International Tax, Accounting and Law Firm in Hungary
By forming a tax group, companies may benefit from consolidating their tax base and reducing their transfer pricing risk.
Group taxation can generally be opted for by at least two associated Hungarian tax resident companies which are connected by a minimum of 75 per cent direct or indirect voting rights. Examples of the above could be two Hungarian companies having voting rights one in the other or several Hungarian subsidiaries belonging to an international group of companies.
In order to be eligible for group taxation, companies have to fulfil some other conditions as well. Corporate tax subjects may form a tax group if they apply the same balance sheet date and if they prepare their financial reports according to Hungarian GAP or IFRS. The accounting currency of the group members may be different from each other, e.g. euro versus Hungarian forint. A taxpayer may participate in only one tax group at the same time.
In order to apply for group taxation, an application must be submitted to the tax administration within an individually calculated deadline. If the conditions laid down by the law are fulfilled, the tax authority will authorize the establishment of the tax group and issue a group identification number. The date of the establishment of the group is the first day of the tax year following the submission of the application.
Establishing the tax base
The group as a taxpayer will be represented before the tax administration by the appointed group representative who will also file the group tax return. The corporate tax base of the group will comprise the individually calculated non-negative bases of the group members. The negative tax base of any group member as well as losses carried forward from previous tax years can be taken into account when establishing the tax base of the group taxpayer. The consideration of losses carried forward may open a window of opportunity for groups of companies with loss-makers to reduce overall corporation tax.
So far as deductions are concerned however, there are certain limitations in place which are aimed to prevent aggressive tax practices. Limitations apply especially to losses carried forward and also, to a lesser degree, to the deduction of interest expense.
Deduction of financing cost
Net interest expense not exceeding 3 million Euros, or 30 per cent of the group tax base if the latter is higher, is generally deductible from the tax base per year. Net interest expense is calculated based on the group members' earnings before interest, tax and depreciation (EBITDA) for the business year and it applies to the group members' total net financing cost.
The tax payable will be allocated to the group members in a proportional rate as based upon their individual tax bases and charged at a rate of 9 per cent.
Tax allowances may be used by the tax group provided that at least one of its members qualifies for the tax allowances in question and fulfills the relevant conditions. The members of the group are jointly and severally liable for the tax obligations of the group.
Reduction of transfer pricing risk
Transactions between domestic entities generally underly transfer pricing in Hungary, not just international transactions. If two or more companies are taxed as a group, they do not need to apply the arm’s length principle in related party transactions between each other and for determining the group’s tax base.
It may be noted that it is still worth maintaining an arm’s length pricing system within the tax group as it may be relevant for other taxes, such as VAT. In any case, group taxation has the positive effect of eliminating the transfer pricing risk of group members for corporate income tax.
The arm’s length principle in transfer pricing transactions with parties outside the tax group applies fully however, and the group representative is required to prepare transfer pricing documentation concerning external related party transactions.
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