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 20^th 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 5^th 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 31^st day after the announcement (i.e. 27^th August 2022) until the end of the 2022 tax year.

The deadline for determination, declaration, and payment is 20^th 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 20^th October, but the deadline for payment will be the 20^th 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.