Core logic of the research and development tax base reduction in corporate income tax

The classic corporate income tax incentive for research and development in Hungary is the tax base reduction linked to the direct costs of basic research, applied research and experimental development carried out within the company’s own scope of activities. The essence of this mechanism is that properly identified and documented R&D costs reduce the pre‑tax result and thereby the payable corporate income tax.

In practice, the definition of “direct costs” is the most critical issue. Typically, these include:

• wage costs of employees directly involved in research and development,
• materials used for R&D projects,
• depreciation of assets used in the R&D activity.

General operating, administrative or sales costs may not be classified as direct costs, even if they are indirectly related to the development activity.

This incentive may provide a stable and predictable solution for companies regularly carrying out research and development in Hungary and having a sufficient tax base. However, in the case of loss‑making or low‑profit operations, the tax benefit may be deferred over time, making it necessary to consider alternative incentive structures.

Experimental development and the impact of accounting decisions on corporate income tax

One of the most significant strategic decisions related to research and development concerns the accounting treatment of experimental development costs. The company may choose between the following accounting options:

• immediate expensing of the costs, or
• capitalisation of the costs as an intangible asset (provided that the applicable accounting conditions are met).

This decision goes beyond purely technical reporting considerations. Capitalisation affects both the tax base and the timing of incentives. The application of R&D costs as a tax base reduction may be performed either immediately or proportionally through depreciation; however, the decision is final and cannot be amended retrospectively. For multi‑year development projects, an advance review of the project’s financial lifecycle is therefore of particular importance.

Special structures in the application of research and development in corporate income tax

Group‑level R&D: between related parties

A specific feature of the R&D tax base reduction is that, subject to certain conditions, it may be transferred to a related company. This may be particularly relevant within corporate groups where the entity performing the Hungarian R&D activity is unable to fully utilise the incentive on its own. However, such a transfer creates joint and several liability between the transferor and the transferee, thereby extending the associated risks to the group level.

Collaborative R&D: joint activities with a higher education institution or research organisation

A further significant incentive applies to R&D activities carried out jointly with a higher education institution or research organisation in Hungary. In the case of genuine collaboration, the tax base may be reduced by up to three times the direct costs, up to a defined threshold. The applicability of this structure is determined primarily by the substance of the cooperation; a mere client-service provider relationship is not sufficient.

New direction: the R&D tax incentive and the obligation to choose

From 2024, the R&D tax incentive in Hungary has been introduced as a new incentive, fundamentally changing the decision logic. This instrument no longer reduces the tax base but directly decreases the payable corporate income tax. For the same R&D costs, a company may not apply both the tax base reduction and this tax incentive simultaneously, thus requiring a conscious and well‑founded choice.

One of the most attractive features of the new tax incentive is that any unused amount may, after a defined period, be refunded in cash. This option is particularly valuable for companies that do not have a significant corporate income tax liability over an extended period but carry out intensive research and development activities in Hungary.

Audit focus areas and risks

When applying R&D incentives, audit exposure cannot be ignored. During tax authority audits in Hungary, the following aspects are typically examined:

• the recognition and allocation of costs,
• the qualification of the activity as research and development,
• development objectives,
• the element of novelty,
• technological or scientific uncertainty,
• the professional background of the projects.

Deficiencies in documentation or attempts at ex post qualification may result in significant tax risks, particularly where incentives affect multiple taxes, including corporate income tax, local business tax and the innovation contribution.

The treatment of research and development in Hungarian corporate income tax is no longer about a single “good solution” but about conscious and well‑considered choices. Selecting the appropriate structure requires a combined assessment of the company’s financial position, development strategy and risk tolerance. With proper planning, R&D incentives may provide a genuine competitive advantage; misapplication, however, may create substantial long‑term risks.If you wish to avoid leaving money on the table, please contact the corporate income tax experts of WTS Klient Hungary with confidence and request a proposal.

A Research and development in Hungarian corporate income tax bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

The Slovenian tax package adopted in October 2019 includes amendments to the Personal Income Tax Act (ZDoh-2V), the Corporate Income Tax Act (ZDDPO-2R), the Act on Tax on Profit from the Disposal of Financial Derivatives (ZDDOIFI-A) and the Tax Procedure Act (ZDavP-2M). The amended and new provisions will apply from 1 January 2020, with the exception of the provisions on the depreciation of assets from operating leases, which have been in force since 1 January 2019.

Taxation of companies according to new Slovenian tax package

Although Slovenia had proposed to increase the general corporate tax rate (DDPO) from 19% to 20% in February, according to the adopted Slovenian tax package this tax rate will remain at 19%, as in 2019, and will not change in 2020.

While the rate remains unchanged, all companies in Slovenia will have to pay corporate income tax from 2020. If a legal entity generates taxable income, any tax exemptions and tax losses from previous tax periods can be used up to a maximum of 63% of the taxable base. This means that companies generating profits for tax purposes and who previously reduced their tax base to zero due to high research and development (R&D) investments, investments in fixed and intangible assets, for employing certain categories of worker (disabled people), as well as for investing in voluntary supplementary pension insurance and for donations, will from now on always have to pay corporate income tax.

The tax allowances for R&D and equipment, as well as in fixed and tangible assets may be carried forward for a limited period of five tax years, while other allowances reduce the tax base only in the year they originated, which further limits the actual application of tax allowances. The same provisions also apply to sole entrepreneurs who determine income tax on the basis of actual expenses. 

Example:
A company generates a profit before corporate tax of EUR 1,000,000 and has invested EUR 1,500,000 in R&D in 2020. In 2020 the company can only consider a tax exemption for the R&D investment amounting to EUR 630,000, and then the difference over the next five years. 

Corporate income tax base: EUR 1 Mio x (1 – 0.63) = EUR 370,000
Corporate income tax calculation: EUR 370,000 x 19% = EUR 70,300 

Irrespective of the high level of investment or previous tax losses, the company will have to pay corporate income tax of EUR 70,300, which represents 7.03% of the profit. 

The changes to depreciation of assets in operating leases are the most important amendments that apply retroactively, i.e. from 1 January 2019. This means that by incorporating the operating lease into fixed and intangible assets in accordance with international and also Slovenian accounting standards, the legislator set the depreciation at the highest annual rate possible, which corresponds to the actual depreciation period of the asset, i.e. the asset’s useful life in operating leases. This provision already applies to the preparation of the corporate income tax self-assessment for 2019 and the determination of income tax for sole entrepreneurs for 2019.

Taxation of capital owners 

In 2019, taxpayers still have to pay 25% of the final tax on investment income (interest, dividends, capital gains and gains on the sale of derivative financial instruments). From 2020, capital gains will be taxed at the rate of 27.5%.

For capital gains realised in 2019, we present the comparable tax rates that will apply from 2020:

To close the legal discrepancy and avoid abuse, income of a shareholder from the sale of shares to the company (purchase of own shares) or company shares from non-regulated market are taxed as a dividend at the total amount paid.For income from real estate leasing, taxpayers can take into account standardised costs of 15% (only 10% in 2019), but the income tax rate for income from real estate leasing increases to 27.5% as well (in 2019 the tax rate is 25%). 

The transferor may inform the taxpayer in writing about the acquisition value of the shares or units sold prior to the tax settlement. 

Taxation of employees

From 4 May 2019 the annual holiday payment is completely exempt from social security contributions as well as income tax. This means that the employer’s costs are equal to the employee’s net payment, which corresponds to the average gross salary in Slovenia, amounting to EUR 1,726 in August 2019. 

Example:
A company pays out the holiday payment at a gross amount of EUR 1,700. It actually has personnel costs of EUR 1,700 and the employee receives a net amount of EUR 1,700 to his or her bank account. 

The Slovenian tax package for 2020 is also intended to change the income tax categories in terms of reducing income from employment of the middle tax brackets.

From 2020 the following income tax categories apply:

Also, the common tax allowance will increase and from 2020 should be the following:

This means that the common tax allowance for all taxpayers will rise at least from the current EUR 3,302 to EUR 3,500.

To apply and recognise a special allowance for supported family members (adult and unemployed children, parents or adoptive parents), the significant change is that such a person must have the same permanent residence as the taxpayer who declares that family member as a supported family member. This does not apply to children under 18 years.

To promote the purchase and use of electric vehicles, the Slovenian tax package reduces the benefit in kind when purchasing company vehicles used by employees for private purposes. The monthly benefit in kind for the private use of a small electric vehicle will only amount to 0.3% of the purchase price of the vehicle, if the purchase cost of the vehicle including VAT does not exceed EUR 60,000. The benefit in kind for private use of company vehicles for conventional petrol and diesel vehicles, as well as for larger electric vehicles (only for a surplus over EUR 60,000), remains at 1.5% of the initial cost in the first year.

According to the new Slovenian tax package the taxation of part of the salary for business success (so-called 14^th salary or Christmas bonus) currently remains unchanged for the coming years. The 14^th salary can be paid without income tax, and only bears the obligatory social security contribution deduction of 38.2%. In 2019, the tax-exempt part of the Christmas bonus can be paid out up to approximately EUR 1,700.

If you would like to find out more detailed information about the adopted Slovenian tax package, please visit the website of WTS Slovenia and contact the local experts of WTS Global for Slovenia.

A Slovenian tax package adopted for 2020 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.