Profit spent on investment could result in total corporate tax exemption

Development reserves may be used against the entire profit for up to HUF 10 billion per fiscal year

On 28 April, besides the bill on the special retail tax, the Hungarian Government also submitted a bill to the Parliament on the necessary amendments to certain tax laws in order to mitigate the economic impact of the coronavirus pandemic. The law would provide companies planning investments with the possibility to reduce their pre-tax profit by the amount of the development reserve, meaning total corporate tax exemption may be claimed for the entire reinvested profit.

Conditions for total corporate tax exemption

According to current rules in Hungary, the development reserve can only be used for 50% of the pre-tax profit, but based on the proposal, this rate could rise to as much as 100% if the taxpayer is planning an investment in Hungary in the next four years.

The bill would also allow for the ceiling to the pre-tax profit used in the case of a development reserve to be applied for fiscal years beginning in 2019, at the taxpayer’s discretion. Pursuant to the bill, if a taxpayer has already filed its tax returns and has approved its financial statements for the fiscal year beginning in 2019, it has to modify these by means of a self-revision or an accounting revision to claim the preferential option.

If a taxpayer has not yet submitted its tax return for the fiscal year beginning in 2019, but its financial statements have been approved, it only has to modify these in an accounting revision. The ceiling defined as the amount of pre-tax profit may first be applied for fiscal years beginning in 2020. The deductible reducing the corporate tax base on the basis of the development reserve may be claimed up to the amount of the pre-tax profit of the given fiscal year, but still may not exceed HUF 10 billion (roughly EUR 28 million) per fiscal year.

Total corporate tax exemption with regard to reinvested profit is not only applicable for Hungarian businesses, it may also be claimed by companies with a foreign registered office operating in Hungary.

For the new rule to be applicable in the simplest way possible even for the 2019 fiscal year, a few days after the bill was submitted Government Decree 171/2020 was promulgated too, amending the rules of development reserves.

Further tax law amendments

Besides the details of total corporate tax exemption, the bill also states that the reduction in the rate of the social contribution tax and the simplified contribution to public revenues by 2 percentage points (from 17.5% to 15.5%) will remain after the state of emergency. If a private individual is liable for social contribution tax, the personal income tax base shall be calculated based on 87% of the assessed income, instead of the currently applicable 85% rate. Furthermore, the bill reduces the rate for small business tax and related tax advances to 11% from 1 January 2021.

WTS Klient Hungary is doing everything it can to provide up-to-date information on the further details of the economy protection action plan launched as a result of the state of emergency, and to help its clients in these tough times too. If you have any questions on how the new measures will impact on your business, and what opportunities the current regulation brings with regard to tax payments for instance, feel free to contact us.

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