TAXATION IN HUNGARY
Taxation in Hungary
2. TAXATION IN HUNGARY FOR COMPANIES
2.1. Corporate and dividend tax
2.1.1. Taxable person of corporate tax
2.1.2. Taxable income
2.1.3. Rules of income (profit) minimum
2.1.4. Tax rate
2.1.5. Tax allowances
2.1.6. Avoidance of double taxation in Hungary
2.1.7. Non-resident individuals
2.1.8. Administration (tax refund and tax return, payment of taxes)
2.2. Other income taxes in Hungary
2.3. Taxes imposed on property
2.4. Other taxation types
The most cost effective solution in Hungary is the private entrepreneurship with simplified taxation.
The small taxpayer enterprise shall pay a fixed tax of HUF 50,000 monthly for each full-time employee registered as a small taxpayer (or, based on his choice, HUF 75,000 due to an application for eligibility for higher social security service base). The fixed flat tax of HUF 25,000 is payable by the small taxpayer enterprise for each registered small taxpayer not qualifying as a full-time employee (e.g. workers employed in 36 hours or more weekly).
Tax payment obligation may only be fulfilled by the payment of the itemized fixed tax of HUF 50,000, HUF 75,000 or HUF 25,000 up to an amount of HUF 8 million (VAT free amount but you can choose that you will be a VAT subject below HUF 8 million). Tax is payable at a rate of 40 percent on the part of the revenue exceeding HUF 12 million until the 25th of February of next year, but you will remain a tax subject, so it is very flexible. The flat tax is payable monthly, until the 12th of the month following the current month.
The local business tax is yearly 50.000 HUF but you have only 15 days to register by the local tax authority not to loose this opportunity and yearly once you have to pay 5.000 HUF to the chamber of commercial industry.
Disadvantage of this taxation is that you can not deduct any cost and the children benefit can not be applied therefore it is suitable mainly for service providers with minimal cost. This taxation can be combined with other company forms.
Private entrepreneurs have to pay entrepreneurs’ personal income tax (15%) and dividend tax or may opt for fixed amount taxation if the conditions are fulfilled. The entrepreneur’s personal income tax base is established based on the total revenue of the entrepreneur, deducting costs and applying the adjustment items prescribed by law. The rate of the entrepreneur’s personal income tax is 10 percent up to HUF 500 million and 19 percent above this amount.
The entrepreneur has further tax payment obligation on the entrepreneurial dividend base established based on the after-tax entrepreneurial income. The tax rate is 15 percent and 14% health care contribution. (We can send you a sample calculation please contact us).
The private entrepreneur has to pay local business tax on their net sales 2% (by trader companies on the margin) and yearly once the fee 5.000 HUF for the chamber of trade and industry.
If you run your business as a private entrepreneur as workers employed in 36 hours or more weekly and your social security is covered in the EU you have to yearly once declaration about your PIT (deadline 25th of February after the year) and about your local tax.
In this case is a Hungarian private entrepreneurship very useful to start business with investments.
Up to 6 million HUF you can be VAT exempt but you can not deduct the input VAT. In case of investments you have to choose that you will be a VAT subject to deduct the input VAT and you have to submit your VAT declaration monthly (20th of the next month).
The profit of companies is subject to corporate tax.
Pursuant to Act LXXXI of 1996 on Corporate Tax and Dividend Tax [hereinafter referred to as the ‘Corporate Tax Act’], resident taxable persons include:
- business associations established under Act V of 2013 on the Civil Code, and, before 15 March 2014, Act IV of 2006 on Business Associations (such as joint-stock company, limited liability company (kft.), general partnerships (kkt.), limited partnerships (bt.) and other organisations (e.g. foundations, associations);
- non-resident taxable persons with a place of business management in Hungary.
Pursuant to Hungarian legislation, group taxation is not permitted.
Generally the tax year corresponds to the calendar year. However, pursuant to the Accounting Act, taxable persons may exercise discretion in deciding on the operation of a financial year differing from the calendar year, especially if it is made reasonable by the characteristics of operation (with special regard to the cyclicity of the course of business or the information claim of the parent company).
The incomes deriving both from Hungary and abroad of resident taxable persons shall be subject to tax. Pre-tax profit, determined by applying the tax base increasing and decreasing items set forth in the Corporate Tax Act, represents the corporate tax base.
Pursuant to the general anti-avoidance rule, the Tax Authority shall qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to enable tax advantages (tax exemption, tax allowance) to be obtained.
Items adjusting the tax base include:
- Costs and expenses: The tax base must be increased with the costs and expenses incurred in relation to items specified in legislation, including e.g. fines, penalties, late payment penalty interest due to delay in the payment of taxes.
- Depreciation: Regarding taxation, the entire purchase value or cost of production – in the course of several years – may be written off the tax base.
- Development reserve: The portion of the retained earnings committed to future capital investments (development reserve) shall be regarded as accelerated depreciation and can be deducted as a lump sum from the pre-tax profit. The taxpayer may release the non-distributable reserve exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserve. The full amount of the development reserve cannot exceed 50 per cent of the pre-tax profit or HUF 500 million per tax year.
- Provisions: The tax base must be increased with the amount of the provisions for probable liabilities and future costs accounted for as expenses; however, the amount recognized as income due to the utilization of such provisions qualifies as a tax-base decreasing item.
- Losses: In principle, deferred losses of previous tax years (negative tax bases), can be deducted from the tax base in an amount of the taxpayer’s choice, in the forthcoming five tax years after the occurrence of the losses (up to 50% of the tax base calculated without losses), and the deferred but not yet deducted loss may be rolled on, with regard to the time limit of five tax years.
- Dividend: Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, the amount of dividends received from a controlled foreign company cannot be deducted from the tax base. From 1th January 2006, income from dividends is not subject to dividend tax. No withholding tax is imposed on dividends paid by a resident company to another (either resident or non-resident) company. (This is not the case – according to a separate law – if dividends are allocated to private individual members of a resident company).
- Profit of off-shore companies: The amount of undistributed dividend allocated with respect to the holding of Hungarian companies in a controlled foreign company increases the tax base. If the dividend is paid at a later date, the tax base can be reduced by this amount, up to the extent of the amount taken into account as an increasing adjustment earlier.
- Transfer price: Transfer price regulations are based on OECD guidelines. Under transfer price regulations, if prices applied in related-party transactions differ from arm’s length prices applied by unrelated parties, the company
- may decrease its pre-tax profit by the difference, provided that
- the consideration applied renders the pre-tax profit greater than it would have
- the related party is also a resident taxpayer or such non-resident company
- it holds a document signed by both parties establishing the amount of the
- shall increase its pre-tax profit by the difference, provided that the consideration applied renders the pre-tax profit smaller than it would have been in case arm’s length prices had been applied.
- may decrease its pre-tax profit by the difference, provided that
The above rules of transfer pricing shall not be applied to long-term agreements concluded by small and medium-sizes enterprises if the associated enterprise was established in the interest of purchases and sales and the voting rights of the small and medium-sized enterprises held in the affiliated company exceeds 50 per cent on the aggregate.
- Controlled foreign companies: Payments to controlled foreign companies do not usually qualify as eligible costs incurred in the interest of the company except when the taxpayer can prove that the payment has been made in connection with its business operation.
Pursuant to regulation on income (profit) minimum, if pre-tax profit or the tax base, whichever is higher, does not reach 2% of the adjusted total income, the taxpayer shall
- pay tax on 2 % of the adjusted total income, otherwise
- make a statement in the form complementing the tax return, which shall qualify as a return.
The corporate tax rate is 10 % of the positive tax base up to 500 million forints and 19 % for the part above fifty million forints.
- Development tax allowances: Among others, development tax allowances can be obtained with regard to the following investments:
- investments started and operated within the administrative jurisdiction of a preferential local self-government of a value of HUF 1 billion or more;
- environmental protection investments of HUF 100 million or more;
- investments of HUF 100 million or more related to the production of films and videos;
- investments promoting the creation of jobs.
- Tax allowance of sponsoring spectator team sports: By applying the tax allowance granted by legislation, taxpayers may achieve a tax saving if they support organisations with an approved sport development program conducting activities in any of the following five sports. Spectator team sports include:
Double taxation may be avoided unilaterally or on the basis of a treaty. A unilateral tax withholding shall be applied to income taxes paid or payable abroad, limited to 90% of the foreign tax and may not exceed the amount determined according to the Hungarian rules.
If a treaties to be observed, allowances serving the purpose of avoiding double taxation may be obtained under the treaty.
- Foreign companies conducting entrepreneurial activities in premises in Hungary (known as ’non-resident entrepreneurs’ in Hungary) shall pay tax on their income deriving from their entrepreneurial activities conducted in premises in Hungary.
The cases in which foreign companies shall apply a form of business establishment in Hungary (for example establishing a branch office) are specified by specific other legislation. A branch office is an organizational unit of a foreign company, without legal personality, vested with financial autonomy but registered in Hungarian company registration records For taxation purposes, a branch office is considered a place of business in Hungary if it complies with the definition of place of business provided under tax legislation. The definition of ‘place of business’ in the Corporate Tax Act fundamentally corresponds to the one in the OECD Model Convention. However, sites of construction or assembly operations – in case of lacking a convention – may be regarded as a place of business only after at least three months elapse.
Taxable incomes related to the place of business shall be determined under the rules applicable to resident companies. Furthermore, the tax base of a foreign entrepreneur in respect of their place of business in Hungary shall be adjusted by reducing it by a portion of its operating costs and expenses and overhead charged to the place of business establishment as commensurate with total revenues and be increasing it by operating costs and expenses and overhead of the place of business charged to the pre-tax profit or loss; furthermore, it shall be increased by 5 per cent of the revenues earned through but not accounted for at the place of business.
The profit of the place of business is subject to tax at the general tax rate and also tax allowances may be obtained, if relevant conditions are fulfilled.
No corporate tax liability is incurred by foreign organisations with no place of business in Hungary with respect to their revenues deriving from Hungary.
- Non-resident individuals who obtain any income through the transfer or withdrawal of their share in a company with real estate holdings (’member of a company with real estate holdings’ in Hungary), incur corporate tax liability with respect to this income. Corporate tax is calculated at the general corporate tax rate and payable to the Hungarian Tax Authority. The tax base of members of companies with real estate holdings shall comprise the consideration received upon the transfer of their share in the company, or the sum received when decreasing the subscribed capital of the company through disinvestment, less the costs of acquisition or maintenance as verified, if the resulting amount is positive.
An annual return of corporate tax shall be filed by taxpayers operating according to the tax year by 31st May of the year following the tax year. In case of taxpayers opting for a business year other than the calendar year, a return shall be filed until the last day of the fifth month following the last day of the tax year. Corporate tax shall be established by the taxpayer through self-assessment.
Local self-governments impose a local business tax on business activities carried out on a permanent basis at a maximum rate of 2%, which shall be collected by the tax authorities of self-governments of Hungary.
In Hungary, local taxes, i.e. building tax and land tax, are payable to the local self-government. Owners are liable to pay the above taxes. The annual maximum rate of building tax is HUF 1,100 per square metre or a maximum 3.6% of the market value of the real property. The annual maximum rate of the land tax is HUF 200 per square metre or 3% of the market value. The above taxes can be accounted for as costs when determining the corporate tax base.
Simplified Entrepreneurial Tax (EVA): Private entrepreneurs and companies can choose this tax type. A 37% tax rate is applied to the income of taxpayers paying simplified entrepreneurial tax (EVA) up to the income 30 million Hungarian forint (including VAT).
Small business tax (KIVA) : Companies with annual revenue and total assets up to HUF 500 million as well as no fewer than 25 employees may opt to pay kiva: 16% of positive cash flow and payroll costs. The employer costs of 28,5% (27% social tax and 1,5% vocational contribution) and the corporate tax 10% can be reduced to 16%.
Double taxation treaties: http://en.nav.gov.hu/taxation/double_taxation_treaties
Information for foreigners: http://en.nav.gov.hu/taxation/inromation_leaflets
Electronic service providers: http://en.nav.gov.hu/e_services
International goverment websites: http://en.nav.gov.hu/links