Tax implications of changing to a foreign currency

An increasing number of Hungarian companies have taken advantage of the legal opportunity and chosen to keep their accounting records in a foreign currency instead of in forints. In addition to the accounting and legal aspects, it is crucial to take the most important tax criteria into consideration too when weighing up a potential transition.

Submission of extra tax returns

There are no particular notification obligations towards the NAV when changing to a foreign currency. However, due to a special reporting obligation the transitioning company must submit unscheduled tax returns. For taxes settled annually (such as corporate tax and local business tax), a tax return has to be submitted by the deadline for the preparation of the financial statements, i.e. within 5 months, while in the case of monthly and quarterly tax returns, this deadline is 30 days after the transition.

Corporate tax issues

When calculating the corporate tax base, we have to convert foreign currency data into HUF using the MNB exchange rate valid on the last day of the fiscal year. For items adjusting the tax base, if the given item relates to data of the financial statements for the reporting year, we have to convert the amount into HUF using the year-end exchange rate, while in the case of items related to previous years (e.g. deferred losses), the value recorded in HUF in the previous tax return has to be taken into account when preparing the tax return for the fiscal year. For accounting purposes a transition can solve many problems if our contracts are mostly denominated in foreign currencies, but exchange-rate differences can arise in many cases in relation to corporate tax, even after making the change.

For example, the foreign currency differences between tax liabilities defined in a foreign currency but payable in HUF, and the tax advances paid in HUF during the fiscal year, will certainly generate discrepancies due to the different exchange rates used. Not to mention the customary items involving exchange-rate differences, i.e. exchange differences may arise with trade receivables and payables not invoiced in foreign currency and with liquid assets not denominated in the bookkeeping currency, primarily when they are settled.

VAT and personal income tax

With VAT we need to remember that a sub-ledger in HUF is required to prepare the VAT return, even after changing to a foreign currency and the individual items cannot be converted at the same exchange rate, instead, either the exchange rate valid on the transaction’s date of performance or the statutory rate applicable when the accounting document was issued must be used for the conversion into HUF. An exchange-rate difference can easily arise when a HUF amount transferred by the NAV is credited to the foreign currency account, or upon the financial settlement of a tax liability.

Although it is not easy to avoid these problems completely, wherever possible it is worth defining contractual amounts in the given foreign currency (euro) after the foreign currency transition (and modifying previous amounts accordingly if possible); if invoicing (and financial settlements) take place in the given foreign currency as per contracts, such exchange-rate differences can be avoided.

As for personal income tax, it is worth highlighting that the tax and employer contributions must be defined with due consideration of the salary determined in HUF, by law, but here as well the accounting must take place in the given foreign currency.

As an accountant or finance manager it is very important to be aware of the above: during a tax inspection it may be necessary to explain all this in detail to the tax inspector to ensure a successful procedure.

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