Egry József - Fények a Balatonon

Doing Business in Hungary 2022

The objective of Doing Business in Hungary 2022 is to provide guidance on the business environment in Hungary for those decision-makers who are interested in engaging in business activity in Hungary.
The publication focuses on the general overview, like currency, climate, cost of living, bankink, and safety and security guidance, followed by a broad outlook on the current economical situation. You will learn from our booklet what business organisations are allowed in the Hungarian company law, what are the criteria to estblish a particular company, what are the minimum share capital requirements, and what is the procedure to form a company.
This publication also deals with the taxation system of Hungary and gives detailed guidance on corporate tax, tax deductibles and tax incentives in Hungary, value-added tax system, personal income tax. A brief guidence will also be found about small business tax, small taxpayers’ itemized lump sum tax, employment taxation, local business tax, innovation contribution, company car tax, withholding tax, and finally tax penalties.

Hungary is an attractive investment target for foreign companies with its qualified human resources, language skills and outstanding location in Central Europe.

Our Doing Business in Hungary booklet has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Please contact us to discuss these matters in the context of your particular circumstances. Neither we nor our partners, employees or agents accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

SPECIAL TRIBUTE

 

This year  we pay special tribute in our publication to the greatest Hungarian painters Munkácsy Mihály, Székely Bertalan, Szinyei Merse Pál, Csontváry Kosztka Tivadar and Egry József.

Employee in office

Employment in Hungary by a UK employer

A foreign employer in Hungary faces several questions, like residency, tax registration, employment reporting, and tax payment. What tax and social insurance obligations arise and who pays them if a UK company employs a worker who carries out their job in Hungary?

Under the Trade and Cooperation Agreement between the United Kingdom and the European Union, the Protocol on the coordination of social security systems applies to persons legally resident in the territory of the Member States or the United Kingdom.

This means that, as a general rule, you will be insured in the country in which you work.

Tax rates

If you work in Hungary, then both income tax and social security contribution obligations must be met in Hungary. In this case, the foreign employer is liable for contributions in Hungary. They shall deduct 18.5 per cent of the contribution from the employee’s gross salary and pays 15.5 per cent employer’s social security contribution.

The employee needs to pay and report the personal income tax every quarter, which is 15 per cent of the amount of the income from the foreign employer.

Accordingly, tax reporting splits between the employer and the employee. The employer will report the social security contribution every month, and the employee will report personal income tax quarterly.

Foreign employer registration

Before starting employing someone in Hungary, a foreign employer must register with the National Tax and Customs Administration (NAV) and apply for registration with the tax office as an employer. This can be initiated on the form T201INT.

After the registration got completed, the foreign employer needs to report the start of the employment. This should be filed to the Hungarian tax office before the first day of employment. When employment terminates, the employer should send a similar report within 8 days. These notifications must be made on the form T1041INT.

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If the foreign employer does not have a representative to fulfil the contribution obligations (ie. does not have a branch or financial representative) and fails to register as a foreign employer, then the employee must fulfil the obligation to register, pay the social insurance contributions and file tax returns. Also, the employee bears the legal consequences of non-compliance with obligations, excluding default fines and tax fines.

Social security payment

The Hungarian social security obligation can be avoided if the English HM Revenue & Customs issues you a so-called A1 certificate, based on which you can remain subject to English social security. You, or your employer, could apply for a certificate or document if you are going to work temporarily in the EU for up to 2 years.

Applications can be made through the gov.uk website here: https://www.gov.uk/guidance/tell-hmrc-about-employees-going-to-work-in-the-european-economic-area-ca3822

This is conceivable if you are sent to work in the Hungarian office. In this case, your English employer will continue to pay your wages, you will be insured in the UK and you will pay your NI there. Your personal income tax will be determined by your tax resident status. If your stay in Hungary exceeds 183 days, you will become a Hungarian tax resident and must pay personal income tax in Hungary on your worldwide income.

Opening a company in Hungary and supply the service through that

It is possible to do the job as a freelancer or by founding a Hungarian company and thus providing services to the UK company.

In the case of the provision of services as a freelancer or by establishing a Hungarian company, the payment of taxes and contributions also arises in Hungary, which must be paid by the self-employed person or the Hungarian company.

Opening a Hungarian company can be an optimal tool to run your business and make use of the Hungarian 9% corporate tax rate, which is the lowest in Europe. Through a company in Hungary, you can easily meet the employment reporting and taxation requirements too.

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In this case, it is important that you carry out the activity on your own and not on the instructions of your former employer. Otherwise, this can qualify as disguised employment, and there is a risk that the tax authorities will reclassify the relationship as employment.

In terms of separating employment from a contractual job, the UK’s IR35 test gives a good understanding. Use this tool to find out if you should be classed as employed or self-employed / contractor for tax purposes. The online questionnaire is available from here: https://www.gov.uk/guidance/check-employment-status-for-tax

Separation considerations include, for example, the following:

  • Does your client have the right to reject a substitute?
  • Would you have to pay your substitute?
  • Does your client have the right to move you from the task you originally agreed to do?
  • Does your client have the right to decide how the work is done?
  • Does your client have the right to decide your working hours?
  • Does your client have the right to decide where you do the work?
  • Will you have to buy equipment before your client pays you?
  • Will you have to fund any vehicle costs before your client pays you?
  • Will you have to buy materials before your client pays you?
  • Will you have to fund any other costs before your client pays you?
  • Would you have to put your mistakes right?
  • Will your client provide you with paid-for corporate benefits?
  • Will you have any management responsibilities for your client?
  • Does this contract stop you from doing similar work for other clients?
  • Are you required to ask permission to work for other clients?
  • Are you having a series of contracts agreed with this client?
  • Does the current contract allow for it to be extended?
  • Will this work take up the majority of your available working time?
  • Have you done any self-employed work of a similar nature for other clients in the last 12 months?

According to similar principles, the Hungarian legislation also distinguishes the employment relationship from the self-employed / company service contract, and though the questions target the same areas, those are less detailed.

  • The activity was not or could not be performed exclusively by you personally.
  • You did not receive at least 50 per cent of your income for the calendar year from the customer.
  • The client could not give instructions on how to carry out the activity.
  • The place where the activity is carried out is in your possession.
  • The tools and materials needed to carry out the activity were not provided to you by the client.
  • You determine the order in which the activity is carried out.
  • You do not have an employment relationship with your client in addition to your business.
united-kingdom-britain-vat-tax

VAT on sales to Britain after the Brexit

Britain became a third country from VAT perspective

From 1 January 2021, Britain became a so-called third country outside the EU in terms of customs, VAT, foreign trade law and statistics. Goods must be placed under an export customs procedure in the European Union. This can be done on behalf of the customer by a customs agent, the parcel delivery service, or even by the customer itself.

 

VAT rules on export to Britain

From a VAT perspective, Section 98 of the VAT Act is applicable in the case of exporting products. This means that the sale of a product dispatched domestically outside the territory of the European Union is exempt from vat.

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The condition to this is that the product needs to leave the territory of the Community

  • right at the time of the sale,
  • but no later than 90 days after the date of performance.

If the goods don’t leave immediately, then those mustn’t be used for their intended purpose or otherwise utilized, excluding testing and trial production.

You need to evidence the proof of dispatch by a certificate of exit from the customs authority. The exporter will receive this certificate from that particular electronic system which placed the goods under the customs export procedure.

If the above conditions are met, then the Hungarian business can issue a VAT-free invoice, referring to Section 98 of the VAT Act.

The goods shipped in Great Britain needs to be placed under an import customs procedure by a customs agent or parcel delivery service. The treatment of goods in the country of destination will be subject to customs and vat rules in the. Make sure you have the correct paperwork for the type of goods you are trading. For more information on this, read the guidance on GOV.UK available from here: https://www.gov.uk/guidance/eu-business-exporting-to-the-uk

VAT rules on export to Northern Ireland

The rule is different if the seller sends the shipment to Northern Ireland. Still, after the end of the Brexit transition period, supplying goods to this area is classed as Community sales for customs and VAT purposes. This means that there is no need to place the goods under a customs procedure. However, in this relation, if you send the supplies to businesses, then B2B rules are applicable and this will govern the place of supply. Generally speaking, in this case, the reverse vat charge method is applicable. On the other hand, if the sale was a B2C supply then the transaction is vatable on the basis of the distant selling rules.

Exceptions may be made only to sales to the Member States to which

  • the seller does not sell the excise goods, and
  • the volume of sales to that Member State in the current year or the preceding year may not exceed the applicable threshold.

For Northern Ireland, this threshold is £70,000.

So this means if the annual value of your distance sales into Northern Ireland is less than the distance selling threshold, you charge VAT at the rate that applies in your own country. You will also account for the VAT in your own country. Registration into the Norther Ireland VAT system is optional under the threshold.

If the seller doesn’t want to register for VAT in Northern Ireland, then it needs to invoice with Hungarian VAT. Upon reaching the particular threshold, the vat registration in the destination country is obligatory.

Upcoming change on 1 July 2021

However, the situation will change on 1st July 2021 with the extension of the Mini One Stop Shop scheme. The expected change will extend the MOSS scheme to include all intra-EU B2C supplies including intra-EU distance sales. This change will lead to the abolishment of distance selling thresholds. More detail on this can be found here: Modernising VAT for cross-border e-commerce.

Company registration

Is company formation in Hungary limited to foreign nationals?

Is company formation in Hungary limited in any way to foreign nationals and are there any differences in the process?

 

This question may arise in setting up a company for a foreign national in Hungary. What are the primary steps before founding? For example, register for a client portal account, or acquire a tax identification number or a TAJ (health insurance) number? In what form of relationship can you be an executive of the company? Who can be a delivery proxy?

 

The establishment of a Hungarian company by a European Union citizen is not restricted. Except, of course, in the cases where a Hungarian citizen would not be allowed to start a company. (e.g., ban). You can be a member of the company, or additionally, an executive too. The managing director has additional obligations, such as opening a company portal account and tasks related to the day-to-day work of the company, eg: compiling accounting documentation, opening a bank account, registering with chambers.

 

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One-stop-shop company formation in Hungary

Company formation

Before engaging in establishing a business in Hungary, it is worth checking out the benefits Hungary can offer.

The process is the same as for Hungarian citizens. If you do not speak Hungarian, it is necessary to translate the documents required for founding a company. The company formation in Hungary is a legal process and the involvement of a lawyer is required.

There are several forms of companies from which you may choose the right, though we generally recommend a limited liability company.

 

Delivery proxy

If either the directors or the members of the company do not have a resident address in Hungary, they need to appoint a delivery proxy. The delivery proxy will act not for the company itself, but the directors and the members. If you reside in Hungary and have an official address card, then you do not need a delivery proxy.

The delivery agent will receive the documents addressed to the foreign person in connection with the operation of the company and then has to forward those to him/her. In the case of a document sent to the delivery proxy by a court or other authority, it shall be presumed that the document became known to the foreign person on the fifteenth day after the lawful service to the delivery proxy.

The name (company name) and place of residence (registered office) of the delivery proxy of a foreign legal or natural person not resident in Hungary must be reported to the court of registration upon the establishment of the company.

The delivery proxy can be an organization with a registered office in Hungary or a natural person with a permanent residence. Members of the company, directors, and members of the supervisory board may not act as a delivery proxy.

 

Client portal account

We recommend that the client portal account be open, but not mandatory. I will write about this below.

A client portal is a tool for managing electronic administration with the government, including tax matters.

To log in to the Client Portal, you need to create a personal Client Portal ID. This is a registration process that you can initiate at any government office. It can be completed at a documentary office, government desk, or tax office customer service and even consular offices. It is worth booking an appointment and indicating if you do not speak Hungarian.

In the case of EEA nationals, an identity card or passport must be presented, otherwise, non-EEA nationals shall show their passport for registration.

 

Company portal account

After opening the client portal account, you can go on with creating a company portal account to which the company is assigned. You’ll be able to manage all the company related e-communication with the government through the company portal. If you do not speak Hungarian, it is worth appointing a company gate agent who will take over the documents instead.

 

Health insurance registration

TAJ (health insurance) card and contributions: An EEA national performing directorship duties in Hungary may not be subject to Hungarian social security rules if he/she has been insured in their home EEA country, and can prove this. If you manage the Hungarian company and do not have social insurance in any of the EU member states, then the Hungarian social security will apply.

 

Personal tax identity number registration

Personal tax identity number: any directors of a Hungarian company need to have a Hungarian tax identity number. This is their private tax id number, separate from the company’s tax numbers. The director, its agent, or accountant can apply for the Hungarian tax identity number. The process can be done at any tax office customer service in person or electronically through the client portal account. The registration can be done by the director, its agent or accountant. A proof of the identity, passport or EEA identity card is also needed to be presented.

 

Opening bank accounts

The tax regulations require all new Hungarian companies, including those that are established by foreign nationals, to open a bank account in the territory of Hungary. Bank accounts cannot be opened remotely, due to the strict anti-money laundering rules all clients shall visit personally the bank office and go through a client screening process before the bank could offer to open the account.

At least one bank account is a must in Hungary, though any other accounts may be opened outside of Hungary. Virtual or mobile app-based accounts, like for example Revolut, Monzo, Starling or N26 are also acceptable. The bank accounts opened in Hungary are automatically declared to the tax office. Additionally, the company needs to report to the tax office any accounts that are opened elsewhere.

Vat exempt intracommunity delivery

Vat exemption: EU vat number is must from 2020

The most significant change in the EU VAT system in 2020 was the tightening of the conditions for the application of the Community tax exemption with the ‘ must have EU vat number ‘ criteria, and the proof of exportation of a product to another Member State.

However, a number of questions have been raised, mainly about the interpretation of the Community Regulation. Concerning these issues, the tax authority has published two leaflets, the main points of which are described in this article (Proof of delivery of a product to another Member State for intra-Community supplies from 2020; Conditions for exemption from intra-Community supplies – the latter establishing the obligation to have EU vat number).

 

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Issues related to tax exemption

According to the law, the conditions for the tax-free sales in the Community are as follows:

(1) The product shall be certified as having been shipped to another Member State and shall have been transported by the seller, the buyer or on their behalf.

(2) The goods shall be sold to another person, acting as a taxable person or a non-taxable legal person in a Member State other than that of the dispatch or the departure place of the transport, and the taxable person or non-taxable legal person to whom the sales is supplied shall have a VAT identification number in a Member State other than that of dispatch or departure place of the transport of the goods and communicated this VAT identification number to the seller.

(3) The vendor of the product shall correctly submit his recapitulative statement (“the exemption shall not apply if the taxable person to whom the tax is payable … has failed to fulfill his obligation to submit the recapitulative statement or has done so incorrectly or incompletely”).

In connection with the above, the leaflet sets out two principles (which are more permissive than the first reading of the Directive and Act CXXVII of 2007 on Value Added Tax [VAT Act]).

The first provision relates to the customer’s EU vat number:

“In the absence of the tax identification number of the buyer in other Member States, or in the absence of the communication thereof, the exemption shall not apply. But provided that the tax identification number is subsequently communicated by the buyer (even after the transaction, and tax number was valid at the time the tax became chargeable) and all other conditions for the tax exemption are met, then the seller may apply for the tax-free treatment of the transaction, subject to any necessary adjustments.”

It is worth pointing out that if the customer’s tax identification number in another Member State is only disclosed to the seller ex post, the transaction can be treated as a tax exemption retroactively, subject to the other conditions for exemption.

Most issues – the new condition in the legislation – were raised by the recapitulative statement as a condition for exemption. The tax office leaflet suggests:

“If the taxable person discovers, before commencing the audit, that the recapitulative statement has not been submitted or is incomplete or incorrect, he may rectify it without further justification.”

The lodging of a summary declaration  according to Article 4/A of the VAT Act point I of Annex I is a prerequisite for the treatment of an intra-Community supply of a product as exempt. Where the tax authority finds during an audit that the recapitulative statement has not been submitted or has been incorrectly submitted, it shall provide the taxable person with an opportunity to rectify it, provided that the taxable person certifies that the mistake happened in good faith. If, however, the taxpayer themselves notice the error or deficiency prior to the commencement of the inspection, they may rectify it without further justification.

Proof of delivery of the product

Council Implementing Regulation (CIR) 2018/1912 of 4 December 2018 amending Implementing Regulation (EU) No 282/2011 as regards to certain tax exemptions for intra-Community transactions shall be directly effective and applicable in all Member States from 1 January 2020. This decree was also interpreted by the tax office in a leaflet (Proof of delivery of the product to another Member State in the case of intra-Community supplies from 2020). Three points are worth highlighting:

The first and most interesting question when interpreting the Regulation is the interpretation of the presumption. The Regulation stipulates that if a particular taxable person holds certain documents, he shall be deemed to have dispatched the product: that is to say, they are entitled to a presumption in relation to the dispatch. However, it is not clear how, in practice, the tax office will assess it if the taxpayer does not have all the documents (which are often very difficult to obtain). That is, how does the tax authority act if the taxable person is not protected by the presumption in the Regulation? The prospectus answers this question as follows:

“… If the taxable person supplying the goods is subject to the provisions of Section 45a of CIR and the other conditions for exemption set out in Article 89 of the VAT Act, they may handle the transaction exempt and use these documents to justify the exemption above in the proceedings at the tax office. Thus, if, for example, a taxable person presents documents under the CIR during an inspection, the tax authority may not require additional proof of delivery from the seller unless they are rebutted by the tax office. For example, if the tax authority proves that, contrary to the evidence in the documents, the product has not yet been shipped to another Member State, the presumption is rebutted. In the event the tax office proves that the documents presented do not comply with the requirements of the CIR (eg, they were not issued by an independent party), this means that they do not meet the requirement of Section 45a of the CIR and the presumption of delivery itself is not met. However, in the latter case, the seller shall have other means of proof that the delivery has been completed. ”

If the taxable person presents documents under the CIR, the tax authority may not require the taxable person to provide further evidence to justify the delivery (unless the presumption is rebutted). However, if the presumption is rebutted, the taxpayer may still justify the delivery with other credible evidence as per the article 45a of CIR, or, failing these, any other document evidencing the fact of the delivery.

If the presumption does not materialize, the question arises as to what kind of certificate can be accepted. As regards proof of delivery, the leaflet states:

“However, it is important to underline that the absence of a taxable person’s certification under the CIR does not automatically mean that the delivery of the product is not justified and thus cannot be exempt. Taxpayers will continue to have the possibility, aside from the provisions of the CIR, to prove that the product has been dispatched or transported to another Member State. The latter shall continue to be guided by the tax office leaflet dated 19 June 2013 on how to verify the shipment of the Product to another Member State in the case of intra-Community sales. ”

According to the prospectus, in the absence of the certificates provided for in the new article of the CIR, dispatch may also be justified according to the tax office leaflet previously disclosed on this subject, provided the content and purpose of such other certificates clearly show the fact of shipment to another Member State. It is worth noting that with the above, the prospectus broadens the way of certification, stating that it is not obligatory to apply the regulation (otherwise directly applicable), since the tax office also accepts other documents to prove the delivery.

Another interesting issue was the interpretation of the concept of ‘independent party’, since under the Regulation certificates of delivery can be issued by two parties, independent of the seller and the buyer.

“The CIR does not specify who is to be understood as independent parties for the purposes of this Article. Therefore, to define independent parties, the provisions of Section 259 (13) of the VAT Act shall be applicable, meaning an independent party shall mean a party who is not related to the purchaser or vendor under Section 259 (13) of the VAT Act. ”

Therefore, Section 259 (13) of the VAT Act applies, and according to this – inter alia – related companies are not independent parties. Based on these, for the  CIR 45a., a document from related parties cannot be used as evidence if the taxable person wishes to set up a presumption set out in the regulation.

Corporate tax in Hungary

Basics of Corporate Income Tax in Hungary

From our article you will learn the basics of corporate tax in Hungary, like what is the tax rate, what expenses are deductible, what rules relate to depreciation, provisions, loss carried forward.

Taxpayer

All business companies are subject to corporate tax regime, and shall pay corporate tax (“társasági adó” or “TA” or “TAO”) on their taxable profit.

Tax rate

The tax rate is 9% of the positive tax base. There is an expected minimum tax base that is 2% of the total income.

Tax base adjusting items

Domestic and foreign businesses alike assess their corporate tax base as the earnings before taxation modified by the items set out in the Corporate Tax Act, such as:

  • Loss carried forward
  • Provisions
  • Depreciation and amortisation
  • Declared share
  • Declared intangible goods and chattels
  • Dividends
  • Research and development
  • Costs and expenses not incurred in the interest of business operations
  • Penalty
  • Thin capitalisation
  • Controlled foreign company (CFC)

Non-deductible costs and non-taxable incomes

Bribes, ‘kickbacks’, and illegal payments are not recognised as business costs, nor are fines and penalties. Any expenses that are not related to the taxable business operation of the company shall not be recognized. Corporate tax base shall be increased with forgiven (waived) receivables if those wouldn’t qualify as uncollectible. Expenses that relate to payments to controlled foreign companies, unless the tax payer proves that those are in relation with the business activity.

Depreciation

Tax depreciation charges are considered as tax deductible expenses for tax purposes at statutory rates. At some types of assets accounting depreciation is accepted for tax purposes. Some assets may not be depreciated, such as land.

Tax depreciation rates of some typical assets are:

  • buildings: 2.0%
  • computers and it assets: 33.0%
  • industrial robots: 33.0%
  • vehicles: 20.0%
  • other fixed assets: 14.5%

Tax Loss Utilization

Inasmuch as the tax base is negative in any tax year, the taxpayer may deduct such amount of loss from its pre-tax profit spread out at any rate, depending on his decision, in the following 5 tax years.

According to the general rule, losses deferred from previous tax years may be deducted from the pre-tax profit up to 50 percent of the tax base for the tax year calculated without any appropriation thereof.

Minimum Tax

Companies, whose corporate income tax base does not reach the expected minimum tax base are expected to pay corporate tax based on the expected tax base.

The expected minimum tax base is 2% of the total revenues adjusted with certain items (for example 50% of private member’s loan increment from prior year is an increasing item).

Those companies, whose corporate tax base doesn’t reach the minimum tax base may opt to not to pay tax by the expected minimum tax base but the actual tax base. In this case a detailed declaration shall be filed regarding the incomes and expenses recognized during the tax year.

Dividends

The dividends distributed to members are not subject to dividend tax. Natural persons may incur personal income tax on received dividend.

The pre-tax profit shall be reduced by any income received or due from dividends and shares, with the exception of the income received or due as dividends and shares from a controlled foreign company if the party approving the dividend records it as an expense.

Under the Corporate Income Tax Act, the taxable person may deduct the dividend received from a controlled foreign company from the pre-tax profit if he/she had previously settled an item which increases the tax base and he/she had not been taken it into consideration as a reducing item.

Filling Requirements

Generally, the tax period is equal to the calendar year. However, companies can apply for different tax and accounting year. A tax return shall be submitted to the respective tax authority up to five calendar months following the last day of the tax period.

Group taxation is not recognised in Hungary, all entities are taxed separately.

Double Taxation Avoidance Treaties

Hungary has concluded double taxation avoidance treaties with 81 states. These bilateral tax treaties are based on the OECD Model Treaty.

Transfer Pricing

Transfer price regulations are based on OECD guidelines. Under transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company

  • may decrease its pre-tax profit by the difference, provided that:
    • the consideration applied renders the pre-tax profit greater than it would have been in case the arm’s length prices had been applied and
    • the related party is also a resident taxpayer or such non-resident company which is subject to corporate tax in their country of residence (with the exceptions of controlled foreign companies) and
    • it holds a document signed by both parties establishing the amount of the difference, or
  • shall increase its pre-tax profit by the difference, provided that the consideration applied renders the pre-tax profit smaller than it would have been in case arm’s length prices had been applied.

The above rules of transfer pricing shall not be applied to long-term agreements concluded by small and medium-sizes enterprises if the associated enterprise was established in the interest of purchases and sales and the voting rights of the small and medium-sized enterprises held in the affiliated company exceeds 50 per cent on the aggregate.

Transfer pricing documentation shall be prepared for each contract between related parties to justify that the price applied is in line with the market price. The documentation may be prepared in English, German or French too.

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Taxation considerations before company formation in Hungary

Before engaging in a company formation in Hungary we present you this short summary on the taxation of business associations. Should you have any further queries relating to establishing a company in Hungary please feel free to contact us.

Corporate and dividend tax

The profit of companies is subject to corporate tax.

 1. Taxable person of corporate tax

Pursuant to Act LXXXI of 1996 on Corporate Tax and Dividend Tax [hereinafter referred to as the ‘Corporate Tax Act’], resident taxable persons include:

  • business associations established under Act V of 2013 on the Civil Code, and, before 15 March 2014, Act IV of 2006 on Business Associations (such as joint-stock company, limited liability company (kft.), general partnerships (kkt.), limited partnerships (bt.) and other organisations (e.g. foundations, associations);
  • non-resident taxable persons with a place of business management in Hungary.

Pursuant to Hungarian legislation, group taxation is not permitted.

Generally the tax year corresponds to the calendar year. However, pursuant to the Accounting Act, taxable persons may exercise discretion in deciding on the operation of a financial year differing from the calendar year, especially if it is made reasonable by the characteristics of operation (with special regard to the cyclicity of the course of business or the information claim of the parent company).

 2. Taxable income

The incomes deriving both from Hungary and abroad of resident taxable persons shall be subject to tax. Pre-tax profit, determined by applying the tax base increasing and decreasing items set forth in the Corporate Tax Act, represents the corporate tax base.

Pursuant to the general anti-avoidance rule, the Tax Authority shall qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to enable tax advantages (tax exemption, tax allowance) to be obtained.

 Items adjusting the tax base include:

2.1 The tax base must be increased with the costs and expenses incurred in relation to items specified in legislation, including e.g. fines, penalties, late payment penalty interest due to delay in the payment of taxes.

 2.2 Depreciation

Regarding taxation, the entire purchase value or cost of production – in the course of several years – may be written off the tax base.

 2.3 Development reserve

The portion of the retained earnings committed to future capital investments (development reserve) shall be regarded as accelerated depreciation and can be deducted as a lump sum from the pre-tax profit. The taxpayer may release the non-distributable reserve exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserve. The full amount of the development reserve cannot exceed 50 per cent of the pre-tax profit or HUF 500 million per tax year.

 2.4 Provisions

The tax base must be increased with the amount of the provisions for probable liabilities and future costs accounted for as expenses; however, the amount recognised as income due to the utilisation of such provisions qualifies as a tax-base decreasing item.

 2.5 Loses

In principle, deferred losses of previous tax years (negative tax bases), can be deducted from the tax base in an amount of the taxpayer’s choice, in the forthcoming five tax years after the occurrence of the losses (up to 50% of the tax base calculated without losses), and the deferred but not yet deducted loss may be rolled on, with regard to the time limit of five tax years.

 2.6 Dividend

Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, the amount of dividends received from a controlled foreign company cannot be deducted from the tax base.

From 1th January 2006, income from dividends is not subject to dividend tax. No withholding tax is imposed on dividends paid by a resident company to another (either resident or non-resident) company. (This is not the case – according to a separate law – if dividends are allocated to private individual members of a resident company).

 2.7 The tax base of taxable persons in contact with a controlled foreign company

The part of the previous-year income (tax base) of the controlled foreign company calculated according to the rules of the CIT Act (considering the controlled foreign company as a resident taxpayer) increases the taxpayer’s pre-tax profit which arises from the following incomes of the controlled foreign company

  • income related to interest and financial assets,
  • income related to intellectual property rights,
  • income arising from retaining and derecognising shares,
  • income related to financial leasing activity,
  • income related to insurance, banking and other financial activities,
  • income from a person who deals with the purchase and sales of goods and services for related parties if this person does not or only slightly realises an added economic value.

The increasing item shall only be applied if pursuant to the rules of the CIT Act, the assessed income is positive and

  • it exceeds the third of the controlled foreign company’s total income, or
  • the foreign company conducts leasing, banking, insurance or other financial activity and the third of its total income arises from transactions made with the taxable person or its related parties.

 Payments made to the controlled foreign company do not usually qualify as eligible cost incurred in favour of the undertaking except if the taxable person can prove that the payment has incurred in connection with its business activity.

 2.8 Transfer price

Transfer price regulations are based on OECD guidelines. Under transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company

  • may decrease its pre-tax profit by the difference, provided that:
    • the consideration applied renders the pre-tax profit greater than it would have been in case the arm’s length prices had been applied and
    • the related party is also a resident taxpayer or such non-resident company which is subject to corporate tax in their country of residence (with the exceptions of controlled foreign companies) and
    • it holds a document signed by both parties establishing the amount of the difference, or
  • shall increase its pre-tax profit by the difference, provided that the consideration applied renders the pre-tax profit smaller than it would have been in case arm’s length prices had been applied.

The above rules of transfer pricing shall not be applied to long-term agreements concluded by small and medium-sizes enterprises if the associated enterprise was established in the interest of purchases and sales and the voting rights of the small and medium-sized enterprises held in the affiliated company exceeds 50 per cent on the aggregate.

 3. Rules of income (profit) minimum

Pursuant to regulation on income (profit) minimum, if pre-tax profit or the tax base, whichever is higher, does not reach 2% of the adjusted total income, the taxpayer shall

  • pay tax on 2 % of the adjusted total income, otherwise
  • make a statement in the form complementing the tax return, which shall qualify as a return.

 4. Tax rate

As of tax year 2017 the corporate tax rate is 9 % of the positive tax base.

 5. Tax allowances

 5.1 Development tax allowances

Among others, development tax allowances can be obtained with regard to the following investments:

(1) investments started and operated within the administrative jurisdiction of a preferential local self-government of a value of HUF 1 billion or more;

(2) environmental protection investments of HUF 100 million or more;

(3) investments of HUF 100 million or more related to the production of films and videos;

(4) investments promoting the creation of jobs.

 5.2 Tax allowance of sponsoring spectator team sports

By applying the tax allowance granted by legislation, taxpayers may achieve a tax saving if they support organisations with an approved sport development programme conducting activities in any of the following five sports.

Spectator team sports include:

(1) football;

(2) handball;

(3) basketball;

(4) volleyball;

(5) ice-hockey.

 5.3 Additional tax allowances

In addition to the above, the assessed tax may be reduced with the following tax allowances:

  • Tax allowance of supporting performing arts organisations,
  • Tax allowance of supporting film making,
  • Tax allowance of supporting cooperatives to create community funds,
  • Tax allowance of the SMEs investment credit interest,
  • Tax allowance of supporting Olympic bid,
  • Tax allowance of supporting energy efficiency investment,
  • Tax allowance of supporting live music service.

 6. Avoidance of double taxation

Double taxation may be avoided unilaterally or on the basis of a treaty. A unilateral tax withholding shall be applied to income taxes paid or payable abroad, limited to 90% of the foreign tax and may not exceed the amount determined according to the Hungarian rules.

If a treaty is to be observed, allowances serving the purpose of avoiding double taxation may be obtained under the treaty.

 7. Non-resident individuals

7.1 Foreign companies conducting entrepreneurial activities in premises in Hungary (known as ’non-resident entrepreneurs’ in Hungary) shall pay tax on their income deriving from their entrepreneurial activities conducted in premises in Hungary.

The cases in which foreign companies shall apply a form of business establishment in Hungary (for example stablishing a branch office) are specified by specific other legislation. A branch office is an organizational unit of a foreign company, without legal personality, vested with financial autonomy but registered in Hungarian company registration records. For taxation purposes, a branch office is considered a place of business in Hungary if it complies with the definition of place of business provided under tax legislation. The definition of ‘place of business’ in the Corporate Tax Act fundamentally corresponds to the one in the OECD Model Convention. However, sites of construction or assembly operations – in case of lacking a convention – may be regarded as a place of business only after at least three months elapse.

Taxable incomes related to the place of business shall be determined under the rules applicable to resident companies. Furthermore, the tax base of a foreign entrepreneur in respect of their place of business in Hungary shall be adjusted by reducing it by a portion of its operating costs and expenses and overhead charged to the place of business establishment as commensurate with total revenues and be increasing it by operating costs and expenses and overhead of the place of business charged to the pre-tax profit or loss; furthermore, it shall be increased by 5 per cent of the revenues earned through but not accounted for at the place of business.

The profit of the place of business is subject to tax at the general tax rate and also tax allowances may be obtained, if relevant conditions are fulfilled.

No corporate tax liability is incurred by foreign organisations with no place of business in Hungary with respect to their revenues deriving from Hungary.

7.2 Non-resident individuals who obtain any income through the transfer or withdrawal of their share in a company with real estate holdings (’member of a company with real estate holdings’ in Hungary), incur corporate tax liability with respect to this income. Corporate tax is calculated at the general corporate tax rate and payable to the Hungarian Tax Authority. The tax base of members of companies with real estate holdings shall comprise the consideration received upon the transfer of their share in the company, or the sum received when decreasing the subscribed capital of the company through disinvestment, less the costs of acquisition or maintenance as verified, if the resulting amount is positive.

 8. Administration (tax refund and tax return, payment of taxes)

An annual return of corporate tax shall be filed by taxpayers operating according to the tax year by 31st May of the year following the tax year. In case of taxpayers opting for a business year other than the calendar year, a return shall be filed until the last day of the fifth month following the last day of the tax year.

Corporate tax shall be established by the taxpayer through self-assessment.

 Other income taxes

Local self-governments impose a local business tax on business activities carried out on a permanent basis at a maximum rate of 2%. This shall be collected by the tax authorities of self-governments of Hungary.

Taxes imposed on property

In Hungary, local taxes, i.e. building tax and land tax, are payable to the local self-government. Owners are liable to declare and pay the above taxes. The annual maximum rate of building tax is HUF 1,100 per square metre or a maximum 3.6% of the market value of the real property. The annual maximum rate of the land tax is HUF 200 per square metre or 3% of the market value. The above taxes can be accounted for as costs when determining the corporate tax base.

Company formation in Hungary

AccountingBudapest has great expertise in company formation in Hungary with competitive prices. Our procedures are assisted by financial and legal professionals that guarantees the easy and hassle-free process.

e-filing

Company Portal goes live from 1 January

The government’s company portal system goes fully live from 1 January 2019, which may block companies’ tax administration if not arranged.

The company portal has been on the table since August 2017, though it might have fallen out of the lights after the National Tax Administration (NTA) confirmed at the end of the last year that they will accept tax reports through the existing channels. They suggested this transition period will be granted for the year 2018.

Recently the NTA has acknowledged that usage of the Company Portal becomes mandatory from 1 January. Accordingly, tax reports and taxation related issues can be managed only via the Company Portal system.

Since the current year is passing quickly we want to call your attention to initiate the registration if you haven’t already completed.

As the first step the director of the company shall register for the Client Portal (“Ügyfélkapu”). This provides identification services for the private persons who want to use the government e-services. The registration can take place at any government desk, or at any Hungarian consular office.
You will need to appear personally, and in the procedure you will be identified by your ID card or passport.

The second step is to register for the Company Portal. The website can be found at https://cegkapu.gov.hu. Here the director of the company needs to login with their Client Portal credentials. After that most likely you will need to fill in a form about the company and the contact details, and upload a fresh copy of the company extract, and the specimen signature of the director.

Finally, you need to assign your tax adviser to the Company Portal, this can be done through the website https://tarhely.gov.hu.