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Articles by: Grant Thornton Hungary

The extra profit tax rules have changed again

Yesterday, Government Decree 62/2023 (II.28.) was promulgated, which modifies the extra profit (or windfall) tax rules with effect from 1 March, but also retroactively in relation to certain provisions. The present issue of our newsletter provides a summary of these changes.

Extra profit tax for pharmaceutical manufacturers

A favourable rules is introduced with retroactive effect for the tax year 2022 whereby companies engaged in the manufacture of basic pharmaceutical products (TEÁOR code 2110) and the manufacture of pharmaceutical preparations (TEÁOR code 2120) will only be required to pay a progressive extra profit tax on their revenue, in bands of 1% to 8%, if their aggregate net revenue from the activities of the under the 2110 and 2120 TEÁOR codes, as calculated on the basis of their latest annual accounts available on the first day of the tax year exceeds 33.33% of their total net revenue. In other words, as a basic rule, for tax year 2022, the data in their annual accounts for the 2020 business year must be used. (Under the earlier rule, even the smallest amount of revenue from the abovementioned activities created an extra profit tax liability for the entire net revenue.)

Contributions to be paid by airlines

On the one hand, the new government decree modifies the minimum and maximum tax rates for contributions to be paid by airlines with effect from 1 March, and on the other hand, it also prescribes a new method of determining the tax base, with retroactive effect from 1 January 2023.

The amount of the contribution for preferential-rate destinations (Albania, Andorra, Bosnia and Herzegovina, Bosnia and Herzegovina, Northern Macedonia, Iceland, Kosovo, Liechtenstein, Moldova, Monaco, Montenegro, United Kingdom, Norway, San Marino, Switzerland, Serbia, Ukraine and Member States of the European Union):

Emission unit

per aircraft seat

Contribution / passenger

January – February 2023

Contribution per passenger

from March 2023
less than 10,5 kg HUF 2,700 HUF 1,600
between 10.5 kg and 17.5 kg HUF 3,900 HUF 3,900
17.5 kg or more HUF 5,100 HUF 6,200

For all other destinations:

Emission units

per aircraft seat

Contribution / passenger

January – February 2023

Contribution / passenger

from March 2023
less than 10,5 kg HUF 6,800 HUF 3,900
between 10.5 kg and 17.5 kg HUF 9,750 HUF 9,750
17.5 kg or more HUF 12,700 HUF 15,600

The government decree sets 30 March as the deadline for retroactive reporting by airlines for the month of January, since

  • previously, the carbon-dioxide emissions value per seat according to the ACI Airport Carbon and Emissions Reporting Tool had to be used as the basis for calculating the contribution, but this has been replaced

  • with retroactive effect to January, and now the average fuel burned during the take-off and landing cycle has to be used, as defined in the Engine Emissions Databank of the International Civil Aviation Organization (ICAO) multiplied by the number of engines and the emissions value (3.16) per seat, as the basis for the contribution to be paid.

In view of the above, as a transitional rule, the entity subject to the contribution payment obligation, i.e. the ground handling company providing passenger and baggage handling services, may revise its January monthly return until 29 April without the obligation to make any additional payment.

Public health product tax (NETA)

With effect from 1 March, in addition to the two previous exemptions, a third one will be introduced (where the buyer sells the goods subject to NETA either directly or after manufacturing its own products in the framework of intra-Community supply or export): from now on, exemption from NETA will also be available for domestic supplies of goods where the goods are used by the buyer to manufacture its product subject to the tax on which it pays NETA. The new exemption will ensure that in case both the raw material and the finished product are products subject to NETA, the product tax liability will arise on the raw material, thereby reducing the cost of production.

It is important to note that the new exemption also requires the seller to submit a declaration in advance and to provide credible evidence that the conditions are fulfilled. (The new government decree sets a uniform time limit of 366 days from the date of the previous declaration for subsequent verification.)

Retail tax

The government decree clarifies that tax subjects whose business year does not coincide with the calendar year must pay the increased retail tax and the advance payment on the special tax for the tax year starting in 2023 if their tax year starts on or after 1 July 2022. In other words, if the balance sheet date of a business engaged in retail activities is 31 August, it will already be liable to pay the higher rate of the special tax for the business year from 1 September 2022 to 31 August 2023.

As a reminder, from 2023, the rate of the retail sales tax will be as follows (depending on the tax base):

  • below HUF 500 million: 0% (unchanged),

  • between HUF 500 million and HUF 30 billion: 0.15% (previously 0.10%),

  • between HUF 30 and 100 billion: 1.00% (previously 0.40%),

  • over HUF 100 billion: 4.10% (previously 2.70%).

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If you need further information in connection with the above changes or would like to know how the supplementary taxes will affect your company’s operations, Grant Thornton’s tax experts are at your disposal to assist you and your company.

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.

Transfer pricing: details of the tax return for reporting related party transactions have been published

Please note that corporate tax return form no. 2229 for 2022 has been published on the website of the Hungarian Tax and Customs Authority (NAV). In order to comply with the reporting obligation regarding the determination of the arm’s length prices, starting this year, taxpayers must complete forms 2229-ATP-01 and 2229-ATP-KV. The ATP-01 form must be completed for the transaction in question, while the ATP-KV form must be completed for the related party information in connection with the transaction shown in the ATP-01 form.

The details of how to provide the data have been previously presented in our newsletter and emails, but at this time we would like to once again highlight the following from the instructions for the form:

All corporate tax returns with a filing deadline after 31 December 2022 are subject to the reporting obligation. Annual corporate tax returns for which the filing deadline falls on or before 31 December 2022 are not subject to the reporting obligation, even if the taxpayer submits a tax return after the statutory deadline.

 

If you have any further questions in connection with the above, the transfer pricing team of Grant Thornton is pleased to be at your service!

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.

Mandatory reporting of data concerning transactions between affiliated enterprises

A few days ago, the journal “Szakma” (Profession) published further details on the changes in the field of transfer pricing, in an unusual move, by the Ministry of Finance, but before the final legislation was promulgated.

The tax authority expects mandatory reporting on arm’s length prices in a uniform way, on the basis of a predetermined nomenclature, so in dubious cases it will be worth acting with much circumspection and care. Data must be reported on all transactions that are not exempted from the disclosure obligation, regardless of whether a written contract has been drawn up for the transaction.

It has been confirmed that the threshold for the documentation requirement will be increased from HUF 50 million to HUF 100 million; further, to ensure the enforceability of the increased fines, the possibility to offset similar transactions of opposite direction will end, and the documentations to be drawn up will be the same as the number of transactions that can be identified in the year under review.  Finally, it has been clarified to what extent the taxpayer’s financial data for a given transaction should be linked to the data of the annual accounts.

 

The content of the data disclosure obligation is briefly described below:

  • certain transactions exceeding the threshold but exempted from documentation requirements should be reported in a limited manner, but the data on transactions covered by advance pricing agreements (APA) must be reported fully;

  • group corporate tax subjects must disclose data fully on their transactions with their non-participating but affiliated enterprises;

  • each controlled (related) transaction will have to be classified into one of the 53 categories defined by the authority, and the most representative TEÁOR (business activity) code for that transaction must be provided;

  • the name, tax number or registration number, as well as the tax residence of each affiliated enterprise must be provided;

  • the net consideration actually accounted for in the current year must be reported for each affiliated partner, in HUF, and it will be also necessary to provide data on the following:

1 – the amount of positive or negative changes to the corporate tax base relating to the adjustment of the arm’s length price for the current year; and

2 – the method used for determining the arm’s length price;

  • the accounting standard applied by the tested party must be provided,

  • the arm’s length range determined in the course of the analysis and the rate actually achieved or applied by the tested party must be described in detail as follows:

1 – the profitability indicator used in case of the resale prices method, the cost plus method, and the transactional net margin method;

2 – the percentage value of the royalty or the service fee in case of the comparative prices method or when valuable rights and services are used;

3 – in the case of loans and other financial transactions, the total interest rate or the value of the reference interest and interest premium; and

4 – the price used in cases where a unit price is used as an arm’s length price.

In connection with the mandatory data disclosure, it was also emphasised that comparison with the control data available to the tax authority is expected to increase the selection of taxpayers for audits in the future, and therefore, we would like to draw your attention once again to the related deadlines and the importance of preparation.

An important deadline is approaching for taxpayers wishing to pay their corporate income tax in foreign currency

As announced in issues of Magyar Közlöny (Hungarian Gazette) published at the end of summer and the beginning of autumn, on 9 August and 26 September, taxpayers now also have the option to pay their corporate income tax, their local business tax advance, as well as the local business tax itself in American dollars (USD) or euros (EUR). But for which taxpayers is this option open? Could this be advantageous for a company that keeps its books in HUF? Are there any prior conditions attached? Our present newsletter will explore these questions.

In case of both corporate income tax and local business tax, the common rule is that switching to USD or EUR as the currency of the tax is independent of what currency the taxpayer concerned is keeping its books in. Therefore, it may be a good option not only for those keeping their books these two currencies, but also for companies that, for example, generate the majority of their revenues in USD or EUR, or that have large transactions in these currencies.

The possibility to pay corporate income tax or local business tax in USD or EUR is therefore open to all Hungarian taxpayers that are required to pay these taxes unless the payment is subject to enforcement proceedings by the tax authorities and must be paid into a separate account in the course of such proceedings.

For both tax types, the choice is left to the business concerned: it is possible to pay one of both of these taxes in a foreign currency, and, of course, it is also possible for a taxpayer not to opt for payment in foreign currency for either tax.

However, the rules differ slightly for the two taxes, and so in the following we will set out the most important pieces of information separately.

Corporate income tax

In the case of corporate income tax, a prior condition for paying the tax in USD or EUR is that taxpayers must notify the National Tax and Customs Administration (NAV) of their choice by the first day of the month preceding the first day of the tax year (i.e., by 1 December of the year preceding the tax year for “calendar-year taxpayers”, whose business year coincides with the calendar year), using form T201.

This notification can be first made for the tax year starting after 30 September 2022 (for calendar-year taxpayers, this option is open until 1 December 2022 for the tax year 2023). This is a forfeiting time limit: no excuses submitted for missing the above deadline are accepted. Interestingly, however, there is an option for taxpayers to change their decision to pay corporation tax in foreign currency by the last day of the tax year (i.e., 31 December for calendar-year taxpayers), but this is also a forfeiting time limit.

The advance corporation income tax, as well as the corporate income tax liability assessed and declared on the returns for the tax year concerned must be paid in the currency according to the notification; conversion costs for transfers from an account in a different currency are to be borne by the company concerned.

Therefore (for calendar-year taxpayers), the first corporate income tax advances for 2023 may be paid in USD or EUR, but the corporate tax liability for the 2022 tax year, which is due by 31 May 2023, must still be paid in HUF, regardless of whether a notification for a different currency was filed.

It is also important to note that, although after such a notification the tax will have to be paid in USD or EUR into an account in the relevant currency, the tax itself will continue to be assessed in HUF. Thus, the exchange rate at which the amount of the tax in HUF is converted into USD or EUR is of particular importance.

Under the relevant provision of law, Government Decree  298/2022 (VIII. 9), the amount of USD or EUR transferred is credited to the tax account of the company concerned in the HUF amount calculated on the day when the bank account concerned is debited, using the exchange rate published by the Central Bank of Hungary (MNB) for that day (or, in the absence of such a rate, in the case of a bank holiday, at the last published exchange rate).

However, the date of payment of the tax is not necessarily the date taken into account in determining the exchange rate, but the date on which the payment is credited to the foreign currency tax payment account held by the Hungarian State Treasury for this purpose.

Local business tax

Unlike in case of corporate income tax, the relevant provision of law, Government Decree 366/2022. (IX. 26.) does not make the payment of local business tax in foreign currency subject to prior notification. However, the Government Decree stipulates that taxpayers may first pay their local business tax advances and local business tax due from 1 January 2023 in USD or EUR. In the case of local business tax, the advance payment in March can therefore already be made in USD or EUR, if the company so chooses.

With the exception of taxpayers belonging to a special economic zone, the local business tax is not paid into a central bank account linked to NAV, but into an account opened for receiving payments in USD or EUR by the Hungarian State Treasury for the relevant municipality that has introduced the local business tax.

Therefore, for this tax, the exchange rate is not established on the date of debiting the bank account concerned by the transfer, but on the date when the amount is received by National Bank of Hungary, as the bank managing the account of the Hungarian State Treasury.

In accordance with the above, the local business tax payable in USD or EUR should not be transferred to the bank account of the local government concerned for the local business tax in HUF. Therefore, if a local government has not yet published the number of this “foreign currency” bank account for local business tax, it is necessary to inquire with them.

Once again, however, a common feature of the two taxes is that the payment of a tax in USD or EUR, which is essentially assessed in HUF, gives rise to exchange rate differences (with an impact on pre-tax profit) even for businesses that keep their books in the same currency. Before making this choice, it is always worthwhile to calculate the impact of paying the tax in USD or EUR on the company’s profits, as this can lead to significant savings, especially for businesses that earn their revenues mainly in USD or EUR and have so far typically had to exchange money before transferring their taxes.

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Should you have any further questions in connection with the above, the tax experts of Grant Thornton Hungary are at your and your company’s disposal.

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.

The scope of subjects of the innovation contribution has been expanded with the permanent establishments and branches

The scope of subjects of the innovation contribution has been expanded with the permanent establishments and branches – the deadline is approaching

With a change in the law that entered into force at the end of August, the Hungarian branches of foreign-based companies and their permanent establishments according to the Hungarian Act on Local Taxes also came under the scope of the innovation contribution. In addition, the affected taxpayers must calculate and declare their innovation contribution advance payment by 20th October, until this deadline they also must pay the advance for 2022. In this newsletter, we cover the most important details of the amendments.

Permanent establishment, branch

Foreign-based companies that conduct their business in Hungary are not always obliged to establish a branch office or a company in Hungary, however, from a tax point of view, they may have a permanent establishment (according to value added tax and / or corporate income tax and / or local business tax), which must always be examined and established according to the law of the tax type concerned.

The legal change currently being discussed affects the permanent establishment according to Hungarian Act C of 1990 on local taxes (hereinafter: “Local Tax Act”), which – based on the relevant definition – should be understood as a permanent business establishment (property) where the relevant foreign-based taxpayer – regardless of the legal title of use – is partially or fully engaged in business activities. Thus, in particular (but not limited to) the factory, the plant, the workshop, the warehouse, the mine, the oil or natural gas well, the water well, the wind power plant (wind-wheel), the solar power plant, the office, the branch, the representative office, the agricultural land, the utilized (rented or leased) real estate, the public road or railway track that can be used in return for compensation. And, among other things, in the case of the pursuit of construction industry activity exceeding 180 days, the area of jurisdiction of the municipality where the taxpayer carries out a such activity should be included here.

In the case of domestic companies, a branch office is a place that is located in a different settlement from the company’s headquarters, but in the case of foreign companies, the branch office in Hungary is considered the headquarters of the foreign enterprise, and as such is registered in the Hungarian company register as an independent company form as a branch office of the foreign company. Such a branch is an organizational unit of the foreign enterprise, which does not have an independent legal personality, but does have a certain degree of economic independence.

The rules of the innovation contribution

The innovation contribution base is the same as the general local business tax base not reduced by tax allowances. The rate of the contribution is uniformly 0.3% throughout Hungary.

As a general rule, the annual innovation contribution obligation must be declared in the corporate income tax return by the deadline for submitting this return (this is 31 May of the following year in the case of calendar year taxpayers, in other cases the last day of the 5th month following the tax year), which is also the date of payment of the annual tax obligation, or the deadline for reclaiming any overpayment.

The changes, which were accepted this summer

In the past, only domestically-based companies subject to the accounting law were obliged to pay the innovation contribution. According to the law published on 27 July 2022, this was supplemented by the permanent establishment of the foreign-based company according to the Local Tax Act and the Hungarian branch of the foreign-based company.

In the case of taxpayers newly included in the regulation, the period for the advance determination for the 2022 tax year lasts from the 31st day after the announcement (i.e. 27th August 2022) until the end of the 2022 tax year.

The deadline for determination, declaration, and payment is 20th October 2022 (which also coincides with the deadline for the VAT return for the Q3 period / September).

The innovation contribution advance for Q1 and Q2 periods of the 2023 tax year must also be established and declared by 20th October, but the deadline for payment will be the 20th day of the month following Q1 and Q2 period of the 2023 tax year. The amount of contribution advances for Q1 and Q2 periods of 2023 is 25% of the innovation contribution calculated for the entire 2022 tax year.

The permanent establishment and branch included in the regulation during the tax year must determine its contribution obligation for the 2022 tax year – at its own choice – using one of the following methods:

  • with the amount of the total contribution obligation calculated for the year 2022, calculated in proportion to the days of contribution obligation, OR

  • by deducting the fractional contribution obligation calculated on the basis of the (accounting) closing prepared the day before the beginning of the contribution obligation (26 August) from the calculated contribution obligation for the entire year.

As you can see from the above, the deadline is approaching, so it is recommended to start performing the relevant calculations as soon as possible. If you have any further questions or would like to ask for professional help in calculating the contribution advance, the tax experts of Grant Thornton Hungary are at your, and your company’s disposal.

This newsletter was written based on the information available up to the date of its publication and for general information purposes only, so it does not in any way qualify as personalized tax advice and does not replace it.

The deadline for reclaiming the value added tax paid abroad is approaching

The Hungarian deadline for submitting an application for a reclaim of value added tax paid abroad during the 2021 calendar year is 30 September 2022. The reclaim is a quite complex process, its most important rules are presented below without claiming to be exhaustive.

Companies based in Hungary cannot claim back the value added tax (“VAT”) they paid abroad – this term will be clarified below – in their Hungarian VAT return. The reason for this is that, in the case of services used abroad or products purchased there, the VAT paid by the Hungarian company is not paid into the Hungarian State budget, but into the budget of the foreign country concerned, so in these cases not the Hungarian Tax Authority (“HTA”) is the competent authority.

However, the right to deduct VAT (if other conditions are met) belongs to all taxpayers established within the territory of the European Union, so there are two methods available for reclaiming the VAT paid abroad (which, however, are not alternatives to each other):

  • VAT registration at the given EU member state; OR

  • reclaiming the VAT paid abroad as discussed in this article.

The former (VAT registration) is only possible if a taxable economic activity, to which the locally executed transaction is linked, also took place in the given EU member state. Since this is not realized in a significant proportion of cases, in the absence of such activity and the absence of a registered office or establishment, it is only possible to reclaim the VAT in a separate procedure: according to the rules for reclaiming VAT paid abroad.

It is absolutely necessary to define what we mean by the term “abroad” in this case. As a Hungarian taxpayer, based on Council Directive 2008/9/EC, it is possible to claim back the VAT paid in all European Union member states (currently there are 26 EU member states apart from Hungary). However, outside of the EU, a VAT reclaim can only be requested in a country with which Hungary has a bilateral reciprocity agreement. At the moment, this includes the following 6 countries: the United Kingdom, which has left the EU, furthermore, Liechtenstein, Norway, Serbia, Switzerland, and Turkey.

A total of 32 (European) countries are therefore involved in the procedure for reclaiming VAT paid abroad: 26 EU member states and 6 “others”.

The VAT reclaim process in Hungary can be started by filling out a special application (the so-called “ELEKAFA” form) and submitting it electronically (paper-based submission is not possible). There are a number of conjunctive (simultaneously fulfilled) conditions for the process:

  • the applicant must be classified as a foreign taxpayer in the country concerned;

  • the applicant could not have an economic establishment in the country concerned (during the period which the application concerns);

  • the applicant could not have had a locally executed transaction in the country concerned (during the period which the application concerns);

  • the applicant used the product or service concerned for its taxable economic activity.

As a result of the above, Hungarian taxpayers who are not entitled to deduct VAT due to their domestic activities, or who have chosen to be exempt from VAT, are not entitled to a reclaim of the VAT they have paid abroad.

In case of a reclaim application (submitted on the Hungarian ELEKAFA form) regarding any of the 26 EU member states, the application must be submitted to the HTA, meanwhile in the case of the other 6 countries, including the United Kingdom, the application must be submitted directly to the tax authority of the relevant state. The applications submitted to the HTA are automatically forwarded by them to the tax authority of the relevant EU member state, so the applicant has nothing further to do. In all cases, the application is assessed by the tax authority of the country concerned.

Precisely because of this, the language of the procedure is not Hungarian, and if the relevant tax authority has further questions, it will almost certainly contact the company submitting the application in a language other than Hungarian.

In case of reaching a tax base of EUR 250 for fuel, or EUR 1,000 in other cases, it is necessary to attach copies of invoices certifying the performance of economic activity to the application. It is absolutely necessary to collect the relevant invoices and other documents in advance, as an application can only be submitted once for a period and a country. At the same time, it should be noted that it is not mandatory to wait for the annual submission deadline for amounts above EUR 400, because at that point the reclaim application can be submitted for a period of at least 3 months. However, the rule of one-time submission of the application still applies.

It should be emphasized that in all cases, the national regulations of the country of origin are relevant for the reclaim of VAT paid abroad, i.e. the VAT that can be deducted in that country can be claimed back (regardless of whether the given VAT is also deductible in Hungary). Although the VAT regulations are basically harmonized at the EU level (since the national VAT laws were drawn up on the basis of the same EU directive), there may be national peculiarities in certain detailed rules. A typical example is that, in contrast to Hungary, in some EU member states the VAT content of fuel for passenger vehicles can be deducted without limitation.

In the case of EU member states, the deadline for submitting the application is forfeited: 30 September. If this deadline is missed, there is no place for legal remedies or requests for verification. Individual deadline rules apply to the 6 non-EU member countries.

Applications are usually evaluated within 4 months. If the tax authority of the foreign country requests missing documents or making a statement, the deadline can be extended, but the procedure cannot be longer than 8 months.

Based on the above, reclaiming VAT paid abroad cannot be called a routine task in the life of an average company. Difficulties can be caused by the fact that the deadline for the procedure is void, that the relevant background rules must be known precisely (which in some cases also means knowledge of the national regulations of the country concerned), and even that the procedure is not conducted in Hungarian. The Hungarian tax experts of the Grant Thornton group with an international background are ready to assist you and your company during the procedure, which has many pitfalls.

This newsletter was written based on the information available up to the date of its publication and for general information purposes only, so it does not in any way qualify as personalized tax advice and does not replace it.

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