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Approved 2010 tax law amendments

14 February 2010

1. Major changes concerning corporate taxation

 

1.1 New taxpayers

The scope of taxpayers subject to corporate taxation has been extended to include one-person-companies, foreign organisations, and companies that own real estate.

 

1.2 Change in the corporate tax rate

The general rate of corporate tax increased from 16 percent to 19 percent. This tax rate also applies to the specific taxable income of a company that owns a real estate. At the same time, however, the 4% surtax, payable by partnerships, has ceased to exist.

Tax must be paid on certain income of foreign organisations at a rate of 30%.

 

1.3 Changes in the tax base modifying items

Tax base modifying items that cease to exist

  • Deduction of the local business tax from the tax base
  • Taking provided or received subsidies into account as items modifying the tax base
  • Tax base modification in relation to the balance of interest payment between related parties
  • Reduction of the tax base in relation to the profit from a transaction concluded on a regulated market
  • Reduction of the tax base in relation to the profit earned from the selling of units of  greenhouse emission gases
  • Allowances enforceable by SMEs based on the costs of patents and designs
  • Deductibility of capital gains earned from investments in SMEs
  • Allowance related to the purchase of works of art

New items to be deducted from the profit before taxation:

  • the direct costs of basic research, applied research, or experimental development (only if performed in the scope of the business profile), from which the amount of the state subsidy used for research or development must be deducted (according to the amendment, upon qualifying of an activity as research, the definition used in the Frascati Manual issued by the OECD must be taken into account as well.);
  • impairment loss reversed in respect of an ownership share, if it had earlier been taken into account by the taxpayer as an item increasing the profit before taxation
  • a portion of the dividend received from a controlled foreign company, which had already been subject to taxation in accordance with the Corporate Tax Act at the time of income generation;
  • value increasing refurbishment of a monument or of a building that is under individual local protection.

New items to be added to the profit before taxation

  • a portion of the after-tax profit generated by a controlled foreign company, not distributed as dividend, calculated on the basis of the ownership share in the company.

 

1.3 New tax liabilities

A foreign person or a person formed in accordance with the national laws, but being a non-resident based on the location of its place of business management, is to be regarded as a foreign organisation if no convention is in effect between the country of the foreign seat or residence and Hungary for the avoidance of double taxation and a resident person, not qualifying as a private individual, pays or provides interest, royalty, or service fee to it. The tax base of a foreign organisation: the aggregate amount of the interests, royalties and service fees (business management, business consulting, advertising, market and public opinion poll and other agency fee) provided to it. The tax must be assessed, deducted and paid by the payer. The corporate tax payable by a foreign organisation must be reported by the payer in its own corporate tax return, or if it is not obliged to file tax returns, then on a separate form serving for this purpose.

A foreign non-private individual member of a company that owns a real estate qualifies as a taxpayer, too, if it sells or withdraws its share in the company that owns a real estate.

A company qualifies as a company that owns a real estate if the value of the real estates included among the assets exceeds 75% and it has an owner who has residence in a country which has not concluded a convention with Hungary for the avoidance of double taxation, or if the convention allows that the capital gain be taxed in Hungary. The residence will be taken into account on the basis of the taxpayer’s declaration provided that this provision will not apply to taxpayers quoted on a recognised stock exchange. Members of a company that owns a real estate must report and pay their tax liabilities by the 20th day of November in the calendar year following the day of the sale of their share, or withdrawal of capital. The tax base of the member of a company that owns a property: is equivalent to the positive amount of the consideration upon the selling of the share or the reducing of the company’s share capital, minus the acquisition value of the share and the proven expenses related to acquisition or holding.

The rule for the avoidance of double taxation will also apply to the tax payable by a foreign enterprise and to the tax payable by a member of the company that owns a property. Pursuant to the legal provision, double taxation can be avoided by offsetting (in the form of withholding tax).

            The rule for the avoidance of double taxation has been modified with regard to the foreign source interest incomes alsoThe foreign source interest income is not subject to corporate tax even in the absence of a treaty on the avoidance of double taxation between Hungary and the state of source (the corporate tax base shall be decreased with the amount of the foreign source interest income.

 

1.4 New terms, changes in terms

            Bad debt: in addition to the definition set out in the Accountancy Act, 20% of the historical cost of a claim is to be regarded as bad debt, too, if the debt has not been settled within one year following the payment deadline, but it has not lapsed and is still enforceable in court.

Reported share: a minimum 30% share acquired in a legal person, or a partnership with no legal personality, or a foreign person, and all other shares, if the taxpayer reports the acquisition of the share to the tax authority within 30 days of acquisition. It is a precondition of reporting a share exceeding 30% that the taxpayer had already reported the 30% share earlier.

            Controlled foreign company: a foreign company which has a resident beneficiary owner as specified by the Personal Income Tax Act on more than half of the days in a tax year, and a foreign company if the major part of its income was earned in the tax year from a Hungarian source, and the amount of the tax similar to the corporate tax, payable in the country of residence, remains below the two thirds of the amount of the corporate tax payable in Hungary. This provision need not be applied if the seat of the foreign company is in the EU, an OECD member state, or in a country with which Hungary has concluded a convention for the avoidance of double taxation and the company has real business presence in such country.

           

The regulations related to preferential transformation have been modified as well. In the case of repeated preferential transformation, the member of the company being transformed or initiating share exchange will have no tax liability until the share is not ultimately withdrawn.

The rules for the calculation of the tax base, applicable to special organisations (school cooperatives, ESOP organisations, public benefit companies, and water works associations), will be modified in accordance with the items ceasing to modify the tax base.

The adjustment obligation on account of being related parties also applies to the transactions between the foreign entrepreneur and its domestic permanent establishment and to the transactions between the taxpayer and its foreign permanent establishment, in the way as if the permanent establishment were an independent enterprise. It also applies to company formation involving the provision of non-pecuniary contribution if following formation the founder will have a majority influence in the taxpayer. In the case of checking related partnership, close relatives must be taken into account a single person. The modification of the tax base in relation to the arm’s length price applies to the value of non-pecuniary contributions made upon company foundation, if the founder will have majority influence in the new company.

Certain rules applicable to banks and credit institutions will also apply to financial enterprises from 2010 (determination of the sales revenue, checking of thin capitalization, rules applicable to impairment loss recognised in respect of receivables).

 

1.5 New tax allowance

Tax allowance may be applied to projects of a present value of minimum 500 million HUF, implemented by a small or a medium enterprise. It is a precondition of the use of the tax allowance that over the four tax years following the tax year in which first use was made, the average number of employees exceeds by at least 20 persons in the case of small enterprises, or by at least 50 persons in the case of medium enterprises, the number of employees in the tax year preceding the launch of the project, or the average of the three years preceding the commencements of the project. Or, the recognised annualized amount of wages and salaries exceeds the annualized amount of wages and salaries by fifty times the annualised amount of the minimum wage for the tax year  in the case of small enterprises or by hundred times the minimum wage in the case of medium enterprises, or the average of the three years preceding the commencements of the project. 

           

1.6. Modification of the rules of loss carryforward

A negative tax base may be carried forward without any limitation and without the permission of the tax authority, if it had been generated in observance of the principle of proper legal practice. This rule must also be applied to the negative tax base of tax year 2009.

The rules on loss carryforward may also be applied by credit institutions, already to the negative tax base of tax year 2009.

 

1.7. Change in the costs incurred in relation to business activities

            Benefits in kind recognised as other staff costs in accordance with the personal income tax act in respect of entertainment expenses and business gifts are specified by the amendment as costs arisen outside the interest of the business activity. (At the same time, the amendment to the Personal Income Tax Act exempts these items from the personal income tax payment obligation.)

            Non-repayable grants, subsidies, the granting of non-repayable funds, asset transfer free of charge, assumed liability, service provided free of charge qualify as costs that have arisen outside the interest of the business activity – if:

            - it is received by a foreign person, with the country of whose residence Hungary has not concluded a convention for the avoidance of double taxation;

            - it is received by a person whose business generates losses;

            - it is received by a controlled foreign company.

            The costs arisen in relation to any kind of training, borne by the payer, are specified by the amendment as costs arisen in the interest of the business activity (earlier strict conditions had to be met).

            The remittal of receivables not qualified as a bad debt will only increase the corporate tax base if the taxpayer remits the debt of such a related party which does not qualify as a private individual.

           

2.  Local taxes

2.1 New local business tax items to be deducted from the tax base

New items to be deducted from the tax base: the direct costs of basic research, applied research, or experimental development  recognised in the tax year (taking into account the definition in the Corporate Tax Act and the provisions of the Frascati Manual).

 

2.2 Tax exemption of the tax base originating from a foreign permanent establishment

As a new rule, a portion of the tax base, originating from activities performed at a permanent establishment established abroad, without any condition or restriction, will be exempt from tax (earlier the tax base earned at a permanent establishment abroad enjoyed exemption only if it was subject to tax payable to a foreign local government).

 

2.3 Changes in the tax procedures

            Changes concerning tax procedures: taxpayers must pay local business tax advance based on self-assessment, which means that taxpayers must submit a tax return specifying the amount of the payable tax advance and must pay such amount during the tax advance payment period.

For the purposes of system-related savings, the majority of the tax authorities’ tasks related to local business taxation will be transferred from the local governments to the Tax Office. In line with this, as regards the regulation of procedural issues, the scope of powers of the local governments will narrow down in accordance with the new rules included in the Act on the Rules of Taxation.

A brief summary of the most important transitional regulations: The tax return concerning tax year 2009 has to be filed with the competent local government and any payable tax must be paid to the local government. As regards the advance tax due in the first part of 2010, it still has to be paid to the local government, in accordance with the decision made by the local government.