innovation contributionIt is no surprise for Hungarian tax consultants and tax leaders, or possibly even for taxpayers who have been in the industry for years, that the regulations for the innovation contribution were amended again in Hungary in 2019. Professionals are probably only rolling their eyes with a cry of “not again”! And rightfully so, since it is difficult to count how many times the innovation contribution regulation has been changed in the last 10-15 years in Hungary.

Innovation contribution – a look back

It verges on the impossible, but since the currently applicable law effective from 1 January 2015 was implemented, one major element of the regulation, the one defining which business entities are liable to pay the innovation contribution, has remained essentially unchanged until the end of 2018. It was always a key issue whether the small and micro enterprise status giving exemption should be defined based on the company’s own indicators, or using consolidated financial data with any related companies as well.

At the end of 2014 the regulation prescribed that all the provisions of Act XXXIV of 2004 on Small and Medium-sized Enterprises and the Promotion of SME Development (hereinafter referred to as: SME Act) must be taken into account when qualifying a small and micro enterprise. Hence, it needed to be checked whether the company had any related or partner companies, and whether, pursuant to the “two-year rule”, its headcount, net sales revenue or total assets exceeded the threshold prescribed by law in two consecutive years.

Thereafter, from 2015 until the end of 2018, enterprises had to be classified based on their own indicators. The returning regulation effective again from 2019 brings back the pre-2015 provisions.

The 2019 regulation

What does all this mean in practice? From this year on, when defining whether a Hungarian company is obliged to pay the innovation contribution, you again need to take into account the relevant financial indicators of any related or partner companies as well, and when assessing whether a contribution needs to be paid, the data in their financial statements becomes relevant too. The “two-year rule” is still applicable: a business “exceeding” (or falling below) the threshold loses its previous rating if it exceeds or falls below the given threshold in two consecutive years.

Let’s take an example. Let us suppose that our company is a small enterprise and has not been obliged to pay innovation contribution since at least 2017, and (based on its own figures in its latest financial statements from 2016) it is classified as a micro enterprise in 2018. Its business activity picked up substantially according to the figures in its 2017 financial statements, so much so that when it reassessed in 2019 based on its 2017 financial statements, it qualifies as a large company. However, it does not matter if we qualified the company as large this year because the data reported in its last financial statements exceeded the threshold; since it happened for the first time, the rating of the company for 2019 is unchanged, so it is still exempt from paying the innovation contribution.

Brief look at aspects to be examined

It is important to specify whether the companies within your group are classified as related or partner companies based on the statutory definitions. If yes, the consolidated figures need to be taken into account when assessing fulfilment of the threshold for the innovation contribution obligation in 2019 – just like before 2015. The good news though is that the base and rate of the innovation contribution remain the same: the contribution must still be calculated and paid on the local business tax base at a rate of 0.3%.

If you would like more detailed information on how the 2019 innovation contribution amendments affect your company, please get in touch with the tax experts at WTS Klient Hungary.