Draft versions of Act XLI of 2018 on interim tax law amendments and Act LII of 2018 on social tax were approved by the Hungarian Parliament on 20 July, 2018. We hereby summarize the major changes in tax legislation- that shall enter into force mainly from 1st January 2019- and highlight some mid-year changes below in our actual newsletter.
I. Major changes that impact on some tax legislation
Main changes in social tax, healthcare contribution and social security contributions
‘New Act on Social Tax’
The most significant change regarding social tax and healthcare contribution is the ‘new Act on Social Tax’ which will merge the above two items from 1 January, 2019. The provisions of the new act mostly comply with the current regulations.
The new law introduces a flat rate of 19.5%. This means a possible increase of the tax burden of some income, that are currently taxable with only 14% tax.
Due to the merger the personal scope of the new social tax law will change since every natural person has to pay social tax instead of healthcare contribution in case of income which was subject to the previous Act on Healthcare Charge.
The new provision also defines the scope of the social tax: the amount subject to the calculation of consolidated tax base according to the Act on Personal Income Tax (including remuneration paid during a long-term assignment abroad); amount paid based on student contract; amount paid under scholarship agreement; trade union membership fee; fringe (in-kind) benefits; specific defined (in-kind) benefits; tax base of the income from interest rate discount. In addition to the above, tax payment obligation arise in case of income subject to the current healthcare contribution such as income from capital gain, dividend, security lending.
The applicable tax cap will be changed too from next year. Social tax would be payable until the income which is subject to social tax do not exceed an amount of 24 times the minimal wage in the tax year concerned. For example, if we take the currently effective amount of the minimum wage (HUF 138 000 of which twenty-four times is HUF 3 312 000) if the income would be at least HUF 3 312 000, then the current upper limit of HUF 450 000 would increase to HUF 645 840. It is important to point out that the income of the consolidated tax base for the upper limit will not only apply to the aforementioned capital gains but also to income of the consolidated tax base. However there are also still some exceptions: the above limit should not include fringe (in-kind) benefits; specific defined (in-kind) benefits; tax base of the income from interest rate discount.
The new act determines the persons exempt from tax: in accordance with the current legislation individuals insured in other EU Member States will not be obliged to pay social tax in Hungary.
With regard to some of the social tax allowances major changes will be made. The allowance available for the employment of individuals under the age of 25 and over 55 and the allowance for companies performing in free enterprise zones will be abolished. Nevertheless, new allowances may be applicable as of 1 January 2019 for public employees and for individuals entering the labour market. These allowances may cover some of the previous allowances e.g. allowance for employees under the age of 25 or for long-term unemployed. Further allowances will be available regarding employees employed in agricultural jobs not requiring professional qualifications, women raising three or more children entering the labour market, R&D employees.
Major changes before the new Act of Social Tax enter into force
The following points will change in the current Act on Social Tax and Act on Healthcare Contribution until the new act enter into force:
Act on Healthcare Contribution
- 14% healthcare contribution has to be paid on benefits in kind;
- in addition to the individuals insured in other EU Member States, exemption from healthcare contribution is extended with regard to the income of officers employed by EU institutions.
Act on Social Tax
- The tax base of the taxpayers’ tax obligation should not include the payments for income supplement compensation and income compensation benefit, however recovered wages and severance payment (received upon termination of employment)should be included.
Changes regarding social security contributions
From 1 January 2019 the amount of the health services contribution will increase to HUF 7 500 per month, HUF 250 per day (in 2018 it is HUF 7 320 per month and HUF 244 per day).
Pension contribution paid under agreement regarding pension service time and pension base will decrease from 34% to 24%.
Changes in corporate income tax
The definition of notified share and the corresponding tax base deduction item have been modified in favour of the taxpayers: according to the approved law proposal, the preferential rules may be applied in case of transformation, merge and division – without a new notification. The new regulation comes into force on the 31st day after the publication, thus it can be applied this year and also in the case of shares acquired after 31 December 2017, depending on the taxpayers’ decision. If choosing the latter option, the taxpayers need to notify the tax authority within 75 days after the law comes into force.
It is also beneficial for the taxpayers that the maximum of the provision for developments has been increased from 500 million HUF to 10 billion HUF (still considering the limit of 50% on the pre-tax profit).
The tax base decreasing item of research and development has been also significantly amended: in connection with direct costs of basic research, applied research and experimental development carried out within the taxpayer’s own scope of activities, the customer and the service provider can split the allowance, based on their agreement. This cannot be applied simultaneously with the possibility of dividing the R&D allowance between related parties.
The definition of ‘investments to comply with energy efficiency targets’ is also expanded, in result of the accepted modifications, the allowance can be requested not only for investments, but for renovations, as well.
From 2019, the tax discounts in relation to corporate income tax can be validated afterwards as well, with a self-correction regardless of the fact, that the taxpayer requested tax credit in its corporate tax return or not. (We would like to highlight that the limitation declared in the Act on Rules of Taxation regarding the relating subsequent choice remains in force.)
As of 1 January 2019, a new definition appears in the corporate tax regulations: the office kindergarten, according to which the operation expenses are considered to be business related expenses (besides the already existing regulations on expenses of office nursery).
Changes in value added tax
In order to be in line with the EU Guidelines, a new title appeared in the VAT Act, which includes the regulations of voucher supplies. There are two types of vouchers: single-purpose vouchers and multi-purpose vouchers. The most significant difference between them is that in the case of single-purpose vouchers, the place of supply in connection with the voucher’s subject is already known when issuing the voucher. Therefore, the payable VAT amount is also known, however this information is not available in the multi-purpose vouchers. Every handover of single-purpose vouchers generates VAT payment obligation, however in the case of multi-purpose vouchers no VAT payment obligation is generated when issuing, selling and granting the voucher. The aim of the new regulation is to generate the VAT payment obligation earlier: already at the time of purchase and not at the time of redemption.
As of 1 January 2019, the durable (and specially heat-treated, UHT and ESL) milks are added to the super-reduced rated products (5%), from next year the VAT rate decreases to 5% from 27%.
The application of reverse-charge taxation is extended until 30 June 2022 in case of grain and steel industrial products. Furthermore, as of 1 January 2021 in the case of labor lending the reverse charge taxation will be only possible in case of property transfers based on point d of section 10 of the Act on VAT and in case of construction and other similar work related labor lending, secondment and provision of staff based on point 1 b of section 142.
Changes in personal income tax
Changes in relation with specific defined benefits and fringe (in-kind) benefits
The most significant personal income tax related change is the transformation of the specific defined and fringe (in-kind) benefits (cafeteria system) which will be implemented as follows.
In case of fringe (in-kind) benefits from 1 January, 2019 the currently used multiplied tax base (118% of income) will not be applicable, the tax base will be the value of the benefit. However, the tax burden will slightly increase based on the provisions of the new Act on Social Tax. On fringe (in-kind) benefits 19,5% social tax will need to be paid instead of the current 14% healthcare contribution, therefore the total tax burden will increase from 34,22% to 34,5%. In this regard we would like to highlight that as of 2019 the HUF 100 000 cash benefit will not be available as fringe benefit, only the so-called SZÉP cards, trade union and co-operative benefits will remain the only way to provide fringe (in-kind) benefits at a favourable tax rate.
In relation with specific defined in-kind benefits the multiplied tax base (118% of income) will be still applicable, however, instead of 19,5% healthcare contribution 19,5% social tax will be payable from next year. The current tax burden of 40,71% will not change. The provision in the Act of Personal Income Tax about the taxable insurance fee paid by the taxpayers will be ceased along with the possibility of employers giving any type of specific defined benefits provided equally and in the same form to all employees or provided based on an internal policy. However, this latter option will be still available in case of students in vocational high school, students undergoing compulsory internship and students participating in dual training in the frame of student contract.
Gifts with negligible value will still remain as specific defined benefit, but from next year it could be given only once a year. (According to the current regulation gifts with negligible value can be provided three times per year.)
Several tax-free benefits will be revoked, inter alia, support provided by employers for housing purposes, housing allowance for mobility purposes, tickets provided for sport and cultural events. In addition, grant for the purpose of repayment of student loans.
- From next year individuals who have government portal registration (so-called Ügyfélkapu) will have the possibility to submit their tax advance declarations online. After submission the tax authority will forward the information to the employers. In case the individual would submit the declaration both electronically and in writing, the employer must take into account the written version of it.
- The tax authority will also prepare draft tax returns for private entrepreneurs based on the information available. In this regard the filing deadline for private entrepreneurs will be also 20 May instead of 25 February following the tax year.
- In case of real estate rental utility costs charged by the landlord to the tenant will not be considered as income on the landlord’s side, thus these items do not need to be included in the costs, as well. In accordance with the current regulations utility costs can be accounted only if applying itemized expense accounting, therefore the positive change from 2019 that in case of applying 10% expense ratio accounting no tax obligation will arise either.
- In addition to the above in case of real estate rental no tax advance should be determined by the taxpayer if the tenant declares that he rents apartment in other city for a longer period then 90 days and would like to offset the costs against the rental income.
- The definition of permanent home will be determined in the Act CXVII of 1995 on Personal Income Tax. Based on that a permanent home will be a place that the private individual uses for permanent habitation and actually lives there. Moreover, permanent home will not change if the individual stays abroad for a longer period on a temporary basis.
- The definition of securities will be clarified as well: the definition will include other form of capital contributions, as well, provided for by law that manifests in membership, such as assets provided for the foundation of a law firm.
- The amount of the family tax base allowance will increase in case of 2 children from HUF 116 670 to HUF 133 330 - which change was introduced in 2015.
Changes in innovation contribution
As of 1st January 2019 the previous provision which had been repealed a few years ago becomes effective again which prescribes that the micro- and small enterprises are exempt from the obligation of paying innovation contribution - which does not contain any additional reference to the revenue, the total assets and the headcount of micro- and small enterprises. This means that during the classification of micro- and small businesses taxpayers in the future have to take into account the data of the affiliated companies and have to follow a rule so called 2-year-rule as well. As a result of the accepted change, the number of those who are subject to innovation contribution may grow as of 1st January.
Changes in local taxes
Due to the new provisions, as of 1st January 2019 the Local Governments are entitled to assess tax benefit on the value of an investment of the entrepreneur (or on a part of the investment) that has been commissioned in the tax year. According to the modification taxpayers can use the part of the tax benefit which is not used in the current tax year and they can use the tax benefit in the following year(s), depending on the Local Government decision.
It is important that in case of the Local Government assesses the usage of the tax benefit, then they cannot repeal the decision for at least three years or cannot change the decision in the way of putting the taxpayer into a more disadvantageous situation.
In spite of the above the tax exemption in connection with the increase of employment ceases.
Changes in simplified entrepreneurial tax
On the basis of the bill adopted, the taxpayers could choose the simplified entrepreneurial tax for the last time by 20th December 2018 (when a new company is founded). The conversion to simplified entrepreneurial tax is only available also until 20th December 2018.
Changes in small business tax
The conditions of choosing small business taxation are changing favourably: the limit of revenue and total assets increased from 500 million to 1 billion Hungarian Forints.
The tax base of small business tax changes significantly: in-kind benefits and specific defined benefits will also be part of the tax base.
The changes approved clarify the former provisions on avoidance of double taxation principally in connection with the taxable income in abroad.
Abolished taxes: 75% special personal income tax, special tax for credit institutions, and cultural tax
Based on the amendment the special tax with the burden of 75% will be abolished retroactively as of 1 January 2018. The tax was levied on a part of the employment termination related income of employees working at budgetary authority, state and local government organizations. In case the employee has already paid the above income in 2018 the employer’s obligation is to determine the relating contributions and re-pay the special tax to the individuals.
Another change is that as of 1st January 2019 the special tax on the credit institutions and the cultural tax are ceased.
Changes in public health product tax
As of 1st January 2019, the public health product tax rate will increase on average to 20 percent and the tax base decreasing item of health promotion programs will be cancelled. On the basis of the justification of the bill the cessation of the tax base decreasing item was justified by possible misuse of healthcare programs.
Special tax on immigration
The provisions on the immigration tax will come into force on the 31st day following the declaration of this Act. Based on the regulation, the special tax will be payable by organizations that assist immigration in Hungary or supporting an immigration-assisting organization based in Hungary. The special tax rate is 25% of the base of the immigration tax.
Changes in excise tax
The rate of excise duty will continue to rise in line with the requirements of the European Union: the tax rate on cigarettes and smoking tobacco will increase by 1st July 2019 in three steps.
II. Major changes in tax administration
Based on the approved bill as of 1st January 2019 the rate of late payment interest changes significantly. Instead of the current rate of late payment interest (1/365 of the doubling of the prevailing central bank base rate) the rate has to be calculated at the rate of 1/365 of the prevailing central bank base rate increased by five percentage points for each calendar day. Thereby the new rate of the late payment interest approximately will be 3.3 times higher than before. However, please, note that the rate of the self-revision surcharge will not change (1/365 of the prevailing central bank base rate), as this provision will be itemised in the future and not subjected to the late payment interest. Let us note that in case of repeated revision the rate of self-audit surcharge shall be 150 percent of the basis self-audit surcharge.
In case of unreliable taxpayers the following changes will be adopted: the rate of late payment interest will be 150 per cent of the rate that may be levied under the general rules instead of the previous five times the prevailing central bank base rate.
The tax authority also has to pay late payment interest if payment obligation arises from earlier illegitimate resolution. This regulation was contained in the previous Act on the rules of taxation (Art), and came into effect again in the scope of the current legislation.
III. Changes referring to accounting
In relation to the current legislations some companies face difficulties regarding the accounting of the costs incurred in connection with state and EU subsidies. The new amendment provides an opportunity for taxpayers to record these costs deferred- even years before financial settlement in case of certain subsidies.