On 22 November 2016 the Hungarian Parliament approved the autumn tax package we dealt with in our previous newsletter. After the Act on the Rules of Taxation, now we highlight the main changes to the corporate tax.
Tax allowances related to start-up companies
The Act on Corporate Tax supports investments in registered early-phase (start-up) companies with tax base allowances. According to this tax base allowance, pre-tax profit is reduced by 2.5 or 1.5 times the cost value of the share acquired in an early phase company depending on the size of the tax base without the allowance/size of the applicable tax rate, but by no more than HUF 20 million per fiscal year. Conditions for such a classification of early-phase companies include having an average headcount of at least 2 employees in the fiscal years when the tax base allowance is claimed, with at least one of them categorised as a researcher/developer pursuant to the Act on Scientific Research, Development and Innovation. Any possibility of “tax trickery” in connection with related companies is restricted by the legislator through detailed rules.
Tax savings related to historic listed buildings and structures
Pre-tax profits/tax bases can be reduced at taxpayers carrying tangible assets in their books not only by the renovation cost of buildings and structures protected under the national scheme of historical monuments or placed under local protection, but also by the cost of any maintenance work performed on them. Deductibles related to maintenance work can only be accounted for up to 50% of the pre-tax profit, where the value of the cost calculated with the valid tax rate cannot exceed the HUF equivalent of EUR 50 million.
In addition, the amount of the already known allowance related to the renovation of historic listed buildings will double. According to the regulation, two times the renovation cost increasing the value of buildings or structures protected under the national scheme of historical monuments or placed under local protection can be claimed as a deductible at taxpayers whose books include tangible assets. The value of the claimed amount calculated with the valid tax rate cannot exceed the HUF equivalent of EUR 100 million. The upper limit related to pre-tax profit will not apply to this allowance, thus the decrease in the tax base may even result in a negative tax base (loss may be carried forward).
Companies adopting IFRS still able to determine their tax base according to the Accounting Act
If a taxpayer adopts IFRS, they can choose between total assets and liabilities or only total tangible and intangible assets. The choice refers to total assets and liabilities (tangible and intangible assets), it is not possible to apply the rule for individual items. The tax base for these assets and liabilities (tangible and intangible assets) may be determined as if the taxpayer had not adopted IFRS, for example a previous depreciation rate is applied in the case of a tangible asset and there is no tax base difference as a result of the transition. When choosing this method, relevant tax and accounting values shall be recorded separately. The taxpayer has to choose the method no later than by the filing of the corporate tax return for the fiscal year of transition, which may not be modified or withdrawn later.
Better conditions for claiming development tax allowances
The conditions for increasing headcounts and wage costs in order to claim the development tax allowance will be eased to encourage investment. In the event of an investment totalling at least HUF 3 billion at present value, the taxpayer may choose to increase employment and wage costs by either at least 50 employees or three hundred times the minimum wage, while in the case of an investment of at least HUF 1 billion at present value, by 25 employees or a hundred and fifty times the minimum wage, complying with the legislative obligations. With respect to investments of small and medium enterprises worth at least HUF 500 million, the prescribed requirement for small businesses falls to a minimum of 5 employees or ten times the minimum wage, and for medium-sized businesses to 10 employees or twenty-five times the minimum wage.
In an effort to fight fraud, for uncollectible claims from related companies taxpayers can apply the 20% deductible if, upon submitting their tax return, they report data on the related company and the actual economic cause providing the grounds for the uncollectible claim.
When applying a deductible linked to transfer pricing, the condition for the deduction is that the related party must declare that it will account for the difference between the applied price and the arm’s length price when assessing corporate tax.