry of the deadline. The subsequent levying of the property transfer tax will not take place if the acquirer repays the benefit only in part (the benefit is reduced on the basis of the number of children born by the deadline), or in case undertaking to have children is not fulfilled due to the health condition of the beneficiary. The new provisions shall apply to cases arising after the 31st day following the promulgation of the amendment.

Companies with holdings of real estate in Hungary

Under the current rules, if a company acquires real property in a given tax year, which would already qualify it as a company with holdings of real estate in Hungary, but the shares of the company are sold in the same year, then under there is no obligation to pay property transfer tax (due to the fact that on the basis of its last closed balance statement it is not considered as a company with holdings of real estate). This loophole would be closed by the bill by way of the following measures. If the company’s shares are sold, then the value of the real property holdings and total assets in the earlier (approved) balance sheets must be corrected by the value of the properties acquired between the dates of the two balance sheets (until the time when the property transfer tax payment obligation arises, i.e. the date of the purchase of the company resulting in 75% holding) and those derecognized in the books. These adjusting items must only be applied if, by taking them into consideration, the company would become a company with holdings of real estate in Hungary at the time when the property transfer tax payment obligation arises. The list of documents supporting the corrections is not specified in an itemised way: it can be, for example, an interim balance sheet or data from the general ledger closing records. The new rules shall enter into force on the 31st day following the date of promulgation of the Act.

Social contribution tax

As of 1 July 2022, the social contribution tax will be reduced by half a percentage point, from 15.5% to 15%, while the vocational training contribution will be abolished and partly incorporated into the social contribution tax.

From 1 July 2022, the tax relief for vocational education and dual training, which is currently provided in the vocational contribution, will be available from the social contribution tax. The social contribution tax may be reclaimed in the form of a tax credit in case of overpayment, and also by tax subjects not required to pay this form of tax by law.

The amendment would extend the cases of exemption from social contribution tax:

  • a legal relationship entered into on the basis of an employment contract and an apprenticeship contract;
  • persons liable to pay taxes and qualified as pensioners under the Social Security Benefits Act (with the exception of “other income”, as defined in the Personal Income Tax Act);
  • the job search allowance, irrespective of the date of the allowance.

Social security contributions

From 1 January 2022, the rules for the payment of contributions and the application of family contribution allowances by flat-rate-paying full-time sole traders will change as follows: the family contribution reduction can also be applied from contributions paid on the basis of minimum wage, up to the contribution for income determined as a tax-free flat amount.

Rules of tax procedures

From 10 January 2020, only persons registered by the designated supervisory body may continue to provide registered office services. The proposed amendments, on the one hand, follow this change, and on the other hand, also introduce some further related measures. They provide that in case a taxpayer notifies a registered service provider that is not registered by the supervisory authority, then the tax authority will warn them about this fact and call upon them to notify a different, suitable registered address or to withdraw their notification concerning the use of the registered office service. If the taxpayer fails to comply with the above, its tax number will be cancelled. The tax authority will also review the legal relationships notified prior to the change.

On the basis of the bill, the scope of data to be reported in the monthly contributions returns would be extended. Thus, it would also include the following payments made to natural person:

  • dividends, interim dividends on securities listed on a stock exchange, according to the law of the given state;
  • in the case of certain separately taxed incomes, information on whether the natural person is considered to be foreigner according to Social Security Benefits Act.

In addition to financial institutions, payment service providers and investment firms, as well as institutions issuing electronic money would also be be subject to the data reporting obligation.

Pursuant to the proposed amendment, the procedures related to advance pricing agreements will be moved from the competence of the tax authority to the minister responsible for tax policy.

Customs

According to the bill, on customs declarations for the free placement on the market of small-value consignments, i.e. those with an intrinsic value not exceeding EUR 150, the description of the goods may also be provided in English.

The threshold for accelerated procedures for infringements committed at the external borders of the European Union will be increased from HUF 50 000 to HUF 100,000. In the framework of an accelerated procedure, fines can be paid on site, which makes the handling of infringements quicker and more effective. The administrative burden is reduced by the fact that the customs authority issues, when imposing a fine, a certificate that can be printed from the customs information system, which replaces the role of a receipt to be filled in manually.

Accounting and auditing

From 1 January 2020, the Accounting Act introduced the accounting model related to accounting units, which may, however, also extend to contracts for which the application is cumbersome and does not provide additional information for those affected by the report. For this reason, from the financial year starting in 2021, the bill allows undertakings not to apply such project accounting relating to accounting units for the serial production of goods in large quantities, using the same working process, which means that they do not need to apply accruals and deferrals in such cases either.

In order to ensure compliance with the principle of comparison, from financial year starting in 2021, such amounts of aid received without repayment obligation for development purposes that are expected but not yet accounted for can also be shown as accruals, thereby reducing the time difference caused by advance-based development aid.

In accordance with the VAT Act, the obligation to allocate VAT in proportion to consideration was deleted from the Accounting Act when determining the cost of tangible assets. This amendment can also be applied to the financial years starting in 2021.

It has been possible to issue independent audit reports electronically since April 2020, in connection with which it has been clarified that electronically issued audit report must also include an electronic signature and a time stamp.

We hope that you found our summary useful. If you have any further questions in connection with this topic, please do not hesitate to contact us.

Postponed deadline for the filing of corporate income tax returns and payments

As we reported in our earlier newsletter, taxpayers may postpone the filing of returns and the payment of annual tax returns for 2019 (e.g. corporate income tax, local business tax, innovation contribution) until 30 September 2020. It is not necessary to notify the tax authority when choosing this postponement option; however, there are a number of questions arising in connection with the interpretation of the provisions. With a view to these uncertainties, both Norbert Izer, state secretary responsible for tax affairs and the National Tax and Customs Administration itself issued some clarifications. In our experience, the following practical questions are the most relevant for our clients.

  • On the basis of the information provided by the state secretary, the postponement of the deadlines overwrites all adverse legal consequences, which means that the tax authority may not impose any default penalty or late payment surcharge until 30 September 2020. In our interpretation, this also implies that a taxpayer whose tax year corresponds to calendar year may decide to file its corporate income tax returns by 31 May 2020 (actually, due to Pentecost/Whit Monday, i.e. 2 June), but only pays the related tax liabilities by 30 September 2020.

 

  • In case of using the option to file the returns later, attention should also be paid to the fact that the tax authority pays the amount of the tax refund within 30 days after the date of receipt of the filing, but not earlier than 30 days after the original tax return due date (2 June 2020 in case of calendar year taxpayers). Therefore, if such a taxpayer has refundable tax in connection with the filing of the annual tax returns and would like to receive this tax refund as soon as possible, it is recommended to file the returns by the “usual” deadline (i.e. 2 June in this year).

 

  • On the basis of our consultations with the Ministry of Finance, in the period between July and September 2020, taxpayers using the option of postponed returns filing must continue paying the tax advances established in their last available tax returns (in the same amount and according to the same schedule). For example, a taxpayer required to pay monthly advances on the corporate income tax that chooses not to file its tax returns for 2019 by 2 June, must continue to pay the tax advances determined in their tax returns no. 1829 (as paid monthly in the first half of 2020) by the 20th day of the month between July and September 2020. At the same time, it is also possible to request a reduction of these monthly tax advances.

 

  • Finally, we would like to note that the deadline for the preparation of the transfer pricing documentations on related party transactions of 2019 is also postponed until 30 September 2020.

Personal income tax on cryptocurrency incomes may be postponed until 22 May 2023

As mentioned in our earlier newsletter, there has been no legislation specifically concerning the taxation of incomes derived from from cryptocurrencies in Hungary. However, the increasing volume of cryptocurrency trading requires that income from this type of transactions, as a new form of capital income, be integrated into the personal income tax (PIT) system.

Bill on the new handling and taxation of cryptocurrency incomes

If passed into law, bill no. T/16208, submitted on 11 May 2021, would take significant steps towards “whitening” incomes from cryptocurrencies. Under the current rules, unless otherwise provided by law, incomes derived from cryptocurrency transfers are taxed in the category of “other income”, which means that, in addition to a 15% personal income tax (SZJA), they are also subject to a 15.5% social contribution tax (SZOCHO). If the income is received by a private individual from a company that is not resident in Hungary (which is quite common in the case of cryptocurrency trading), the social contribution tax must be paid by the individual, which means that the tax base of the SZJA and the SZOCHO are 87% of the otherwise established amount of income.

By contrast, under the proposed new rules, income from the sale of crypto-assets would no longer constitute part of the aggregated tax base, but would be regarded as a “separately taxed income”, which entails no social contribution tax to be paid. Thus, under the rules of the bill, the tax burdens on cryptocurrencies would be reduced from 30.5% to 15%.

Definition of crypto-assets and transactions

Under the new rules of the Personal Income Tax Act, ‘crypto-asset’ means a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.

A transaction with a crypto-asset would be one whereby a private individual derives income in the form of a non-crypto asset through the transfer or assignment of a crypto-asset, by way of a transaction that is open and available to anyone (a non-private transaction). In other words, the transaction is only taxable if the crypto-asset is converted into a non-crypto asset; otherwise, the transaction is tax-free.

The method of determining and declaring the income

The method of determining the income from transactions with crypto-assets will follow a logic similar to the determination of income from controlled capital market transactions. Income is considered to have been derived if, in the given tax year, the combined amount of transaction gains in the given tax year exceeds the combined amount of transaction losses plus the fees and commissions paid in connection with the transaction. The latter also includes documented expenses not linked to the specific transaction, but related to the holding of the crypto-assets. A transactional profit is achieved if the income derived exceeds the documented expenses incurred in connection with the acquisition of the crypto-assets, from fees and commissions and related to the transaction. However, it is not necessary (not possible) to determine a transactional income if its amount is less than 10 percent of the prevailing minimum wage. This latter provision is applicable if the individual does not receive income from other transactions of the same subject matter on the date of the income, and the combined amount of such incomes is less than the minimum wage.

In determining the transactional profit, the arm’s length (market) value of the crypto-asset determined for the date of the transfer or assignment of the crypto-asset (the date when the associated rights are first exercised) must be used as income. On the other hand, as expenses, such costs may be taken into consideration that were incurred in the given year under legal titles specifically mentioned in the law (e.g. the expenses incurred in connection with the purchasing of the crypto-asset or in the course of crypto mining activity).

If the combined amount of all transaction losses in the tax year exceeds the combined amount of all transactional gains, the individual who has suffered the loss may use tax equalisation. In the course of tax equalisation, individuals may offset the “tax content” of their losses arising from transactions carried out with crypto-assets during the given and the preceding two tax years against the taxes to be paid on their current annual tax return.

Private individuals must determine the income derived from transactions with crypto assets annually, for each tax year, which may be done either by supplementing the draft tax returns prepared by the tax authority or by filing their own tax returns.

Transitional provision – deferrable PIT payment obligation

A transitional rule related to the PIT payable on income from a crypto assets provides that, if the private individual has not declared income from the transfer or assignment of crypt assets before 2022, they may elect to apply the new rules on all transactions involving crypto assets, provided that the profit from the abovementioned transactions must be taken into consideration as transactional profit for 2022.

Therefore, on the basis of this transitional provision, individuals satisfying the above conditions may defer their obligation to pay the personal income tax on cryptocurrency incomes until the deadline for submitting the tax return for 2022, i.e. until 22 May 2023.

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