The Economic Commission of Hungary’s parliament has submitted draft amendments (No. T/6349/2. and T/6351/21.) to the draft law submitted by the Ministry of Finance (No. T/6349. and T/6351.) on 26 June 2019. This bulletin summarizes the most important changes to the tax legislation in question.

Corporate income tax

Group taxation

Interest limitation rules in connection with group taxation would be modified in a way that net borrowing costs and earnings before interest, tax, depreciation and amortization (“EBITDA”) for the tax year should be calculated for each group member and those amounts should be aggregated. Thus, the aggregate amount of net borrowing costs would be compared to 30% of the aggregated amount of EBITDA and to a cap of HUF 939,810,000 (whichever limit is higher). The calculated amount of non-deductible net borrowing costs would be allocated to the respective group members who accounted for net borrowing costs based on a ratio of the members' and the aggregated EBITDA. Based on the draft amendment, the HUF 939,810,000 cap would only be applicable for group members who recorded net borrowing costs in the given tax year.

The group would only be entitled to apply the allowances in connection with grants for filmmaking or popular team sports, if at least one group member meets the related requirements. The declaration and submission should be performed by the group's representative.

In case the tax liability of the group or that of a group member were abolished on a day different from the last day of the financial year, the date of termination would be the last day of the previous financial year.

Tax allowances

In contrast to the draft law, according to the amendment companies would be obliged to maintain their number of staff in relation to the Development Tax allowance for HUF 300 million- and 400 million-, and for the HUF 1, 3 and 6 billion investments. The average number of staff (not including the staff of a foreign permanent establishment) in the four consecutive tax years following the claim of the tax allowance must not be less than the average staff number of the three tax years prior to the tax year of the investment.

Based on the amendment, the cap for the corporate income tax contribution would be modified from 50% to 80% of the monthly or quarterly tax allowance, being in line with the abolishment of the top-up requirement.

Other provisions

The amendment would clarify the tax base-increasing obligation regarding exit taxation, while its scope would remain the same. Accordingly, the difference between the fair market value and the tax net value (or an amount equivalent to it) of the transferred assets or activities at the time of exit would increase the tax base (if there is no other tax base-increasing obligation on the same basis).

Rules regarding top-up obligation would be abolished from the tax year 2019. However, taxpayers would have the opportunity to perform top-up payment on the 20th day of the last month of 2019 (when a declaration is filed). According to the amendment, taxpayers would have the opportunity to apply rules that have been in place so far in connection with grants made for filmmaking or popular team sports. For the period from 1 July 2019 to 31 December 2022 – when the advertisement tax would be set at a flat rate of 0% – the amendment would suspend any tax base-increasing obligation in connection with non business-related costs (Point 16 Part A Appendix 3 of Act on Corporate Income Tax).

Social security

Social tax

As of 1 July 2019, the rate of social tax is 17.5% (before July 2019 the applicable rate was 19.5%).

If the social tax is payable by the individual, 85% of the income shall be considered as the individual’s personal income tax and the social tax base as of 1 July 2019.

Local business tax

Based on the Amendment, the State Tax Authority will forward local business tax returns it has received to the appropriate local municipality, not only on the 15th and the last day of each month, but on every day of the tax year (and also issues a certification of filing accordingly), if the returns do not contain any errors or inconsistencies.

The wording of the top-up requirements would be modified: in respect to local business tax the year-end’s top-up return and payment liability would still exist for those taxpayers who are taxable persons from a corporate income tax point of view, and who are obliged to apply double-entry bookkeeping if their annual net sales revenue for the tax year prior to the tax year in question exceeded HUF 100 million.

Based on the amendment, these rules are also applicable for taxpayers having financial years different from the calendar year if the 20th day of the last month of their financial year would fall after the effective date of this amendment (from tax year 2019 on).