Major changes affecting personal income tax (PIT)
Tax base, tax credit
The most important changes affecting personal income tax are the discontinuation of the applicability of tax credits and that, from 2012, the 27% supplementation of the tax base will only apply to that part of the annual gross income which exceeds HUF 2,424,000. Pursuant to the statutory regulation, tax base supplementation will have been phased out by 2013.
‘Cafeteria’ fringe benefits
Tax on benefits provided by employers will also change. These benefits include what is called cafeteria-type benefits. In addition to a 16% personal income tax, the basis of which is 1.19 times the value of the benefit in question, a 10% health care contribution will also levied on fringe benefits. Fringe benefits taxed at the above preferential tax rate are capped at HUF 500,000 p.a. Any fringe benefit above the annual limit of HUF 500,000 will be considered as so called ‘certain other benefits’ that are subject to both PIT and a 27% rather than 10% health care contribution (HCC).
With effect from 1 January 2012, the available types of fringe benefits will also change, especially as regards benefits related catering services. Food vouchers that used to be universally accepted will no longer qualify as fringe benefits and be replaced with so called Erzsébet vouchers. Benefits provided in the form of Erzsébet vouchers for food ready for consumption or the purchase of food ready for consumption cannot exceed HUF 5,000 per month. Employees may opt for canteen catering at work up to HUF 12,500 per month as an alternative to Erzsébet vouchers.
Subsidies transferred by employers to the Széchenyi Holiday Card will continue to qualify as fringe benefits and the card will comprise three separate sub-accounts from 2012. The maximum amount of the subsidy qualifying as fringe benefits that can be transferred (1) to the accommodation card is up to HUF 225,000 p.a., (2) to the hospitality card is up to HUF 150,000 p.a. and (3) leisure time services is up to HUF 75,000 p.a.
A further change affecting fringe benefits is that Internet subscription will no longer qualify as a fringe benefit from 2012.
Business gifts and representation costs as certain other benefits (except those granted, up to a certain amount, by social entities, public bodies, churches and foundations) will also be subject to a 16% income tax, where the tax base is 1.19 times the value of the benefits, and to a 27% health care contribution. Concurrently, with effect from 2012, in respect of corporate income tax, business gifts and representation costs will, yet again, qualify as business related costs.
The available types of certain other benefits will also change. Their shared characteristic is that the payer incurs 16% PIT liability, where the tax base is 1.19 times the value of the benefits, and a 27% health care contribution liability.
From 2012, the following will, yet again, qualify as certain other benefits: (1) taxable income from products and services provided by employers free of charge or for a discounted price for all employees and/or their close relatives under identical terms and conditions and in an identical manner, and (2) benefits provided by employers for their employees on the basis of internal regulations under identical terms and conditions and in an identical manner.
Costs borne by the payer in connection with business events, including the costs of business gifts and presents up to 25% of the minimum (subsistence) wage per person, will also qualify as certain other benefits.
Certain other benefits also include such business policy benefits (advertising purposes) not considered either as tax exempt or as business gifts that do not fall under the provisions of the Act on Gambling.
Early final repayment scheme
A further major change is that, under the law, a non-refundable subsidy up to HUF 7,500,000 granted by employers to employees for the purpose of the early final repayment of a loan will be tax exempt. Under the law, the subsidy can be transferred directly to the financial institution or, if the private individual has already made the final repayment, directly to the private individual (on condition that the necessary supporting documents are available). The above tax exempt subsidy can be granted between 22 September 2011 and 28 February 2012.
No income from preferential interest will need to be declared in regard to interest-free loans granted by employers to employees for the purpose of early final repayment.
Major changes affecting social security
Replaced with social contribution tax with effect from 2012, social security contribution payable by the employer will be discontinued. Accordingly, from 2012 on, only contributions paid by individuals the social contribution tax not)will trigger entitlement to social security care and social security benefits.
Compared with the previous social security contribution scheme, there will be a partial change in both taxable persons and the method of calculating the tax base.
A change affecting employees is that health care and labour market contribution payable by the insured person will increase from 7.5% to 8.5%; contribution base will also be wider, which means that e.g. jubilee rewards and severance money will also be part of contribution base of private individuals.
Health care service contribution will increase from HUF 5,100 to HUF 6,390 per month.
Major changes affecting corporate income tax
Losses carried forward
One of the most important changes affecting corporate income tax is changes in the rules applicable to losses carried forward. Although losses may be carried forward with no time limit imposed by or consent having to be obtained from the Tax Authority in accordance with the legal principle that rights must be exercised according to their intended purpose; however, in the future, it will take longer to use the losses carried forward, and from 2012, losses carried forward will only be deductible for up to 50 % of the tax base.
From 2012 onward, the losses taken over through transformation or purchase of businesses entities may only be used to a limited extent. Accordingly, legal successors may only use the losses of their legal predecessors if, as a result of the transformation, a member having majority control over the legal predecessor company or the related company thereof acquires majority control and the legal successor company gains sales revenues from at least one activity pursued by the legal predecessor in the two tax years following the transformation. If a business entity is purchased, a further condition of using losses is that a person that was, without a break, a related company of the taxpayer during the preceding two tax years, should acquire majority control. An exception to the above rule is when the shares of the taxpayer or the company acquiring majority control are quoted on the regulated market or the company continues the activity in the two tax years following the acquisition of majority control and the nature of the activity does not differ significantly from the one performed before the acquisition of majority control.
Notified intangible goods
The concept of ‘notified intangible goods’ (i.e. intangible goods granting the owner the right to income from royalties) has been introduced. Taxation is similar to that of notified shares. The deadline open for notifying the Tax Authority is 60 days following acquisition. Profit from the sale or derecognition as contribution in-kind of notified intangible goods (such part of recognised income that exceeds recognised expenses) is deductible from the corporate tax base if the taxpayer presented the notified intangible goods among its own assets for at least one year, without a break, prior to their sale or derecognition. Losses upon the derecognition of notified intangible goods under any legal title (except transformation) increase pre-tax P&L.
Sale of intangible goods granting the owner the right to income from royalties
From 2012 onwards, conditional tax exemption similar to the regulations governing development reserves will be introduced in respect of profit from the sale or derecognition as contribution in-kind of intangible goods granting the owner the right to income from royalties. Accordingly, the corporate tax base can be reduced by such amount of the profit from the sale or derecognition as contribution in-kind of intangible goods granting the owner the right to income from royalties that has been booked as committed reserves. The condition for such reduction in the corporate tax base is that the taxpayer should spend the committed amount on the acquisition of other intangible goods granting the owner the right to income from royalties during the three tax years following the tax year in question.
The calculation of thin capitalisation will change. Under the amendment, when calculating thin capitalisation, it is important that not only the liabilities on which the taxpayer has to pay interest is to be charged to profit, but also those liabilities towards related companies where, in respect of transfer prices, there is a tax base decreasing component that should be taken into consideration. During the calculation the amount of the liability is equal to that of the cash receivables stated as invested financial assets, receivables or securities.
Eligible costs incurred in the interest of the company
There will also be changes in the costs and expenses eligible in respect of corporate income tax. Accordingly, with effect from 2012, eligible costs will include business entertainment under the personal income tax act, business gifts booked as personnel-type other disbursement, donations on condition that the taxpayer holds a certificate issued by public benefit organisations, registered public benefit organisation, churches and organisers of commitment to public benefit and non-refundable subsidies, donations and transfers based on statutory regulations.
Controlled foreign company
Costs and expenses that may be incurred as a result of any consideration paid to a controlled foreign company do not increase the tax base only if the taxpayer can prove that those costs/expenses have been incurred in the interest of its business activity. However, under a new stipulation, the taxpayer is obliged, as part of its obligation to provide the requisite proof, to keep a record of the contracts that it have entered into with the controlled foreign company providing the details stipulated set forth in the act.
In addition the taxpayer will have to prove that its business partner qualifies as a controlled foreign company.
Companies in the ownership of reclassified real estate
With effect from 2012, the Corporate Tax Act will contain special rules applicable to companies in the ownership of land re-categorised as real estate. Under the rules, the sale of such real property will be subject to a special additional tax.
New provisions pertaining to research and development
The Corporate Tax Act states that, with effect from 2010, the Frascati Manual can be used to determine whether an activity qualifies as research and/or development. With effect from 2012, reference to the Frascati Manual will be removed from the Act and, hence, the applicability of the guidelines in the Manual will cease. In the future a definition of basic research, applied research and experimental development will be provided in the Act on Innovation. It also introduces the term ‘R&D agreement’, which intends to solve legal uncertainties surrounding joint R&D activities.
R&D can be pre-assessed. During this process the National Office of Intellectual Property may be asked for a resolution confirming the R&D nature of an activity. The Tax Authority may also contact the National Office of Intellectual Property if, during a tax inspection, the need for the confirmation or otherwise of the R&D nature of an activity or the issue of the connectability of the costs incurred to an R&D activity arises. The Corporate Tax Act provides a definition of an R&D activity as part of corporations’ own activities and that of joint R&D activity. An R&D activity carried out as part of corporations’ own activities are an R&D activity performed with the taxpayer’s own assets and by the taxpayer’s own employees for its own benefit and at its own risks if the taxpayer utilises the results and an R&D activity that is carried out with the taxpayer’s own assets and by the taxpayer’s own employees at other taxpayers’ order; the direct costs of a shared R&D activity performed on the basis of an R&D agreement and within the framework of a joint R&D activity qualify as the costs of basic research, applied research and experimental development conducted as part of the taxpayer's own activity.
The direct cost of basic research, applied research and experimental development conducted as part of the taxpayer's own activity may still be a tax base decreasing item.
With effect from 2012, tax allowances recognised with regard to wage costs recognised as part of the direct costs of an R&D activity and the wage costs related to the employment of a software developer shall cease to exist. The above tax allowances booked on wage costs by 31 December 2011 will, under the temporary provisions, last be deducted from the tax calculated from the 2014 tax base. A major change related to R&D is that from 2012, for the purposes of corporate income tax, the direct costs of R&D will not qualify as eligible costs if the taxpayer does not actually utilise the R&D results for its business activities.
Major changes affecting innovation contribution
In addition to a consistent definition of the term, a major change is that SME’s will no longer be exempted from innovation contribution liability. Liability will cover all types of businesses. With effect from 2012, R&D expenses will not be deductible from the amount of the innovation contribution.
Major changes affecting value added tax
27% VAT rate
The most important change affecting value added tax is that, with effect from 1 January 2012, the VAT rate in Hungary will increase from 25% to 27%, the highest in the Member States of the European Union. According to the general rule the VAT rate applicable to the assessment of the tax payable is the one in effect at the date of supply/performance. In case of certain transactions, however, the law stipulates the application of the VAT rate in force at the time of the assessment of the tax payable rather than the date of supply/performance.
The law also contains temporary provisions on transactions with invoicing periods. In respect of these transactions, the date of performance and that of the incurrence of tax payment liability will be the date when the payment of the consideration falls due; accordingly, under the general rule, the VAT rate in force on the due date of payment shall be applied. The 25% VAT rate will continue to apply to such invoicing periods that will end before 1 January 2012, irrespective of the fact that payment will only fall due after 1 January 2012. Under the temporary provisions, the invoicing periods that also contain 1 January 2012 and where the due date of payment is after 1 January 2012 will have to be split in a time-proportionate manner, on the basis of the number of the calendar days.
VAT on the leasing of passenger cars and other means of transport
The prohibition on itemised deduction linked to passenger cars and other means of transport will be lifted. Accordingly, the VAT charged previously will be deductible from 1 January 2012 if the general conditions for tax deductibility (use in the interest of taxable sale of goods and services) are met. The European Court of Justice called on Hungary to discontinue the practice of limiting the right of tax deduction in respect of the open-end leasing of passenger cars, an issue that we discussed in our July 2011 Newsletter.
Ex post lowering of the tax base
Under the effective VAT Act, according to the general rule, if the amount of the payable tax is reduced ex post, the taxable person is obliged to book the reduction within the framework of self-revision. The law allows only a limited number of exceptions to the rule (e.g. failure of performance and cancellation). Our experience has revealed that this provision imposes a significant amount of administrative burden on taxable persons.
From 2012, exception will increase in number, and taxable persons will be exempted from the obligation of self-revision provided that only after the performance does it become evident that, by mistake, a higher consideration had been invoiced, the advance paid prior to performance is repaid only in part due to failed performance or if a lower tax results from an event other than an ex post reduction in the tax base (e.g. the lowering of VAT rates).
Advance on services provided from abroad
Under the currently effective regulations, reverse charging related to advances paid does not incur tax liability. With effect from 1 January 2012, in the case of services with a place of supply that conforms to the general rule and are purchased from foreign taxable persons, the recipient of the services will, in respect of the advances paid, at the date of receipt of the crediting thereof, be obliged to pay taxes in accordance with the rules of reverse charging. If services are purchased from a taxable person in the Community, the advances paid must be listed in the summary declaration as well.
In addition to the above, a major change affecting VAT is that under the new rules on chain transactions with effect from 2012 only the intermediary company in the supply chain rather than the Tax Authority will have the right to rebut the presumption that it was involved in the chain as a purchaser.
Several amendments have been made to tax warehousing. The definition of the incurrence of tax liability linked to dispatching will change, and so will that of the dispatcher. The amendment also clarifies invoicing (the obligation to issue an invoice will also pertain to transactions by the taxpayer’s head office or permanent branches in Hungary outside the territorial scope of the VAT Act).
A summary report on domestic transactions from 2013
A further major change set forth in the Act on the Rules of Taxation that affects VAT returns is that, with effect from 1 January 2013, a VAT summary report on domestic transactions will have to be prepared. The rules applicable to the summary report are not known yet. The detailed rules will be published in a Ministry of National Economy decree.
Major changes affecting the Act on the Rules of Taxation
Tax registration procedure
From 2012, prior to the establishment of a tax number, the tax authority will conduct a tax registration procedure, as a result of which a tax number is established or refused to be established. During the tax registration procedure the tax authority will check the taxpayer’s executive officer and a member of the taxpayer authorised to represent the taxpayer and a member or a shareholder of a Kft. or a Zrt. holding over 50% of the voting rights or qualified majority influence. A tax number will be refused to be established in such cases where any one of the conditions below exists:
- A current or former executive officer of a company
- that has tax arrears in excess of HUF 15 million (HUF 30 million in the case of taxpayers with the highest tax output) outstanding for 180 days in succession, or
- that ceased to operate without a legal successor with outstanding tax obligations more than HUF 15 million within 5 years prior to the submission of a request for the establishment of a tax number, or
- the tax number of which the Tax Authority cancelled due to unlawful operation within 5 years prior to the submission of a request for the establishment.
- The representative or shareholder has more than HUF 15 million (HUF 30 million in the case of taxpayers with the highest tax output) outstanding tax obligation for 180 days in succession on the day of the submission of a request for the establishment of a tax number.
As a result of the procedure the Tax Authority will establish a tax number within 1 working day from the date of application if none of the above obstacles is likely to exist. In any other cases decision is made within 8 days. If a tax number is established, the Tax Authority will be entitled to cancel it from the registry within 1 year from the date of establishment, if it turns out that the establishment of the tax number occurred despite the existence of an objective obstacle.
The Tax Authority will also check on these conditions when there is a change in shareholders or members listed.
A risk assessment procedure will be introduced in case of a change in the person of the taxpayer’s executive officers or members. Taxpayers that were granted exemption during the tax registration procedure will also be put under revision. The Tax Authority will be entitled to place taxpayers rated as risky as a result of the procedure under stringent tax authority supervision (surveillance) for 1 year, which means that taxpayers can be obliged to submit VAT returns and VIES reports more frequently, have their tax returns or equivalent declarations countersigned and submit photocopies of the supporting documents that serve as a basis for VAT returns to the Tax Authority.
Announcement of an uncertain tax law situation
The notification of an uncertain tax law situation as a new institution will be introduced. During the procedure taxpayers notify the Tax Authority of the fact that they are uncertain about the tax law approach to a situation that incurs tax liability, and, consequently, the tax payable and/or the tax reclaimable may have been erroneously stated in the tax return. The announcement must be included in the tax return submitted by the prescribed deadline . A further condition for the announcement is that the questionable situation, the related legal rules and understanding of law shall be included into a written protocol countersigned by lawyer, tax advisor or (certified) tax expert by the date of submission. As a result of the procedure, no tax penalty or default penalty can be charged in subsequent inspections in connection with tax shortfall found by the tax authority arising from the announced understanding of the law. Notification will not pertain to VAT, innovation contribution, the determination of arm’s length prices or the use of tax allowances.
The rules governing tax inspections will change in a number of respects. In the future, the Tax Authority will not send notification prior to the tax inspections. The inspection will, upon the delivery or handover of a letter of mandate, commence. From that date, no self-revision will be allowed.
A new targeted inspection will be introduced: an inspection aimed at the verification of the real content of the economic events. The objective of the inspection is to verify the real content of the business transactions laid down in the contract in order to determine and control the tax liability of the tax payers connected to the tax payer.
As regards inspection prior to refund that part of subsidies and refunds that is not contested by the Tax Authority will be allowed to be disbursed in a manner that the inspection of the remaining amount will continue.
The mandatory inspection of businesses under liquidation and the regular inspection (inspection with a frequency of at least 3 years) of the 3,000 taxpayers with the largest tax output will be cancelled.
Rules applicable to binding ruling will change. One of the most important changes is that taxpayers may request the extension of the applicability for a 3-year period (irrespective of any future legal changes) of those parts of the ruling that affect the corporate tax, if in the year preceding the tax year the number of employees was at least 200, and/or the balance sheet total amounted to at least HUF 1 billion.
The fee charged for binding ruling is 1% of the transaction concerned, but at least HUF 1 million and at most HUF 8 million. The fee for contract types and contract packages is HUF 10 million. The fee for such transactions that are unrelated in economic point of view, but that have identical tax consequences is HUF 8 million per transaction. The fee charged for a permanent binding ruling will be three times the fee applicable to the taxpayer, but at most HUF 15 million. The fee for binding ruling passed in a priority procedure will be twice the applicable fee. In a priority procedure, the applicable length of administration is 30 days, instead of the standard 60-day deadline.
With effect from 2012 there is no need for certified translations of contracts, vouchers or other documents, including the obligation of TP documentation, if they are available in English, German or French, as the Tax Authority accepts the above documents in these languages as well during a tax inspection.
Higher tax penalties
Penalties that the Tax Authority is entitled to impose will also increase in 2012. Leviable default penalty will increase from the current 75% to 200% of the amount of the tax shortfall if the shortfall is associated with the falsification or destruction of accounting documents, book or records. The lower rate of penalty that used to be applied to qualified taxpayers will be discontinued. From 2012, failure to safe-keep documents will be punishable up to HUF 1 million, and failure to safe-keep preprinted documents will be punishable up to an amount equal to the product of the highest amount of default penalty and the number of the documents that have not been safe-kept.
Tax law changes related to prices applied between related parties (transfer pricing)
The maximum amount of default penalty that can be imposed due to failure to prepare transfer pricing documentation will be higher. If taxpayers fail to fulfil their documentation obligation (including the safe-keeping of documents) related to the determination of arm's length prices, the maximum imposable penalty remains HUF 2 million per record (consolidated record) on the first occasion. If, however, taxpayers are in breach of law even after the first tax inspection, the maximum amount of penalty imposable on the second occasion will rise to HUF 4 million per record. Penalties can be even higher if taxpayers are found to be in a repeated breach of law in connection with records that have already been or would have been inspected. In these cases, a default penalty eight times the one imposed on the first occasion can be levied. Tax inspectors will be allowed to make discretionary decisions if taxpayers prepare the required documents subsequent to the inspection: In such cases the penalty levied can be reduced to an unlimited extent.
With effect from 1 January 2012, taxpayers will have to report data not only on those related companies that are still in operation (within 15 days from the conclusion of the first contract), but also the end of a “related” relation. (within 15 days from the termination).
Under the amendment, with effect from 2012, in the case of transactions between Hungarian taxpayers and their branches and related parties abroad, pre-tax profit shall not be adjusted with the arm’s length price if, based on international treaties, the taxpayer determine its corporate tax base in a manner that it does not contain the income taxable abroad. Pursuant to changes in the rules of taxation, with effect from 2012, during a tax inspection, the Tax Authority will also accept transfer pricing documentation in English, German or French. However, the strict Hungarian statutory regulations will continue to apply to the content of transfer pricing documents. Accordingly, the use of transfer pricing documents prepared by foreign companies in the above languages may carry significant risks for domestic companies.
Major changes affecting eco-tax
Significant changes in the regulations governing eco-tax have been introduced.
One of the most important changes is that packaging devices and other means of packaging rather than packaging as such will qualify as goods subject to eco-tax. Means of packaging include packaging materials and ancillary packaging materials. Accordingly, the law imposes eco-tax liability on domestic manufacturers of packaging materials rather than those performing a packaging activity. There will be no change in the regulations applicable to purchases from abroad.
Major changes affecting vocational training contribution
The basis for the calculation of employer’s contribution to vocational training is the base for the social contribution tax and its rate is 1.5% of the tax base. Gross contribution to vocational training is allowed to be reduced only if the decreasing factor is practical training. No reducing factor will be allowed to be taken into account with regard to the training costs of employers' own employees with effect from 2012.