On changes of taxation in Hungary - 2014

14-01-2014

Tax

Hungary

taxation

I Personal income tax

Vouchers

The modification provides a more specific definition for voucher and excludes redeemable vouchers from the category of both non-wage benefits and specific defined benefits. This change does not effect the return of undis­tributed vouchers.

Tax exempt in-kind benefits

From 1^st January 2014 single game or season tickets for sport events subject to the Act on Sports can be granted tax exempt by employers to individuals, without any limitation. (Previously only organizers of sport events were allowed to grant tickets under such favourable condi­tions.)

The limit of HUF 50,000 valid for cultural services remains in force.

Individual pension fund and insurance payments

The tax benefit on voluntary mutual pension fund pay­ments has been increased. The amount of benefit that can be credited to the pension fund account of the indi­vidual will go to HUF 150,000 from HUF 130,000.

In the same time, tax benefits combined from voluntary mutual funds, retirement savings, and pension insurance will be capped at HUF 280,000.

As a new regulation, tax allowance will be available for the premiums paid under pension insurance policies. The amount of the tax allowance – to be credited to the taxpay­er’s account held with the insurance company – will be 20% of the insurance premium paid by the policyholder, capped at HUF 130,000. This allowance can only be claimed for insurance policies issued after 31^st December 2013

.

Prior year’s payments

Revenues and benefits from employment paid out until 10^th January the following year but pertaining to the prior year shall be recognised as income in the prior year. Pre­viously, the cut-off date was defined as 15^th January.

Simplified contribution to public revenues

The tax scheme of simplified contribution to public reve­nues will be made available to a wider range of individu­als engaged in sport activities.

Unimplemented proposals

Regulations relating to the translation of income and expense denominated in foreign currency have not been simplified. As before, the official foreign exchange rate quoted by the Central Bank of Hungary in effect on the 15^th of the month prior to the date of obtaining the income shall be used.

It remains optional for Hungarian companies to act as employers in respect to the revenues granted to their employees by another entity (e.g. foreign parent com­pany). According to former plans, they would have been compelled to act as employers in such situations.

Family tax allowance

As of 1^st January the new rules will allow to claim the unu­tilized part of family tax allowance against contribution lia­bilities as well. As a result of this amendment, individuals eligible for family tax allowance will be able to deduct 16%

(i.e. the personal income tax rate) of their unutilized fam­ily tax allowance from their 7% health care contribution liability and 10% pension contribution liability. Utilizing the family tax allowance as contribution credit will not limit the individuals’ entitlement to social security services.

The rate of allowance remains unchanged.

• One child or two children: HUF 62,500 /child/month × 16% ⇒ HUF 10.000
• Three or more children:

HUF 206,250 /child/month × 16% ⇒ HUF 33.000 Such utilization of the family tax allowance will have to be reported in the personal income tax return.

As a prerequisite for claiming family tax allowance filers shall attach a written statement on the number of months in which their children are to be regarded as (beneficiary) dependent. The fact of sharing the allowance shall also be stated along with the tax code of the other party in case of sharing.

The Act specifies that divorced or separated parents that share custody are entitled to utilize the family tax allow­ance in a 50:50 ratio.

Who is affected by the changes? (Example)

Parents with 3 children, monthly gross total salary is HUF 500,000. Family tax allowance is claimed both in 2013 and in 2014.

Monthly average net income in 2013 (HUF)

(maximum of utilizable family tax allowance:HUF 206,250 × 3 × 16% = HUF 99,000 per month)

HUF 206,250 × 3 × 16% = HUF 99,000 per month)

Social security contributions of foreign employees

Third country citizens will be able to be exempted from individual Hungarian social security liabilities even if the period of their secondment exceeds two years, provided that the extension is due to unexpected reasons occur­ring in the second year of their assignment, and furthermore, it is reported within 8 days to the Tax Office. Even so the social contribution tax (27%) shall have to be paid after two years.

This regulation does not apply to EC citizens.

As a result of the previous transitional rule, until 2015, third country assignees can be exempted from social security contribution liabilities while employed in Hun­gary. This is because the two-year period for current secondments has to be calculated from 1^st January 2013,

meaning that the social security contribution liability will arise on the 1^st January 2015 at the earliest

.

Health services contribution

Individuals who are not insured shall pay health services contribution monthly. In 2014 the amount of this contribu­tion is increased up to HUF 6,810 per month (HUF 227 per day).

Social contribution tax

From 2014 the social contribution tax benefit available in respect of the expected wage increase will be phased out. Also allowances once associated with START cards will be cancelled.

In the same time tax allowances launched at the begin­ning of 2013 have been extended:

Companies operating in a free enterprise zone will be able to claim the social contribution tax allowance also for employees living outside the zone but within a range of 20 km, or living in the micro region hosting the zone, provided that the employee has been resident in the said place for at least 6 months prior employment. The amount of the allowance is 27% of the employee’s gross salary (capped at HUF 27,000) in the first two years of the employment and 14.5% in the third.

The social contribution tax allowance on research­ers and developers can also be claimed for individuals with PhDs, and doctoral candidates. The amount of the allowance is the gross salary, but limited in 14.5% of HUF 200,000.

Minimum wages in 2014

From 1^st January 2014 the amount of minimum wage will be raised from HUF 98,000 to HUF 101,500, meaning an increase of 3.57%. The guaranteed wage minimum pay­able for jobs requiring at least a high school education will be set at HUF 118,000 instead of the current amount of HUF 114,100, an increase of 3.5%.

III Corporate income tax

Non significant error

Taxpayers are no longer required to revise their previous tax reports for tax discrepancies due to non significant errors provided that the discrepancy is to the credit of the taxpayer. The discrepancy can be presented in the tax year when the error is discovered.

Allowable business expenses

In the future simple receipts (instead of an invoice for VAT purposes) for restaurant services paid with a credit or debit card will be deductable for CIT purposes if the service qualifies as business representation.

Tax base deductions

Companies will be allowed to claim the R&D tax bene­fits unutilized by their related parties. As a pre-condition, the taxpayer has to possess a declaration issued by the related party indicating the amount of direct R&D costs incurred during the tax year and the amount available for tax benefit. Moreover, the R&D project itself has to be connected to the main business activity.

Participation exemption

Share acquisitions as low as 10% (down from the current 30%) will be eligible for the participation exemption regime. The deadline to report such acquisition to the Tax Office will be extended to 75 days (from the current 60 days).

Real estate holding company

When determining whether an entity in possession of properties qualifies as real estate holding company or not, the book value of the property will have to be con­sidered instead of the fair market value.

Small and medium enterprises

The ratio of tax allowance available to SMEs regard­ing the interest paid on loans received after 1^st January 2014 in respect of the acquisition or production of tangi­ble assets will be increased to 60% from 40%. Further­more, the range of tax base decreasing items available to SMEs will be extended to include the acquisition cost of software licences.

Place of business

A foreign entity shall be regarded as having a place of business in Hungary not only in the case of utilization, but also in the case of sale of any real estate property.

Losses in case of merger

Losses incurred by the predecessor in the tax year of the merger will be allowed to be first utilized by the succes­sor in the same year. This regulation is already applicable for 2013

.

Donations

The period available for entities to utilize the tax allowance claimable for sport donations will be extended. The tax allowance can be claimed in the tax year of the donation and in the following six years. Therefore the supporters’ risk of not being able to utilize the allowance will decrease significantly.

The list of beneficiaries of the supplementary sport donation has also been modified. The obligation to make supplementary donations will also be introduced for film and arts donations, and the period available for the utilization of tax allowances will also be extended for 6 years.

Transfer pricing

New regulations clarify that transfer pricing rules shall be applied not only for subscribed capital payments but also for the non-monetary contributions made to the capital reserve.

IV Value added tax

Tax date of periodic settlements

The regulations applicable to periodic settlements (‘con­tinuous performance’) will change. The tax date of busi­ness transactions subject to the rules of periodic settle­ment will be the closing day of the settlement period as opposed to the currently applicable due date of payment. Nevertheless, the current rules will remain in effect for public (utility) service contracts. The new regulation will have to be applied for settlement periods commencing from 30^th June 2014. As the definition for ‘periodic settle­ment’ will also be re-defined, it is advisable to review all business transactions treated previously in compliance with the rules of ‘settlement for a fixed period’ or ‘instal­ment payment’ to ascertain they still fall under the rules of ‘periodic settlement’ also in light of the new concept.

Subsequent reduction of the taxable amount

The amendments attempt to consolidate and simplify the treatment of changes subsequently made to the tax base (e.g. due to discounts, price changes and other subse­quent changes) by defining a general rule for the events, which will no longer call for a self revision – replacing most of the previous itemized listing of eligible business transactions.

The possibility to account for the credit note in the period of its delivery will also be introduced. The regulation also specifies two new events when the tax base can be reduced subsequently:

• credit notes issued at the end of the settlement period to settle the difference between the invoiced and actual purchase value; in case of flat rate fee agreements
• money refunds provided in consumer incentive pro­grams.

As for the latter, a subsequent reduction of the tax base is only allowed on condition that the refund is given as consumer incentive in line with the business policy of the company, and that the refundable transaction does not take place between the company and the consum­er directly. Moreover, the transaction should be taxable in Hungary and the refund itself should not exceed the value of the base transaction. According to the law the amount refunded has to be regarded as it includes the amount of tax as well

.

Fixed assets and intangible assets

The law will extend the definition of fixed assets – with­in the framework of the VAT system – to cover intangible assets, too. Therefore, taxpayers subject to proportional tax deductions will have to apply the monitoring period of 5/20 years already applicable to fixed assets also to intan­gibles such as software, and rights to immovable. Only rights acquired from 2014 will be subject to the new rules

– however, the taxable person can also decide to apply the new rules retroactively to rights acquired prior to 2014.

VAT exemption of exports

According to a unique Hungarian VAT regulation – currently being challenged by the European Court of Justice –, VAT exemption of exports to third countries depends on a deadline: the product should leave the territory of the European Union within 90 days of declaration. The amendment will offer practical solutions for the VAT treatment of deliveries made after this deadline. In case the goods exit the EU after 90 days, the seller will have to issue an invoice with VAT and pay the tax amount as before. However, should the product manage to leave the territory of the EU within 360 days, the seller will be entitled to correct the previously issued invoice and to reclaim the VAT amount paid.

Reverse charge

The application of VAT reverse charge mechanism for certain agricultural products (namely for cereals and oily seeds) will be prolonged until 31^st December 2018.

Receipts

It will be possible to issue receipts electronically. More­over, the requirements for treating entrance tickets as receipts will be simplified.

Local tax

Local business tax advance of newlyestablished entities

It has been clarified that taxpayers without a legal prede­cessor are exempt from advance payments for the first advance payment period only – instead of the entire start up tax year.

Tax return template

Taxpayers not applying for tax exemptions will be allowed to use a single unified template return when filing for their obligations. (Previously, individual templates created by local authorities had to be used.)

Filers subject to local tax or tourism tax will also be able to use the template for registering and status change reporting purposes.

Electronic submission of these template returns will only be possible if local regulations support such method of filing.

Splitting of the local business tax base

From 2014 the tax base splitting method to be applied by wireless telecommunication service providers will be amended. 20% of the tax base will have to be split between the registered seat and the locations of perma­nent business establishments (e.g. office, shop) accord­ing to the general rules, while the remaining part of the tax base will have to be split between the settlements, where the billing addresses of customers are located. As a result, a bigger portion of the tax base will be allo­cated to the location of the registered seat and larger business settlements.

VI Stamp duties

Elimination of unfavourable duty liability

Unfavourable duty liabilities arising due to the transition­al rules of certain amendments introduced at the begin­ning of 2013 will be eliminated.

Thus, if the duty levied under the new rules on acquisi­tions reported in 2013 is higher than it would have been under the former rules, then the levels set out in these latter rules should be applicable. Differences which had already been settled will be reimbursed.

Waiving dividends

It has been clarified that the waiving of dividends and – under certain conditions, during winding up proceedings – the cancellation of receivables is exempt of gift duty.

Stricter requirements for gift duty exemption

Stricter requirements will have to be satisfied for the duty exempt treatment of assets transfer without considera­tion, cancellation of receivables and takeover of liabili­ties between business entities. The exemption will not be available if the beneficiary is registered in a country in which the CIT rate or the effective tax rate is less than 10% or where the income arising from the sale of shares is not subject to at least 10% tax.

Real estate holding company

The definition of a real estate holding company will be amended to correspond with the definition employed under the Act on CIT. Consequently, the acquisition of shares in real estate holding companies will trigger transfer duty liability – irrespectively of the company’s main activity indicated in the company register

.

Other changes

It has been clarified that transfer duty payment liability arises in cases of the leasing of real estates and vehicles provided the ownership right is transferred at the end of the repayment term.

Exemption from gift and transfer duty will be extended for transfers between spouses and for acquisitions due to the termination of marital arrangements.

An instalment payment scheme for a period of 12 months will become available for any private individual when acquiring their fist residential property. Up till now, the acquirer had to be under 35 to be eligible for paying in instalments.

VII Rules of taxation

Exemption from tax registration

Based on the tax law changes, taxpayers having no establishment in Hungary or not being obliged to be established according to the regulations of the Act on VAT, will be exempt from tax registration if their busi­ness activity is limited to selling products under VAT warehousing arrangement – provided that the products remain under the arrangement or if the Customs Office acknowledges the export of the products to locations outside the territory of the Community.

Self-revision

As of 1^st January 2014 VAT return adjustments neces­sitated by the change in the amount of VAT levied by the Customs Office will also have to be regarded as self revision.

Modification of tax return with self revision

Tax returns filed before the deadline set for submission will be allowed to be revised – previously, self revision of these returns was only possible once the official dead­line prescribed for submission was passed. The revised amount will become due according to the general rules and no self revision fee will need to be charged.

Electronic mandate letters

Mandate letters announcing tax investigations may now be delivered electronically (presumably via the electronic filing system) as well as physically. Furthermore, during a tax audit, the Tax Office will be authorized to audit any software, IT system and calculation used for the book­keeping or the processing of receipts or documents.

Default penalties

The rate of default penalties regarding the top-up pay­ment obligation is not modified; however, the differ­ence (gain) deriving from exchange rate fluctuations – between the due date of the top-up payment and the last day of the company’s business year – does not have to be included in the base of the default penalty calculation.

Modification of choices made in the tax return

In case the taxpayer is granted several options to choose from in a tax return, he will be entitled to file an applica­tion requesting the modification of the choice he made, provided that this modification does not effect the amount of tax, tax base or state subsidy.

Binding ruling

According to the tax law changes, future binding rulings (the resolution of the minister in charge of taxation) will determine tax liabilities or the lack of it only for the requestor taxpayer, and not for all taxpayers who have a connection with the issue of the binding ruling request (i.e. the ruling is binding only in respect of the requestor, not the other contracting parties). Furthermore, the processing time of the binding ruling request will be extended, and the fee of the standard ruling request will be HUF 5 million, while an urgent ruling request will cost HUF 8 million. Permanent ruling requests for standard cases will cost the taxpayer HUF 8 million, while requesting an urgent permanent ruling will cost HUF 11 million. The taxpayer can request a personal consultation with the minister responsible for taxation about the transac­tion in question and about the process of the binding rul­ing before filing the ruling request; this consultation costs HUF 100,000. The opportunity to appeal against binding ruling resolutions at the Ministry is abolished; however,

taxpayers may address the case to the courts and initiate the review of any resolution by legal means. The time limit set for the process is increased from 60 to 75 days, that may be extended once by a maximum of 60 days. Time limit in urgent procedures will increase from 30 to 45 days, that may once be extended by 30 days.

Special tariffs applicable to contract types, contract pack­ages and to transactions not recognized as anticipated future transaction will be eliminated. As a result, a sepa­rate application should be submitted for each transaction and contract, thus it will no longer be possible to cover a given type of contract by filing only one binding ruling request. The new regulations shall be applied to requests submit­ted after 1^st January 2014.

Rules of representation

Rules of representation will be eased in relation to the procedure of tax refund: according to the changes a taxable person not established in Hungary may be represented by a foreign private individual, legal person or other organisation in front of the Tax Office.

VIII Green tax

Green tax warehouse

The amendments will introduce the concept of green tax warehouses from 1^st July 2014. Within such warehous­es goods will be allowed to be manufactured, received and stored without the payment of green tax. The ware­houses can be operated for 5 years under the licence of the Customs Office. This period will be possible to be extended by an additional 5 years.

Other changes

Record keeping obligations prescribed for reusable packaging materials will be changed. Furthermore, in addition to the currently existing reusable packaging sys­tem – granting exemption of the environmental fee obli­gation – a new rental system will be introduced, which will be available only under the licence of the Environ­mental Protection Authority. In addition, recorded return­able pallets will not incur green tax liability provided they are used as reusable packaging within 365 days of their procurement.

IX Special tax of financialinstitutions

The effect of special tax of financial institutions, cred­it institutions and credit institutions’ contribution will be extended also for 2014. The tax base for the special tax of financial institutions is to be determined on the basis of the 2009 annual report as before.

The Act introduces a one-off special tax called credit institutions’ contribution: credit institutions will be com­pelled to pay corporate income tax on the revenues resulting from the cancellation of previous years’ risk provision even if losses would otherwise allow for an off­set of such revenues.

The definition of the financial enterprise also changes. From 1^st January 2014 financial institutions established for the sole purpose of carrying out group financing shall not be considered as financial enterprises, therefore

they will not be subject to the law.

X Accounting rules

Bookkeeping in foreign currency, conversion rules

From 2014 the books will be permitted to be kept and annual reports to be presented also in USD. The official exchange rates declared by European Cen­tral Bank will also be applicable for the conversion of for­eign currency transactions.

Repayment of debt denominated in a foreign currency

Deferred exchange losses arising from the one off repay­ment of loans or bonds denominated in foreign currency before their due date but not later than 31^st December 2014 will be allowed to be accounted for in instalments over 3 years.

The rule can also be applied for debts paid off in the financial year of 2013.

Consolidated annual report

The benchmarks set for consolidation requirements has been elevated considerably in terms of both balance sheet total and net revenues.

Parent companies will not be required to draw consoli­dated reports provided two of the three indices do not exceed the limits indicated below:

1. balance sheet total of HUF 5,400 million,
2. annual net sales of HUF 8,000 million,
3. the average number of employees of 250.

According to a 2011 amendment effective from 2014 the audit of books shall not be compulsory for companies with annualized net sales under HUF 300 million on the average of the two financial years preceding the finan­cial year under review (this threshold is currently set at HUF 200 million). The other condition relating to staffing (the number of employees shall not exceed 50) remains unchanged.

Accounting treatment of transfer pricingadjustment

A modification implemented on 30^th June 2013 will allow intercompany entities to capture transfer pricing adjust­ments – provided these adjustment are actually settled – in the accounting records instead of the tax return. Thecorrections should directly adjust the original account­ing entry, sharing the same accounting treatment. As a result, the transaction will be recorded at arm’s length price in the books as sales revenue, acquisition value or material cost. No other revenue and expense will be incurred unlike in the case of other schemes based on subsequent credit and discount methods.

As the regulation basically provides for an alternative for conventional tax base transfer price adjustments, the corresponding entries can be backed up with any adequate documentation satisfying the general formal and content requirements prescribed for accounting documents.

XI Other

Energy taxes

From 2014 taxpayers will be allowed to exercise the right to reclaim in any tax period within limitation without self-revision.

Income tax of energy suppliers

According to the adopted amendments the tax base does not need to be increased in case of successive preferen­tial transformations or preferential exchange of shares.

Taxpayers will be obliged to make advance payments in respect of this tax type from 2014. As per the main rule, the taxpayers shall declare tax advance for a period of 12 months starting from the first day of the second month following the due date of their tax return.

The amount of the advance shall equal to the annualized tax liability of the previous tax year. The frequency of advance payment depends on the amount of the previous year’s tax liability. The advance will be due on a monthly basis if the amount of the tax due exceeds HUF 5 million. Otherwise quarterly instal­ments will have to be paid.

The advance payment obligation should be fulfilled for the first time for the tax year of 2014.

Public utility line tax

The progressive tax credit scheme for communication lines will be expanded, and the scheme itself will be sim­plified. The Act specifies that the tax credit shall not be regarded as de minimis aid as under EU regulation pro­gressive tax credits available to anyone do not qualify as de minimis aid.