At the beginning of June, three tax bills were submitted to Parliament. The one that was passed first, the bill on reducing the rate of the social contributions tax, has already been discussed in our earlier newsletter. In this present edition, we would like to provide an overview of the two other bills passed by the Parliament on 12 July 2019. These introduced a wide range of changes from which we will discuss the changes, without an aim for comprehensiveness, that we think will affect our clients the most. Please contact our experts in case you need further information about the details, the entering into effect or the transitional rules.

CORPORATE INCOME TAX (CIT)

From 2019, the corporate income tax advance payment “top up” obligation will be eliminated. Regardless of the above, taxpayers can still choose for the 2019 tax year to apply the earlier “top up” rules, in the framework of which they can also make arrangements concerning their taxes. (Simultaneously with the elimination of the “top up” obligation, the rules of growth tax credit also changed.) Also those companies can be exempt from the top up obligation the business year of which is different from the calendar year and whose business year starts in 2019 and the 20th day of the last month of its business year falls after the publication of this law.

With respect to tax credits, the amendment brought the following changes.

• Related to the tax credit linked to energy efficiency increasing investments, the scope of eligible expenses will become narrower: in the future, only the costs of tangible and intangible assets contributing to the achievement of a higher energy efficiency level will be eligible for the tax credits.
• In case of the development tax credit available to small and medium-sized enterprises, with respect to the installation and operation of investments having a present value of at least 500 million Hungarian forints, the current investment value will be reduced in three steps until 2022. For small enterprises, the minimal present value of the investment will be reduced to HUF 300 million from 2020, to HUF 200 million from 2021, and then to HUF 50 million from 2022. In case of medium-sized enterprises, the new value threshold will be HUF 400 million, HUF 300 million and HUF 100 million in the respective years.
• A further change related to the use of the development tax credit is that in case of investments announced and started after 1 January 2020, the headcount and wage increasing conditions no longer need to be applied for eligibility of the tax credit. However, the average headcount calculated on the basis of the three years preceding the commencement of the investment, should be maintained.
• The possibilities to support spectacle team sports will be extended further: institutions may receive aids up to 80% of the operating costs of real properties used for sports-related purposes, or a maximum of HUF 600 million, for which they may issue certificates to the sponsors. The new provisions may first be applied for the sponsorship programmes applicable to the 2019/2020 period.
• With the elimination of the top up obligation, the limit for the monthly, quarterly tax advance offered to the beneficiary purposes will increase from 50% to 80% of the amount of the tax advance (from 1 January 2020).

Certain concepts related to tax groups, first introduced in 2018, have been clarified and amended.

• Pursuant to the new provisions, enterprises established during the year may also become members of tax groups already in that initial year, meaning that they start their operation as tax group members for corporate tax purposes.
• The current obligation applicable to tax group members to submit a declaration to the tax authority that is the equivalent of a tax return will end. The members will only make a declaration to the representative of the tax group, on the basis of which the latter supplies data in its tax returns for the tax authority.
• It has been clarified that tax group members are required to apply the minimum income (profit) rules; at the same time, based on a new provision, the choice will be made by the group representative.
• The amendments will make it clear that the tax and late payment surcharge will have to be paid by way of the group representative in cases where a member of the tax group has a sanction-type repayment obligation related to the earlier tax base reduction (for example, because of development reserve or a notified intangible asset).
• It has also been clarified that the interest deduction limitation rules (HUF 939,810,000) need to be examined for the entire group, not on the level of individual members. Moreover, the modification specifies that the tax base increasing item related to the interest deduction limitation rules should only be allocated among the affected parties.
• The eligibility conditions of tax group status will also change: in the future, it will not be a requirement that all members of a tax group keep their books in the same currency.
• It has become possible to offer 50% of the tax advance prescribed at the time when becoming a tax group member, as well as upon the termination of membership in a tax group for one of the beneficiary purposes.

From of 1 January 2020, in case of non-pecuniary capital increase, capital decrease and dividend payment, the transfer pricing rules of the corporate income tax act will apply not only with respect to members with majority control, but to all affiliates.

In harmony with the Directive 2016/1164 of the European Council, new concepts and procedures related to international tax avoidance have been introduced in the Hungarian corporate income tax act. On the basis of the directive, new rules concerning the modification of the tax base have appeared, related to capital withdrawals. The application of the tax base increasing item may become necessary if the company relocates any of the following to another country:

• its place of mind and management,
• its assets (from its registered seat or permanent establishment) or
• its business activities.

As a new element, some new rules appeared that are aimed at eliminating tax avoidance arising from the different evaluation, for tax law purposes, of the same facts of the case in different member states. In connection with this, several new concepts have been introduced, and the act prescribes various requirements for the recognition of the incomes and expenses of enterprises operating in several countries (e.g. hybrid entities, payments between the registered seat and a permanent establishment in another country). A taxable person needs to apply these special rules in case tax avoidance situation emerges due to the different evaluation of the transaction under tax law, and an affiliated enterprise is involved (in this case, 50% control would already mean affiliation), or the difference affected the consideration according to the agreement between the parties in a manner that can be evidenced.

Other changes:

• Taking into consideration that the tax rate of the advertising tax will be 0% from 1 July 2019 until 31 December 2022, in this period the CIT law’s non-business related costs rules in connection with the advertising costs will also be suspended.
• The act introduces the concept of trust foundations, and also clarifies that their tax obligations must be determined in the same manner as applicable to the assets managed on the basis of the fiduciary asset management contract. Moreover, amendment stipulates related to both kind of institutions that if they meet some conditions (e.g.: the beneficiary is a natural person) and their income is derived only from certain defined  sources (e.g.:  from securities) then no tax liability should arise.
• In case of taxpayers keeping their books according to IAS/IFRS, there is a new rule for licenses as assets, which do not quality either as tangible or as intangible assets. From the point of view of corporate income tax, these special assets will be treated in the same way as valuable rights (concessions, licenses and similar rights), and depreciation can be recognized after them accordingly.

VALUE ADDED TAX (VAT)

The VAT rate for commercial accommodation services will be reduced from 18% to 5% from 2020. At the same time, a 4% tourism development contribution will have to be paid after these incomes in the future.

From 1 January 2020, the rules applicable to call-off stock will change, which has become necessary due to Directive 2018/1910. The essence of the simplification related to call-off stock is that even though the goods are transported to another Member State within the EU, the actual supply of goods in the intra-Community trade will be considered to be realized when the customer calls off the goods from the stock. In the framework of the amendment, the conditions applicable to call-off stock maintained both domestically and abroad, and especially the administrative rules, will be stricter. As a result, an obligation to maintain detailed records will apply to goods both supplied and acquired as call-off stock, and such supply or acquisition of goods will also have to be reported in the summary statement (i.e. in return form no. A60). Another important change is that a time limit was established for call-off stock. In case goods are stored in another Member State (or Hungary) for a period exceeding 12 months, then the transaction occurs on the last day of the 12^th month, and the intra-Community acquisition of goods will have to be considered to have taken place in the destination country. This option can be applied retroactively too, if the transaction’s date of performance is after 31 December 2015 but before  1 January 2020.

With respect to chain transactions, it is of particular significance whether, in case an intermediate entity in the chain performs the forwarding or it is performed at such entity’s commission, this transaction is done with a view to the acquisition or the sale, and as a result, the acquisition or sale of such entity will constitute the tax-exempt intra-Community supply of goods. Even previously, the VAT Act used a statutory assumption that the intermediate entity in the chain carries this out with a view to the acquisition of the goods, but this will be supplemented now with the provision that this intermediate member of the chain may overwrite the statutory assumption by notifying to the seller its tax number registered in the country of dispatch of the goods.

From 2020, the tax base may be reduced by irrecoverable claims, and as a result, VAT paid earlier may be reclaimed by way of self-revision. With a view to the above, the amendment defines what is considered as an irrevocable claim, as well as what other conditions need to be satisfied to reduce the tax base. It is important that a notification with a certain given content must be given to the partner concerning the tax base reduction, and simultaneously with the self-revision, the taxpayer also has additional data supply obligations to the tax authority.

In connection with tax-exempt intra-Community supply of goods:

• it has been clarified that a condition of the exemption is that the acquiring party must have an EU VAT number; and
• at the same time, it has been introduced as a new condition that the vendor must also properly complete the intra-Community sales list with regard to the transaction (form no. A60).

From 1 January 2019, the VAT Act provides that it is a condition of the tax exemption of services related to goods subject to export or certain, defined customs procedures (e.g. forwarding, services auxiliary to the forwarding of goods) that the service be provided directly for the person that realises the export or the chargeable event with the goods subject to the given customs procedure. The present amendment introduces a similar clarification concerning services related to importing; in other words, it will be the condition of the exemption that the services be performed directly for the importer.

With a view to the principle of tax neutrality, from 1 January 2020, the taxpayer may also reclaim directly from the tax authority the amount of VAT due that was previously assessed erroneously, has been paid to the budget, and cannot be settled in any other way for reasons not attributable to the taxpayer. Such a situation may arise, for example, if the VAT was charged to the taxpayer erroneously, but the taxpayer cannot reclaim in directly, for example, because of the termination/winding-up of the seller in the meantime.

PERSONAL INCOME TAX (PIT)

The most important measure is that the personal income tax allowance of mothers with four children will be introduced from 2020. In case of certain types of independent and non-independent incomes, the allowance, which is applicable to the tax base, will practically provide a full exemption from personal income tax. The allowance may be used by women who are either currently entitled or were entitled for a period of at least 12 years to child benefit in connection with at least four children, who may be her own children or adopted. If the taxpayer uses this allowance, this must be applied before any other allowance. If the taxpayer cannot use the family tax allowance due to the allowance for mothers of four children, then the former may be applied in the form of a family allowance on contribution payments. For the use of this allowance, it is necessary to submit a declaration to the payer, and to indicate in the tax return the names and tax numbers of the children.

The amendment provides for several exemptions in connection with sporting events. Thus, the following will be tax exempt:

• benefits (e.g. daily allowance, bonus, uniforms, etc.) provided for private individuals (e.g. referees, athletes, volunteers, etc.) in the employment of, or in some other contractual relationship with aimed at the performance of work, UEFA or a business association owned by UEFA, in connection with the European football championship to be held in 2020;
• the following benefits provided by an international sport association:
  • accommodation, travel, catering, gifts, provided in the framework of sports diplomatic relations;
  • daily allowance paid to an employed person with regard to its posting abroad; and
  • stipends provided for athletes and coaches independent from the international athletic association;
• incomes provided for persons performing tasks in connection with the holding of international sporting events declared by a government decision to be a high-priority event, to the extent determined in the government decision.

Further amendments deal with foundations that have no public benefit status, as well as with incomes from such foundations. Thus, the amendment defines the concept of private foundations, as well as the method for treating incomes from such foundations (fundamentally in a similar way to the rules applicable to fiduciary asset management).

LOCAL BUSINESS TAX

Although the “top up” obligation will be eliminated in case of several types of tax, in order to ensure the proper financing of local authorities, the obligation to pay a tax advance on the local business tax will remain in case of enterprises subject to corporate income tax, using double-entry bookkeeping whose net revenue reached HUF 100 million in the previous tax year.

From 1 January 2020, the tax authority will forward data notified as new or modified data not only to the municipal government with competence according to the seat of the company, but also to those according to other permanent establishments; as a result, provided that the company notifies the tax authority of its permanent establishments according to the act on local taxes, they no longer has to provide information to each local government individually. A further easing of the rules is that the taxpayer may also register through the state tax authority its representative authorised to act with the municipal tax authority in connection with the local business tax.

The amendment introduces stricter rules for tax exemption, for example, it defines the concept of foundations in such a way that private trust foundations would not enjoy a conditional exemption from local taxes.

ADVERTISING TAX

The amendment practically suspends the obligation to pay advertising tax for the period between 1 July 2019 and 31 December 2022 by setting the rate of the tax at 0%, both for the publisher of the advertisement and its customer.

With respect to the tax year including the day 1 July 2019, the 0% tax rate can be applied for the given part of the tax base, which can be calculated as a time-proportionate part based on the number of days or on the basis of a closing of the books as of 30 June 2019. In any case, only half of the tax advance for the tax year including the day 1 July 2019 must be paid at one of the advance payment dates selected by the taxpayer. The favourable provisions may also be applied from 1 July 2019 by taxpayers following a business year that is different from the calendar year.

SOCIAL SECURITY CONTRIBUTION

From 1 January 2020, the monthly amount of the healthcare services contribution will increase to HUF 7,710 (i.e. HUF 257 per day).

SOCIAL CONTRIBUTION TAX 

The amendment proposes the enactment of special rules concerning the posting of employees between Hungary and the United Kingdom for the eventuality that the UK leaves the EU without a withdrawal agreement (no-deal Brexit).

Previously, the law did not explicitly provide that retired persons who are in a special service relationship with a church would also be exempted from the social contribution tax, but this would have been the intention. The current amendment settles this situation.

Instead of the current quarterly period, an annual period will be used for the assessment of the social contribution tax in the case of agricultural primary and small producers. The amendment clarifies the definition of the tax base and prescribes a quarterly advance payment obligation.

SMALL BUSINESS TAX (KIVA)

The rate for the small business tax (KIVA) will be reduced from 13% to 12% from 2020.

Some new provisions will also be added to the law, under which it will be a condition of choosing the KIVA scheme that:

• the company did not have a controlled foreign company in the previous tax years; and
• the company’s financing expenses according to the CIT Act, deducted with the income from interests (and equivalent) cannot exceed HUF 939,810,000.

If these conditions are not satisfied, the company also loses its KIVA taxpayer status.

Additional amendments:

• the income attributable to a foreign permanent establishment can be taken into consideration as a tax base reducing item (deducted with the tax paid/payable abroad);
• dividends received may only be taken into consideration if the entity from which the dividends come did not deduct the dividends from its pre-tax profit.

THE ACT ON THE RULES OF TAXATION 

From 1 January 2020, if the taxpayer, in the course of performing its EKAER notification obligation, provided modifiable data erroneously, it may correct the already closed notification once, electronically, on the interface of the EKAER system:

• within the expiry data of the EKAER number, or
• within 3 business day after the closing, but in any case
• until the start of an audit by the state tax and customs administration directly in connection with the transport,

Such correction is subject to a fee, the rate of which is HUF 5,000 per modifiable data. The law was also amended with respect to the default penalty that may be imposed in connection with EKAER: on the basis of this change, there will be no penalty imposed in case the taxpayer can prove to have acted as may be generally expected in the given situation.

Any documents related to the determination of tax liabilities on income or assets subject to treaties on the avoidance of double taxation and received on or after 1 January 2018 must be retained by the taxpayer for 10 years from the last day of the calendar year for which the tax return or notification should have been submitted.

With respect to corporate income tax groups, the amendment clarifies that in case the conditions according to the CIT Act do not or do not fully apply to any member of the group, the group status for corporate income tax purposes will automatically terminate.

OTHER CHANGES 

• From of 1 January 2020, simplified entrepreneurial tax (“EVA”) as a form of taxation will end.
• From 2019, the “top up” obligation will also end in connection with the innovation contribution and the income tax of energy suppliers.
• The conditions of tax exemption applicable to foundations will become stricter.
• The favourable simplified contribution to public revenues (EKHO) taxation may also be chosen in the future by persons employed by international sports associations.
• Payments made by way of postal money orders will be exempt from the financial transaction tax up to the amount of HUF 20,000, and the maximum amount of the tax will be HUF 6,000 also in case of payments made by postal money orders. In addition, the amendment also provides for a general exemption applicable to payment transactions made by a certain group of account holders related to the treasury.

We do hope that we could be at your service with this information. Should you have any further queries, please feel free, to contact us!