At the end of last year, a number of amendments entered into force, by way of Acts of Parliament and Government Decrees, concerning the HIPA-related obligations of businesses for 2021. In our newsletter we give a comprehensive overview of the changes concerning local governments’ tax policy and the allowances for micro, small and medium-sized enterprises, as well as provide information on the abolition of the concept of temporary business activities, as well as changes in the earlier practices concerning the division of the tax bases, auditing and the filing of tax returns.
- Restrictions concerning local tax policy
Pursuant to Government decree no. 535/2020 promulgated on 1 December 2020:
● In the tax year ending in 2021, the rate of any local tax (e.g.: HIPA) or municipal tax may not be higher than the rate laid down in the municipal tax decree applicable on 2 December 2020 to the same local tax or municipal tax.
● Local authorities must continue to provide all tax exemptions and allowances available under the rules in effect on 2 December 2020 also in the tax year ending in 2021.
● Local authorities may not introduce new local or municipal taxes for 2021.
- Reduced HIPA rates for micro, small and medium-sized enterprises
In the tax year ending in 2021, the rate of the HIPA is capped at 1% for all micro, small and medium-sized enterprises, as defined in Government Decree 639/2020, promulgated on 22 December 2020. This scope of this provision covers enterprises where:
● the total number of employees is less than 250 and
● the annual net turnover or balance sheet total is not more than HUF 4 billion.
With the exception of the HUF 4 billion limit, the regulations of the SME Act apply to the classification.
As a further reduction of their tax burdens, in 2021, micro, small and medium-sized enterprises are required to pay only 50% of their tax advance as due at the given tax advance due date, which reduction is to be entered in the records of the local tax authority without adopting a decision.
Compliance with the above requirements can be determined:
● in case of enterprises required to prepare annual reports, on the basis of the last annual report drawn up and accepted pursuant to the Accounting Act and available on the first day of the tax year starting in 2021, or in the absence of an accepted annual report, on the basis of the estimated balance sheet total, annual net turnover and employee headcount figures;
● in case of enterprises not required to prepare annual reports, on the basis of the annual net turnover and headcount figures in the tax year ending in 2020; and
● in case of enterprises starting their activity in 2021, on the basis of the annual net turnover and headcount figures estimated for the tax year.
The condition of the above reduction of the local business tax advance is that the enterprise is required to submit a declaration via the Hungarian Tax and Customs Administration (NAV), by way of an electronic form, not later than 25 February 2021, to the tax authority according to its registered seat or business premises, to the effect that
● it qualifies as a micro, small or medium-sized enterprise;
● it is entitled to use the amount of the tax reduction according to Government Decree 640/2020 as a temporary subsidy; and
● on 31 December 2019, it was not classified as an undertaking in difficulty, as defined in Section 6 (4a) to (4b) of Government Decree 37/2011, or
● the circumstances according to Section 6 (4a), points c) and d) do not apply to it at the time of the declaration, and further
● if it has not previously done so, it has the address of its business premises registered.
- Prices between affiliated undertakings
As from 1 January 2021, the requirement of the Act on the Rules of Taxation to classify contracts between affiliated undertakings will also be incorporated in the provisions on HIPA, and it is stipulated that taxable persons subject to corporate income tax are required to determine their net turnover or net turnover reducing costs and expenses arising from transactions with affiliated undertakings by taking arm’s length prices pursuant to the Act on Corporate Income Tax and Dividend Tax into consideration.
If the difference would reduce the basis for HIPA, it is only possible if the taxpayer has a statement from the affiliated undertaking to the effect that it has increased its HIPA base (the base of foreign tax corresponding to local business tax, corporate income tax or equivalent foreign tax) by the same amount.
The correction may be made in a lump sum or by modifying each component of the tax base separately.
- Temporary business activities
As of 1 January 2021, the concept of temporary business activity and the related HIPA obligation will also be abolished.
It is important that the local government on the area of jurisdiction of in which an enterprise is engaged in building construction activities for more than 180 days shall continue to be considered as business premises and thus be subject to the local business tax, provided that all calendar days of the period from the date of commencement of the activity until the date of acceptance of the performance by the client on the basis of the contract between the parties shall be taken into consideration in the calculation of the number of days.
- Division of the local business tax base
Due to the change in the definition of permanent establishments and the elimination of the concept of temporary business activity, the rules applicable to the special tax base division method available to businesses pursuing building construction activities have been refined.
In the course of the asset-proportionate division of the tax base between the registered seat and other business premises, the value of leased motor vehicles is to be taken into consideration in proportion to the personnel expenses allocated to the given registered seat and the business premises. So far, the asset value of these vehicles had to be (or should have been) allocated to the settlement where they are typically stored, for which reason taxpayers often opted for a local government with a low tax rate.
- Self-revision and tax audits of earlier tax years
It has been clarified that in case the enterprise itself in the framework of self-revision, or the tax authority in the course of an audit, found a tax difference for earlier tax years, then the effect of this difference must be disregarded in the calculation of the local business tax base for the year in which the difference is accounted for. This way it can be precluded that an enterprise would taking certain items into account in the determination of the local business tax base in two tax different years, i.e. it not to increase or decrease the tax base twice.
The new provision continues to allow the taxpayer to take the effect of the detected error into account not in the course of a self-revision, but a tax assessment for the year of the discovery, i.e. not to deviate from the amount of the tax base as shown in its ledger accounts.
- Local business tax returns
It was also possible before to submit local business tax returns using the relevant form of NAV instead those of the individual municipalities, but from 1 January 2021, HIPA tax returns may only be submitted with the use of the electronic form of NAV. Excepted from the above rule are private entrepreneurs that do not qualify as sole traders, who may still submit their HIPA tax returns in a paper form, directly to the local authorities.
The local business tax and tax advances must be paid directly to the individual municipalities also in the future.
We do hope that we could be at your service with this information. Should you have further queries, please feel free, to contact us!
