Tax Alert

Hungary's Ministry of Finance submitted a draft tax law amendment (No. T/1614) to Hungary's Parliament on 18^th October 2022. This bulletin summarizes the most important changes expected to come into force regarding tax legislation in Hungary.

• The amendment extends to Hungarian versions of trusts recognizing only investment revenues the eligibility for tax exemption, and allows the possibility to file a formal statement via a form in lieu of tax return, provided that the founders and beneficiaries of such “trusts” are exclusively natural persons. These proposed amendments are also applicable to the 2022 tax year, based on the discretion of the taxpayer.
• The amendment clarifies in which cases and on what dates the group membership in a CIT tax group is deemed to be terminated. It also modifies the deadline of the tax advance return in case of termination. 
• The proposed tax package would introduce a new transitional provision to the legislation on the basis of which utilization of carryforward losses incurred before 2015 should be calculated by taking into account the tax base excluding any interest limitation capacity-related adjustments. In relation to 2022, this proposed amendment would be applicable based on the preference of the taxpayer.
• The postponement of tax base increase in case of a preferential exchange of shares is proposed to change according to the amendment. Based on the amendment, in case impairment is recorded, the impairment should be added back to the tax base in the year of recognition of the impairment, instead of in the year of derecognition of the shares. Consequently, the definition of the minimum income (profit) will also need to be amended.

• The amendment extends the deadline for the application of the current legislation by another year; thus, the tax rate remains 0% until 31 December 2023.

• The amendment extends the requirement of the statement related to the decrease of the local business tax base due to transfer pricing adjustment to those cases where the related party is subject to local business tax, but the value of the transaction is recorded in accordance with the correct application of accounting rules as an item, which is not taken into account in the local business tax base (e.g. as a cost of mediated services).
• The amendment also extends the rules for determining the transition difference to cases when an entity is terminated with legal succession after the decision on the change of accounting policy or on the switching to the application of IFRS but prior to the tax year of transition. Accordingly, the legal successor will be liable to modify its tax base with the transition difference.
• In the case of small enterprises, it is important to highlight that the amendment renews the simplified local business tax base determination method. Based on the amendment, entrepreneurs with a revenue not exceeding HUF 25 million (HUF 120 million in case of retailers opting for flat-rate taxation) in the tax year (or a proportionally-computed amount if the tax year is shorter than 12 months) will be entitled to determine the local business tax base according to the simplified method. The tax base is differentiated by ranges according to the amount of income in the tax year. The amendment defines three different income brackets and the corresponding tax base. A major simplification of the amendment is that by choosing this method, tax should be paid once a year, by the last day of the 5^th month of the following tax year, without filing a tax return. If the amount of tax for the tax year does not exceed the amount of the tax advance payments —settled by the last day of the 5^th month of the tax year—the small enterprise can be considered to have already fulfilled its annual tax liability by paying the tax advances. It is also important to note that small enterprises choosing the new simplified tax base determination method are not entitled to any tax exemptions, tax allowances or tax reductions granted by the legislation or by decree of the municipal government.

• With regard to tax exemption in relation to the transfer of property for consideration between related parties, the amendment changes the requirement of the exemption. Fifty percent of the turnover should come from the preferential activities (renting and operating of own or leased real estate, or the sale or purchase of own properties) within the total turnover. (Previously, the buyer’s principal activity registered in the Company Register was required to be one of the activities listed). The amendment imposes various reporting obligations on the buyer. If the buyer fails to comply with the above-mentioned requirements, a surcharge up to twice the unpaid tax may be imposed.

• The amendment modifies the deadline for submitting the VAT return in connection with the setting up a VAT group. According to the amendment, the deadline should be calculated from the date when the VAT group was established, or the date when new member(s) join the VAT group, and not from the date when the relevant resolution becomes final.

Advance Pricing Arrangement

• The rules of Advance Pricing Arrangement (APA) will be amended from 1^st January 2023. According to the new rules, APA applications can only be requested for full tax years. In addition, the duration of the bilateral and multilateral procedures will be slightly limited, while their scope will be extended to tax years preceding the filing date if certain conditions are met. Once the changes come into force, the authority fees for APA extensions will be increased and the rules on the tax audit ban concerning APA procedures will be clarified.

Report on income tax information — Public CbC

The income tax information report will be introduced as a new obligation as follows:

• Where the consolidated turnover of a Hungarian resident ultimate parent company exceeds HUF 275 billion in the last two consecutive years, or in the case of a non-Hungarian resident ultimate parent company the consolidated turnover exceeds EUR 750 million, the Hungarian resident taxpayer will—subject to certain conditions—prepare, publish and make available an income tax information report for the later of the two consecutive financial years.
• The report must include information on the activities of the ultimate parent company or of the standalone company and of all related companies included in the consolidation. The report will primarily cover the activities, number of employees, revenues and other tax-related financial data of the group companies. The above information should be presented for each concerned Member State/tax jurisdiction.
• The report must be filed and published by the ultimate parent company/standalone company with the annual financial statement. Additionally, the report must be published on its website.
• The new obligation does not apply to groups of companies operating exclusively in Hungary.

The first income tax information report must be prepared for the financial year starting on or after 22^nd June 2024.

• The proposal will also provide the possibility for SESOP (‘KMRP’) participants to entrust an asset managing foundation to manage their participation rights. In such cases, participants will receive the shares they are entitled to through the SESOP directly from the foundation, rather than the SESOP organization.   
• The proposal would also amend the definition of group transportation by including vehicles leased or rented by the employer in addition to those directly owned or operated; thus, the former means of transportation can also qualify as a tax-free benefit.
• Telecommunication costs set out as typically arising costs (Annexes 3 and 11 of Act on PIT) would be extended to mobile phone and Internet expenses.

• The proposal inserts the 5% reduced tax rate on the sale of new residential property, which was extended for two years from this summer, into the Act on VAT. In addition, it also clarifies that the reduced rate will be applicable for the period between 1^st  January 2025 and 31^st December 2028, provided that the building permit for the construction of the residential property becomes finalized by 31^st  December 2024, or provided the construction activity is reported before 31^st  December 2024 at the latest.
• As a next step in the process of economic whitening and the digitalization of taxation, the proposal sets the framework for the wider use of electronic receipting. The legislation allows for a ministerial decree to lay down rules on other technical solutions for issuing cash registers or receipts, their reporting, and the (remote) monitoring of the devices.

• Further relief comes with the current proposal following the modification of custom penalties related to a custom deficit, which entered into force in July. This time, the modification bill introduces further relaxation concerning penalties resulting in no custom deficit. According to the proposal, if a default or misconduct occurs for the first time within a year, the person concerned will only receive a warning and no penalty will be imposed.