More and more attention has been paid to stimulating R&D activities both at international level and in Hungary. In addition to the tax base discounts, Hungarian regulation provides tax incentives and discounts related to the so-called "Patent Box" - to support R&D businesses in Hungary.
„Front-end” tax incentives
Corporate income tax
R&D costs are recognized costs, provided that this activity is related to the revenue-generating activity of the company. In addition, a further 100% deduction is allowed from the tax base for the R&D expenses incurred in its own scope of activity; by election, in the current year or when the costs are activated as capitalized development cost, in the tax year of the depreciation.
The company may reduce the tax base three-times if the company performs in R&D activities jointly by an institution of higher education, the Hungarian Academy of Sciences or research institute / research center. However, there is a ceiling for this subsidy, up to maximum 50 million forints for each tax year which shall be treated as de minimis aid.
Social contribution tax
If the corporate income tax base turns negative resulting from the R&D decrement factor, a social contribution tax allowance may be used in case of certain conditions are fulfilled. Its rate is the 50% of the negative tax base resulting from the tax base reduction multiplied with the corporate income tax rate (9%). The discount can be used for up to 12 months from the month subsequent to the filing of the corporate income tax return, but it can be used only against those employees’ social contribution who are working on any R&D project, even against the working hours they spent on this activity.
When employing a research developer employee with a PhD degree or higher, no social contribution tax and vocational contribution is payable for a maximum of 500 thousand HUF gross salary. If an employee is participating in a doctoral program, the payable social contribution is only 11% up to 200 thousand HUF gross salary.
Development tax benefit
In specified regions development tax benefit is available. This requires that at least $100 million worth of investment should be capitalized or operated in connection with R&D activity. This discount is available up to 80% of the calculated corporate income tax.
Local income tax and innovation tax
When calculating the tax base, the revenue (as per the Act on Accounting) is reduced by the revenue from royalties, then it can be further reduced by the direct R&D costs occurred in the tax year. From 2017, this is the same as the amount of the deduction from the corporate income tax base.
Beside the tax base allowance, the law allows municipalities to provide 10% tax incentives for R&D direct costs. This should be checked separately for each municipality.
„Back-end” tax incentives, Patent Box
The 50% of the profit from the royalties may be considered as a tax base decrement factor, but not more than 50% of the pre-tax profit. If this reduction was applied in the previous tax year and a loss was realized on the same intangible asset in the current year, 50% of the loss should be considered as tax base increment factor.
The profit from the sale of royalty-intangible assets may be transferred to the tied-up reserve. This amount placed in the tied-up reserve is a tax base reducing item. (5 years available for released)
Also a tax base reducing item is the gain on the sale of the notified intangible asset - provided that it was owned by the company for one year. If the intangible asset is notified, it should be considered as a tax base increment factor in the case of loss-making sales.
In addition to the above-mentioned tax advantages, it is important to note that the documentation of R&D activities require considerable administrative burden and prudence. Proper accounting treatment is essential, because this is the base of the tax incentives. For this reason, it is recommended for companies to plan their R&D activities, ask for tax advisory’s/accountant’s assistance, plan and utilize the related tax benefits beside the appropriate documentation.