Taxation in Hungary in 2020 - What's New?

Several new tax regulations have entered into force in Hungary in 2020 that are relevant for internationally active businesses. A new exit tax for companies leaving Hungary, novel transfer pricing rules for equity transactions, clarifications with respect to group taxation and the long awaited VAT-refund for non-recoverable receivables are some of the most significant changes affecting multinationals.

Exit Tax for Companies Leaving Hungary

Hungarian companies which relocate their place of management to a foreign country resulting in the transfer of their tax residence to that other state are taxable under the new exit tax with effect of 2020. The same applies if the assets or activities of a foreign entrepreneur's Hungarian permanent establishment are transferred abroad.

The tax liability constitutes the difference between the carrying value of the transferred assets or activities for taxation purposes and the market value at the time of disposal.

If the transfer takes place to an EU Member State or an EEA Member State the taxpayer has the option to pay the tax in five installments over a period of five years.

Parallel with the introduction of the exit tax the law determines the calculation method for the historical cost to be taken into consideration when moving assets from one state to another.

The exit tax provisions follow the initiative of the European Commission (Anti Tax Avoidance Directive - ATAD). The aim is protection against tax avoidance through the migration of companies or the transfer of assets to low tax jurisdictions.

New Transfer Pricing Rules for Equity Transactions

Capital increases or decreases within companies as well as dividend payments that take place in kind, i.e. not in cash, are subject to transfer pricing rules when such a transaction takes place between related undertakings.

The same applies if a company returns its repurchased own shares to its shareholders without compensation within one year to comply with the regulations of the Civil Code.

Restrictions on Hybrid Tax Structures

From 1 January 2020 certain cross-border transactions, typically taking place within internationally active enterprises, such as a company and its foreign subsidiary or permanent establishment, are identified as hybrid structures. These are mostly cases where payments within a group are recognized as costs for the reduction of the corporate income tax base in both states concerned. In other examples payments to hybrid entities are not subject to tax in either state.

The taxpayer may not reduce the tax base or deduct the related costs and expenses if a hybrid tax structure is identified. The restrictions only apply between related parties, where there is an influence of at least 25 percent of one entity in another. These rules have been introduced in accordance with the Anti Tax Avoidance Directive of the European Union (ATAD).

Clarifications with Respect to Group Taxation

The rules on the application of group taxation in corporate income tax have undergone some simplifications and technical clarifications.

Group members are no longer required to maintain their bookkeeping accounts in the same accounting currency.

The interest deduction cap has been aligned to group members' earnings before interest, tax and depreciation (EBITDA) for the business year, and it applies to the group members' total net financing cost. For the purpose of determining the individual tax base, the net financing cost not deductible at group level is allocated to the group members at their ratio in the EBITDA.

Tax Planning Schemes - Reporting and Automatic Exchange of Information

Tax planning schemes are to be reported to the Hungarian tax authority and are subject to automatic exchange of information from 2020. This rule has been introduced in accordance with the DAC6 Directive of the European Union.

Advisors, other participants and taxpayers involved in tax planning are obliged to report cross-border arrangements which qualify as tax planning schemes to the Hungarian tax authority for the firs time by 31 August 2020. This regulation applies to arrangements implemented between 25 June 2018 and 1 July 2020.

If the advisor falls under the obligation of professional secrecy, the reporting obligation is imposed on other participants of the tax planning or the taxpayer as the last default option.

In the event of failure to comply with the obligation the tax authority may impose a fine of up to 500,000 HUF on the person required to provide information or notification. In addition, a fine of up to HUF 5 million has been introduced for recalcitrant cases.

The Hungarian tax authority will transfer the data thus received in the form of automatic exchange of information to other states by 31 October 2020.

Accounting Rules Concerning Multiple Year Projects

The accounting rules for projects with the duration of several business years have been approximated to those of IFRS and other international accounting systems. For the first time in the business year starting in 2020 (optional for contracts concluded before January 1, 2020) revenue will be recognized through accruals based on costs incurred instead of using revenue based on current invoicing.

VAT-Refund for Non-Recoverable Receivables

The deductibility of VAT has become possible in many cases where companies could not reclaim VAT on non-collectible receivables in the past. The law defines the concept of non-recoverable receivables as follows:

• the claim is unsecured or only partially covered by enforcement against the debtor,
• the claim has been released by the creditor in the context of bankruptcy, liquidation and municipal debt settlement proceedings,
• the claim is not covered by a written certificate (declaration) from the liquidator, provided that at least 2 years have elapsed since the beginning of the liquidation,
• the asset is not covered by the assets taken over by the liquidation proposal at the end of the liquidation or debt settlement process.

In the above cases the reduction of the tax base is possible by filing a VAT self-audit for uncollectible receivables. The VAT-deduction may be applied if the supply of goods or services that resulted in the uncollectible claim took place after 31 December 2015.

Special Cases of VAT Refund

The new legislation offers a solution, in close connection with the principle of fiscal neutrality, in which the taxable person is in a position where he is unable to recover the input VAT. In this case, the taxable person can apply directly to the tax authority for a refund of the VAT incurred, provided that there is no loss to the budget.