Standard returns to be sent to the National Tax and Customs Administration 

The first standard return to be filed by newly established businesses in Hungary is the T201T form, which generally includes the registration with the National Tax and Customs Administration (NAV), the chosen MNB or ECB exchange rate, and if applicable, the registered office service and the company’s document archive for the tax authority. The filing deadline is 15 days from the date of the change.

From the moment the company has a valid tax number, it is also obliged to submit VAT returns. Newly established businesses have to file monthly returns in the year of registration and in the following year, so before starting to keep accounts, it is also necessary to check which periods require monthly VAT returns, possibly retrospectively. VAT returns can be submitted on form 65 by the 20^th day of the month following the month in which the return is filed.

For contributions, the requisite return is 08, the deadline for which is the 12^th day of the month following the given month. In this case, it is also advisable to check whether any return has been missed and needs filing.

Moreover, at the end of the financial year, newly established businesses must submit the 01 return for other contributions, the deadline for which is 25 February after the end of the financial year. Year-end closes in Hungary include the corporate tax return (29) and the local business tax return (HIPAK), the deadline for which is the last day of the fifth month following the end of the financial year.

It is important to note that these returns must be submitted even if they don’t contain any data (nil returns). In all cases, returns must be submitted electronically to the NAV, and if the company decides to submit the returns through a representative, it is also necessary to fill in the so-called EGYKE form.

In addition to what is listed above, all organisations in Hungary that conduct economic activities – businesses, civil society organisations, foundations, churches or religious organisations – are obliged to register on the business gate. Business gate registration allows companies to communicate electronically with the various authorities and institutions, thereby improving the efficiency of their relations with public authorities.

Other reporting obligations of newly established businesses 

In addition to the commonly known returns for submission to the NAV, newly established businesses must also register with other institutions. To register with the Central Statistical Office, form 1032 must be sent to the CSO regional directorate with jurisdiction for the location of the company’s head office, within 15 days of the date of establishment. This form collects preliminary information on the company’s activities, sales revenue and other data.

In addition, all companies have to register with the Hungarian Chamber of Commerce and Industry. Entities engaged in agricultural activities have to register with the Hungarian Chamber of Agriculture instead.

The registration for local business tax is done electronically to the local authority with jurisdiction for the location of the company’s registered office or place of business, using the form designated by the local authority.

And you shouldn’t forget that for companies incorporated in Hungary, the head of the company must open at least one domestic bank account within eight days of the company’s establishment. In addition, if the company has a bank account abroad, this must be notified to the Hungarian Tax and Customs Administration. And that’s not all… 

Problems encountered when the bookkeeping starts 

Bookkeeping currency: As an accountant, I often find that newly established businesses don’t necessarily choose the right bookkeeping currency. Many companies have a significant part of their transactions in a currency other than the forint, such as the euro, and while the parent company’s bookkeeping currency is also the euro, the firm chooses to keep its accounts in HUF in its articles of association. This can cause a number of difficulties with reconciliations and reporting, and the fact that changes in the forint exchange rate can have a significant impact on the operation and performance of companies should not be ignored.

Audit: One might rightly think with newly established businesses that there is no need for a statutory audit, as they have not yet started their activities and have no sales revenue, only registered capital. However, if the company is a consolidated entity, an audit is always mandatory, regardless of the size of its activity.

Different legal environments: Another complication is that companies registered in Hungary must be accounted for in accordance with the Hungarian Accounting Act, and of course, Hungarian law applies to all other legislation. This means that a number of reconciliations are needed at the outset with the foreign parent company to deal with accounting and taxation issues.

Financial year: The financial years of companies incorporated in Hungary often don’t align with the financial year of the foreign parent company, which makes information reporting, accounting, the preparation of reports and consolidation processes much trickier. When established in Hungary, companies can determine the end of their financial year, so choosing a different financial year from the conventional one can avoid difficulties that may arise later.

As our article shows, newly established businesses face a number of reporting and filing obligations, whether they have actually started trading or not. Yet in addition to a thorough analysis of these, before starting the accounts it is also very important to deliberate on other issues, such as the choice of financial year or bookkeeping currency, in order to avoid the difficulties associated with making corrections afterwards. The staff at the accounting division of WTS Klient Hungary have over 25 years of experience in helping clients make these decisions.

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In this article I present an example where the company’s accounting is based not only on Hungarian legislation (HU GAAP), but also on US laws (US GAAP). Since accounting under US GAAP rules may differ from the rules of HU GAAP both at the level of accounting policies and legislation, these differences must be integrated into the new system. I describe the circumstances of this process – as I have experienced them – in my article.

When to roll out new accounting software 

I believe the new system should be introduced at a time when the accountant’s life is relatively calmer. Starting something new always requires extra effort, and it can be advisable to take this into account when making your decision. Implementing new accounting software can equate to a year-end close, and the amount of energy required is influenced by the volume of work, daily tasks and other circumstances at the given company.

Consideration must also be given to whether there is sufficient capacity to roll out the system, whether there are enough people to take on this extra task alongside day-to-day activities, and whether all the needs of all parties can be taken into account.

Changing chart of accounts 

When making the switch, you might rightly think that the primary accounting in the new software will still be done in accordance with Hungarian law, but that’s not necessarily the case. In the current situation, the primary accounting is US GAAP accounting which meant a corresponding chart of accounts. The HU GAAP general ledger numbers had to be assigned to these general ledger numbers, and any new ledger numbers had to be added in the new system. In preparation for this, a number of reconciliations were previously made to ensure the same kind of HU GAAP ledger numbers were opened in accordance with the same kind of US GAAP ledger numbers. However, it still happened, for example, that a payroll-type Hungarian general ledger account was opened as a service account under US GAAP, and the balance of the account had to be transferred to the appropriate place under Hungarian law.

Content of general ledger numbers 

Despite the many preparations for reconciling the general ledger figures, differences based on the various laws and accounting policies still arose during the accounting process, which we were only able to deal with when they emerged. One such difference was the threshold for capitalising tangible assets. While capitalising tangible assets in the US GAAP general ledger only became relevant – in our case – for assets of USD 5,000 or more, in the HU GAAP general ledger all tangible assets must be capitalised, regardless of the threshold. It is also interesting to note that the tangible assets not capitalised under US GAAP are booked on the profit and loss side of the general ledger, not among work-in-progress, as is common under HU GAAP. The risk here is that if the accountant is not attentive enough, the tangible asset will be included under retained earnings on the HU GAAP side in the following year, which is very difficult to correct.

A similar example is the widely known deferred tax which is not a concept used in Hungarian law, but is applied in US GAAP, and as such, it has to be accounted for. In this case, it may be advisable to ensure – if possible – that this item cannot be recognised in the HU GAAP general ledger, or that it is adjusted by this amount no later than at the end of the year.

Integration of general ledgers into the new system ­– opening

In this case, the opening date was 1 July, so the new accounting software was introduced during the year. The balance of each general ledger number was opened under the corresponding general ledger number in the new system, based on HU GAAP. By comparison, in the US GAAP general ledger, the profit and loss accounts were opened on the retained earnings ledger account, which we had to take into account when eliminating the differences between the general ledgers at the year-end.

In addition, we had to check that the correct opening balance was entered in the system for the right general ledger number, and at the correct amount.

General ledgers in different currencies 

In this case, the two ledgers had different currencies. The US GAAP accounting currency was USD, and the HU GAAP accounting currency was HUF. These differences occurred during the year-end revaluation, and when accounting foreign-currency bank balances at the end of the year. In this case, for example, the USD bank account is denominated in the accounting currency under US GAAP, so there is no need to calculate the exchange rate. By contrast, in the general ledger under HU GAAP, this counts as a foreign-currency bank account, and as such, in accordance with Hungarian law any incoming items must be recorded at the chosen exchange rate, while outgoing items must be recorded at the average exchange rate. The USD balance should match in both cases of course, but the HUF amounts may differ.

Tasks during the year-end close

Since two general ledgers had to be managed within the one system, the year-end close was extended to include other activities that were not previously carried out. The first step was to eliminate all items in the HU GAAP general ledger that were legally recorded under US GAAP but are not allowed under Hungarian law. Furthermore, any items treated differently owing to the different legislation and accounting policies (see: content of general ledger figures) had to be eliminated. When all this was done, the classic accounting close could begin.

Audit 

During the year-end audit you have to be prepared for routine things perhaps not running so smoothly after the introduction of the new accounting software. The auditors will be given a completely new general ledger, which they also have to understand and put through their own systems. Examining opening balances is also an additional task for the audit that previously didn’t have to be conducted. This can also increase the time needed for the audit, and thus the deadlines prescribed by the company’s internal policies may also need extended.

Post-audit work 

Once the audit is over, you can finally start to deal with the current financial year. Any issues that the auditor or the accountant finds during the audit must be remedied in the next financial year, in preparation for the smoothest possible close of that financial year.

Advantages of new accounting software

It is clear that implementing new accounting software takes a lot of preparation and energy, but this investment will have its benefits. From a work perspective, for example, you can omit reports that were previously needed, but now that both general ledgers are managed in one system and everyone has access to the data, these are no longer relevant. And last but not least, it can represent huge professional development for the accountant too.

In this article we endeavoured to give you a flavour of implementing a new system, and to highlight the most important things. Many other issues can arise during a system implementation of course, as every company is different and every accountant is different, so there is no one-size-fits-all solution to prepare for such an event. It follows from the above that differences between countries due to different legislation can cause minor surprises, which should be addressed by taking accounting advice before rolling out the new accounting software. Feel free to contact us.

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What does a financial year and a different financial year mean? 

A financial year is the period for which a business must prepare its financial statements. As a general rule, the financial year corresponds to the calendar year (1 January – 31 December). A different financial year means that the company decides to apply a financial year that differs from the calendar year. At international level, 31 March and 30 September are the most frequently used balance sheet dates. Hungarian companies founded without a legal predecessor may decide when established to use a different financial year, while businesses already in operation may switch to a different financial year by changing the balance sheet date of the defined financial year.

The financial year and the different financial year both last for 12 months; companies may deviate from this in the following cases:

• for companies established without legal predecessors, the period from the date of foundation (date when the articles of association are signed and notarised) until registered in the company register or until the application for company registration is rejected or the company registration procedure is terminated (as the balance sheet date), irrespective of the duration involved (pre-company period);
• in the year following the pre-company period;
• switching from a financial year based on the calendar year to a financial year differing from the calendar year or from a previous (different) financial year to a new (different) financial year;
• for a new company established by transformation, merger or division the financial year lasts from the day after the day of transformation, merger or division until the day designated by the company as the end of the financial year (as the balance sheet date);
• for data presented in the financial statements, when switching from Hungarian forints to a foreign currency, from a foreign currency to Hungarian forints, and from one foreign currency to another;
• for a company under liquidation or voluntary liquidation or undergoing involuntary deregistration the financial year shall commence on the day after the balance sheet date of the previous financial year and shall end on the day preceding the date when the liquidation, voluntary liquidation or the involuntary deregistration procedure begins (as the balance sheet date);
• during the period of liquidation or involuntary deregistration (this is construed as a financial year, regardless of its duration);
• during the period of voluntary liquidation (generally one financial year). If the voluntary liquidation procedure is not concluded within 12 calendar months, the length of the financial year(s) under the voluntary liquidation shall be 12 months, while the last financial year may be less than 12 calendar months.

Who may choose a different financial year? 

In Hungary almost any company may choose a different financial year where this is justified by the characteristics of the business activity (such as the cyclicality of business operations, or the parent company’s need for information in the case of consolidated companies). However, companies qualifying as credit institutions, financial enterprises or insurance companies as well as foreign higher education institutions operating in Hungary with a licence and businesses preparing micro-enterprise simplified annual financial statements may not choose a different financial year.

When can you choose to switch to a different financial year? 

A company may decide to change its balance sheet date for the financial year

• after three financial years closed by financial statements, or
• upon its consolidation, or
• if the parent company changes

with an appropriate modification of the articles of association.

When changing the balance sheet date of the financial year – i.e. when switching from a financial year based on the calendar year or changing the balance sheet date of an already different financial year – the financial statements of the transition year are not prepared for 12 calendar months, so its comparison to both previous and subsequent periods may cause difficulties. The supplementary notes of the annual financial statements prepared with the new balance sheet date must present, besides the figures of the balance sheet and the income statement for the given period, a balance sheet and income statement including base data (from the previous financial year) for comparison. 

Notifications necessary when changing the balance sheet date for the financial year 

Following a resolution including the owner’s decision, the duly modified articles of association must be submitted to the Court of Registration together with a change request. After the registration, the company must notify the Hungarian national tax authority and the local tax authority about the balance sheet date of the different financial year that deviates from the calendar year.

Advantages and disadvantages of choosing a different financial year 

Since parent companies have various information needs, not only for the sake of consolidation, it may be worth for companies not included in the consolidation to consider switching to the balance sheet date of the parent company as well. This may save the company time and human resources.

Another benefit of having a different financial year is that annual deadlines (such as the submission deadline for annual corporate tax and local business tax returns, or the publication deadline of the financial statements by the last day of the 5^th month after the balance sheet date) are adjusted to the balance sheet date. This can help companies since they do not have to conduct their audit or annual close at the “busiest time” of the normal financial year.

This timing advantage could also be a drawback because a balance sheet date of 31 March means a return-filing and financial statement publication deadline of 31 August, which could cause problems because of the summer holidays.

All in all, the best way for a company to define its financial year is by adjusting it to the business operations of the company, to serve the information needs of the parent company best. Based on the above, Hungarian companies can adjust the balance sheet date of their financial year so they can present a true and fair view of the company’s financial position, cash flows and financial performance in the year-end financial statements (considering, for instance, the year-end amount of receivables and liabilities or inventories).

The highly experienced accounting professionals at WTS Klient Hungary will be happy to advise you on how to choose the most optimal financial year for your business, on switching from a normal financial year to a different financial year, or on changing the balance sheet date of an already different financial year.  Feel free to contact us.

A Normal financial year or different financial year? bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Who is affected by consolidation?

Consolidated annual financial statements must be prepared by the parent company. The parent company involves its subsidiaries and jointly-controlled companies in the consolidation process. There are relief rules of course, which can exempt parent companies from their obligation to consolidate.

A Hungarian parent company does not need to prepare consolidated annual financial statements on a given financial year if two of the following three indicators fall short of the thresholds on the reporting dates of the preceding two financial years:

• total assets: HUF 6 billion (roughly EUR 18.4 million),
• annual net sales revenue: HUF 12 billion (roughly EUR 36.8 million),
• average headcount in the financial year: 250 people

The question does arise as to how the parent company can know this information if it has not yet prepared its consolidated annual financial statements? The answer is simple. The aggregate figures of the parent company, the subsidiaries and jointly-controlled companies must be compared to the thresholds. The consolidation takes place by adding the parent company’s data to that of the subsidiaries, while the data of any jointly-controlled companies is also added proportionate to the given equity shares; this is all “raw” data, prior to the consolidation.

Exemption from consolidation due to size is not applicable in cases where the parent company is a bank, insurance company or financial enterprise, or if exchange trading of the shares or partnership shares of, or securities issued by, the parent company or its subsidiary is authorised, or such authorisation has already been applied for.

Who may (also) be exempted from consolidation?

If certain conditions are met, Hungarian parent companies obliged to prepare consolidated annual financial statements based on their size can also be given exemption.

Subsidiaries of companies based in any country of the European Economic Area (where such subsidiaries are also parent companies of their own subsidiaries and jointly-controlled companies), i.e. “exempt parent companies” can be exempted from their obligation to prepare consolidated annual financial statements if the superior parent company prepares and publishes its own consolidated annual financial statements and business report – in accordance with relevant EU directives and EU regulations – in which the exempt parent company and its subsidiaries are also included.

The exemption from consolidation must be presented in the supplementary notes of the individual annual financial statements of the exempt parent company, and further data must be presented on both the superior parent company and the exempt parent company’s subsidiaries.

Difference between the two types of exemption

It is important, however, that while a parent company has no further administrative duties following its exemption based on the size thresholds, a parent company that is exempted from preparing consolidated annual financial statements because it qualifies as an exempt parent company still has a filing obligation in Hungary.

Since they do not prepare consolidated annual financial statements of their own, they have to file the consolidated annual financial statements and the consolidated business report of the superior foreign parent company, including the auditor’s report, in Hungarian. This must take place within 60 days of the approval of the consolidated annual financial statements of the superior foreign parent company.

Preparing consolidated annual financial statements is a very time-consuming and resource-intensive task for the finance department of a corporation. It is important to note, however, that consolidated annual financial statements do not always have to be prepared, exemptions can be provided for certain parent companies on various grounds. To decide whether your group of companies is subject to consolidation, or whether you are eligible for exemption, please do not hesitate to contact our financial advisory experts.

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From July 2018 distribution of dividends in Romania is permitted before the closing of the financial year. The quarterly distribution is enabled through Law No. 163/2018 which was published in the Romanian Official Gazette on 12 July 2018 and took effect on 15 July 2018. 

Until July 2018, the distribution of dividends in Romania was possible only after the financial year was closed and the net profit of the closed financial year was determined. As it can be imagined, such prohibition had implications from a cash-flow perspective for the shareholders of Romanian companies.

Distribution of dividends in Romania before July 2018

In this respect, the Romanian company law allowed for dividends to be distributed only from profits determined according to the law (i.e. after the closing of the financial year). Furthermore, the same law provided that the distribution of dividends in Romania, amongst others, in the absence of financial statements was fraud, action punishable with prison for the administrator of the company distributing such dividends.

To disallow such prohibition, the distribution of dividends in advance is possible in Romania starting from July 2018 when the company law and accounting law were modified (Law No. 163/2018) to enable the distribution in advance on quarterly basis.

Conditions of quarterly distribution

There are some conditions for allowing the quarterly distribution. The interim distribution can be performed during the year – only up to the quarterly net profit (after the mandatory reserves, if any, are set-up) –, but the carried forward losses must be off-set before the dividends can be distributed. The interim distribution must be based on interim financial statements approved by the shareholders. Such interim financial statements must be prepared therefore quarterly and they must be audited if the company is subject to mandatory audit (thus, increasing the costs and the administrative burden of the company).

The distribution of quarterly dividends is recorded in accounting as receivable against the shareholders and the settlement of the interim dividends must be performed after the annual financial statements are approved. In case the dividends distributed in advance are higher than the dividends approved through the annual financial statements, the overpaid dividends must be returned in 60 days from the date when the annual financial statements were approved (otherwise, interest would be due).

Having considered the above, the new provision is a step forward, from a cash-flow perspective, for the shareholders of Romanian companies.

If you would like to know more about distribution of dividends in Romania, please visit the homepage of Ensight, the exclusive representative of WTS Global in Romania.

If you are interested in more news about taxation and legislative amendments in the Central and Eastern European Region, please feel free to sign up for our newsletter!

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Distribution of costs affecting more than one financial year

One accounting principle in Hungary clearly states that costs affecting more than one year must be divided proportionately between the financial years to which they relate. In practice, a significant number of accrued expenses comprise trade payable invoices received after the reporting date. An important characteristic of accrued costs and expenses is the fact that their amount is known and approved by the company. Under German standards, such accrued expenses are treated as other liabilities; therefore, they must be reclassified in the reports and statements. Items recognised as accrued expenses are acknowledged by default when assessing corporate tax, unless they cannot be recognised as such because of the type of expense involved.

When are provisions obligatory?

Companies are required to allocate provisions for their contingent liabilities, and for any other significant, anticipated and periodically recurring costs that are expected to arise, but where the amount or exact time they will be incurred is uncertain. German standards define the criteria for provisions in similar ways; there is no difference to Hungarian accounting rules in this respect. There are a number of differences, however, as to which expenses have to be provided for under Hungarian or German regulations. For instance, while annual taxes payable are recognised as liabilities according to Hungarian standards, German accounting standards require provisioning for the unpaid amount of such taxes. There are further discrepancies between Hungarian and German rules as regards the release of provisions. According to Hungarian standards, provisions must always be released against other income. The German standards, however, differentiate between three cases, based on whether the amount of the actually incurred expense is the same, higher or lower than the amount of the provision. If the expense is equal to the provision, the release of the provision is recognised against liabilities, without affecting revenues and expenses. If the amount of the allocated provision is higher or lower than the expense, the difference must be booked on a separate general ledger account.

What should be done in the case of group reports?

When preparing a consolidated report, such differences must be compensated for by reclassifications in the income statement. Under Hungarian standards, provisions do not affect taxes, as the tax base must be adjusted with the provision. As provisioning does not entail any tax base adjustment under German regulations, the German tax authority closely examines the legitimacy of provisions if they differ from the expense incurred, since they might indicate a reclassification of profit and loss accounts between multiple years.

The importance of understanding legal regulations

The above comparison relates mainly to costs and expenses; however, it is also important to know that accruals/deferrals and provisions must be allocated not only for costs and expenses, but also for revenues and other special cases when preparing both Hungarian and German annual reports and financial statements as regulated by the Accounting Act.

RELATED ARTICLE:

Challenges when preparing group reports

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