Corporate tax in Hungary

Summary

Corporate Income Tax Rate (%) 10 / 19 (a)
Capital Gains Tax Rate (%) 10 / 19 (a)
Branch Tax Rate (%) 10 / 19 (a) (b)
Withholding Tax (%)
Dividends
Paid to Companies 0
Paid to Individuals 15
Interest
Paid to Companies 0
Paid to Individuals 15 (c)
Royalties 0
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 5 (d)

a) The 19% rate is the standard rate of corporate income tax. The 10% rate ap­plies to the first HUF500 million (approximately USD1,720,000) of taxable income. All taxpayers must pay tax on the alternative minimum tax base if this base exceeds taxable income calculated under the general rules (for further details, see Section B).

b) Permanent establishments of foreign companies are subject to special rules for the computation of the tax base (see Section B).

c) See Section B.

d) Losses incurred before the 2015 tax year can be carried forward until 2025. Losses incurred in the 2015 tax year or subsequent years can be carried for­ward for five years.

Taxes on corporate income and gains

Corporate income tax. Companies incorporated in Hungary are subject to corporate tax on their worldwide profits. A company not incorporated in Hungary that has its place of effective man­agement in Hungary is regarded as a Hungarian resident for cor­porate tax purposes and, accordingly, is subject to corporate tax on its worldwide profits. If a double tax treaty applies, the provisions of the treaty may affect residence. Foreign companies carrying out taxable activities in Hungary through a permanent establish­ment are subject to corporate tax on their net profits derived from Hungarian sources.

Rates of corporate income tax. For the first HUF500 million (ap­proximately USD1,720,000) of taxable income, the tax rate is 10%. The excess is taxed at 19%.

The same rates apply to the taxable income of permanent estab­lishments of nonresident companies. In general, the various per­manent establishments of a nonresident company are taxed as a single entity. However, the taxable income of permanent establish­ments that are registered as distinct branches with the Court of Registration must be calculated separately, and losses incurred by one branch may not offset the profits of another. Such registra­tions are an option for foreign taxpayers in some cases and man­datory in other cases, depending on the country of incorporation of the foreign entity, its planned activities and other circumstances.

Alternative minimum tax. The alternative minimum tax (AMT) was originally a tax on a certain minimum tax base. However, in response to a decision of the Constitutional Court invalidating the legislation, the AMT was effectively converted to an optional tax. Taxpayers either pay the AMT or fill out a form and, in principle, are more likely to be selected for a tax audit.

The AMT is calculated by applying the general rates of 10% and 19% to the AMT tax base. In general, the AMT tax base is 2% of total revenues, excluding any revenue attributable to foreign per­manent establishments. The AMT tax base must be increased by an amount equal to 50% of additional loans contracted by the company from its shareholders or members during the tax year.

If a company’s AMT is higher than the corporate income tax other­wise calculated or the pretax profit, the taxpayer may choose to pay either of the following:

  • AMT
  • Corporate income tax otherwise payable. In this case, the com­pany must fill out a one-page form that provides information regarding certain types of expenses and, in principle, is more like ly to be selected for a tax audit.

Tax incentives

Reduced rates on certain types of income. Companies may reduce their corporate tax base by 50% of royalty income, which in­cludes, in certain cases, income from the disposal of intangible property. In effect, only half of the royalty income is taxable.

The total reduction mentioned above may not exceed 50% of the pretax profit of the company. The deduction may be claimed on the tax return. Unlike the development tax allowance (see Develop­ment tax allowance), no special reporting or preapproval obliga­tions are imposed.

Research and development double deduction. In addition to being recognized expenses for corporate income tax purposes, the direct costs of basic research, applied research and research and devel­opment (R&D) incurred within the scope of a company’s activi­ties reduces the corporate income tax base. As a result, a double deduction is allowed for these expenses for corporate income tax purposes. It is not required that the research itself take place in Hungary, and the double deduction may include R&D purchased from related or unrelated foreign enterprises and, in some cases, from Hungarian enterprises.

R&D triple deduction. Certain R&D activities conducted in coop­eration with the Hungarian Academy of Arts and Sciences and its research institutions, public research centers or private research centers directly or indirectly owned by the state can result in a deduction of three times the R&D cost. However, this deduction is capped at HUF50 million (approximately USD172,000).

Development tax allowance. Companies may benefit from a devel­opment tax allowance (tax credit), conforming with European Community (EC) law, for up to 10 tax years if they satisfy all of the following conditions:

  • They make an investment of at least HUF3 billion (approxi­mately USD10,350,000) or an investment of HUF1 billion (ap­proximately USD3,450,000) in an underdeveloped region.
  • They meet either of the following conditions:

— The average number of employees increases by at least 150 (or 75 in underdeveloped regions).

— Compared to the tax year preceding the commencement of the investment, the increase in the annual wage cost is at least 600 times (300 times in underdeveloped regions) the mini­mum wage (for 2016, the minimum monthly wage is ap­proximately HUF100,000 [approximately USD345]).

  • The investment comprises one of the following:

— The acquisition of a new asset

— The enlargement of existing assets

— The fundamental modification of the final product or the

previous production method as a result of the investment

Beginning in 2013, taxpayers may claim a development tax allow­ance with respect to investments of at least HUF100 million (approximately USD345,000) in free entrepreneurial zones.

Small and medium-sized enterprises may become eligible for development tax allowances with respect to investments imple­mented in any region.

A development tax allowance can also be claimed for investments of at least HUF100 million (approximately USD345,000) in the fields of food product hygiene, environmental protection, basic or applied research or film production, if certain other requirements are met. Investments of any amount in any field that result in a certain level of job creation may also qualify for a tax allowance.

In general, companies must submit a notification regarding the allowance to the Ministry of National Economy before the start date of the investment and self-assess the tax allowance. How­ever, companies must obtain permission from the Ministry of National Economy if their investment-related costs and expenses exceed EUR100 million (approximately USD110 million). Tax­payers must report the completion date of their investments within 90 days after the date on which the investment becomes operational.

The tax allowance may reduce the company’s corporate income tax liability by up to 80%, resulting in an effective tax rate of 2% (instead of 10%) to 3.8% (instead of 19%). Depending on the location of the project, the allowance may cover between 20% and 50% of the eligible investment costs. In general, the allowance may be used within a 10-year period after the investment is put into operation, but it must be used by the 14th year after the dec­laration for the allowance was filed. In general, the 10-year pe­riod begins in the year following the year in which the investment is put into operation. However, the investor may request that the 10-year period begin in the year in which the investment is put into operation.

Film tax credit. Tax relief is provided to Hungarian companies sponsoring film production carried out in Hungary. The contribu­tions are effectively refunded by the state because the sponsors can deduct the contributions from the corporate income tax pay­able, but the amount deducted may not exceed 20% of eligible expenses of the film production. In addition, these contributions, up to the above limit, are also deductible for corporate income tax purposes. The tax relief may be carried forward for a period of three years. It is available only if the sponsor does not receive any rights with respect to the sponsored film.

To qualify for tax incentives, films are subject to a comprehen­sive cultural test, which grants points for various aspects of the production, including the members of the crew, the actors and the theme of the film being European. In general, only films receiv­ing more than a certain number of points qualify.

To use the film tax credit, the taxpayer must pay supplementary support to the beneficiary in the tax year in which the basic sup­port is provided. The amount of supplementary support must be at least 75% of the basic support multiplied by the corporate in­come tax rate. This means that the taxpayer must pay at least 7.5% (considering a 10% tax rate) or 14.25% (considering a 19% tax rate) of the basic support as a supplementary support to the ben­eficiary. The supplementary support is not deductible for corpo­rate income tax purposes.

Sports tax credit. Tax relief is provided to Hungarian companies supporting sports organizations in the following popular team sports:

  • Football (that is, soccer)
  • Handball
  • Basketball
  • Water polo
  • Ice hockey

Under the sports tax credit scheme, national sports associations, professional sports organizations, amateur sports organizations, nonprofit foundations and civil sports organizations may be sup­ported. Donations granted to these sports organizations are fully creditable against the corporate tax liability of the donor, capped at 70% of the donor’s total corporate tax liability, if the taxpayer does not have government liabilities in arrears. Unused tax cred­its may be carried forward for a period of six years. In addition, amounts donated are also deductible for corporate income tax purposes. Supplementary sport development aid must be paid by the donors within the framework of sponsorship or aid contracts equal to at least 75% of the amount indicated in the support cer­tificate, multiplied by the 10% or 19% tax rate (that is, this sup­plementary development aid equals 75% of the tax saving). This expense is not deductible for corporate income tax purposes. The supplementary development aid must be transferred to the re­spective national sport associations or the respective sports orga­nizations or foundations.

Culture tax credit. Tax relief is provided to Hungarian corporate taxpayers supporting cultural organizations (for example, the­aters). The support can be for an amount of up to 80% of the or-ganization’s revenues from ticket sales, capped at HUF1.5 billion (approximately USD5,170,000). The mechanism of the tax relief is the same as for the sports tax credit (see Sports tax credit).

New film, culture and sports tax credit. Effective from 2015, film productions, sports organizations and cultural organizations may be supported by Hungarian corporate taxpayers in a new manner, as an alternative to the “old” model that will also remain in exis­tence. Under the new rules, the taxpayer may designate a portion of its tax liability as support for a selected, qualifying organiza­tion. On receiving the tax payment from the taxpayer, the tax au­thority remits the designated amount to the beneficiary. Tax payers can designate up to 50% of their monthly or quarterly tax advance payments and up to 80% of their “top-up payments” or year-end tax payments. The total amount of the support is capped at the same amounts as under the “old” rules. As a benefit, the tax au­thority credits 7.5% of the amounts designated from advance tax payments and “top-up payments” and 2.5% of the amounts desig­nated from the year-end tax payment to the taxpayer’s tax account.

Capital gains. With the exception of capital gains on “reported shares,” “reported intangibles” and certain other intellectual prop­erty (see below), capital gains derived by Hungarian companies are included in taxable income and taxed at the standard corporate income tax rates.

Capital gains derived by nonresident companies from disposals of Hungarian shares (except for shares in Hungarian real estate companies, see below) are not subject to tax, unless the shares are held through a permanent establishment of the seller in Hungary.

Reported shares. If a taxpayer has held at least 10% of the regis­tered shares of an entity for at least one year and reported the ac­quisition of the shares within 75 days after the date of the acqui­sition to the Hungarian tax authorities, the shares are “reported shares.” If a shareholding has already been reported to the tax authorities, further reporting is necessary only if the proportion of the shareholding increases.

Capital gains (including foreign-exchange gains) derived from the sale of the reported shares or from the contribution of the report­ed shares in kind to the capital of another company are exempt from corporate income tax. Capital losses (including foreign-exchange losses) incurred on such investments are not deductible for tax purposes.

Reported intangibles. Similar to the rules of reported shares, the ac quisition and creation of royalty-generating intangible assets (intellectual property and pecuniary rights) by Hungarian taxpay­ers can be reported to the Hungarian tax authorities within 60 days after the date of acquisition or creation. If the reported intangible asset is sold or disposed of after a holding period of at least one year, the gain on the sale is non-taxable. However, any losses re­lated to such reported intangible asset (that is, impairment) are not deductible for corporate income tax purposes.

If an unreported intangible asset is sold, the gain on the sale is exempt from tax if this gain is used to purchase further royalty-generating intangibles within four years. A taxpayer may not en joy the benefits arising from the reporting of a repurchased intangi­ble if this asset was previously sold as an unreported intangible that benefited from this capital gains tax exemption.

Hungarian real estate holding companies. Gains derived by a non resident from the alienation of shares in a Hungarian real estate holding company are taxed at a rate of 19% unless a tax treaty exempts such gains from taxation. A Hungarian company is deemed to be a Hungarian real estate holding company if either of the following circumstances exists:

  • More than 75% of its book value is derived from real property located in Hungary.
  • More than 75% of the total book value of the group, compris ed of the company and its related companies that are engaged in business in Hungary (whether as resident entities or through permanent establishments), is derived from real property locat­ed in Hungary.

The capital gains are not taxable if the Hungarian company is listed on a recognized stock exchange.

Administration. In general, the calendar year is the tax year. How­ever, companies may choose a different tax year if such year best fits their business cycle or is required to meet the management information needs of the parent company. Companies selecting a tax year other than the calendar year must notify the tax authori­ties within 15 days after making the decision on the selection.

Companies must file their corporate income tax returns by the last day of the fifth month following the end of the tax year. If their annual tax liability is greater than the total advance tax pay­ments paid during the year, they are required to pay the balance on filing the return.

Extensions to file tax returns may not be obtained in advance of the due date. However, a company may obtain an extension after the due date if it files, with the completed late return, a letter re questing an extension to the date the return is filed. At their discretion, the tax authorities may accept the late return as being filed on time if the letter explains the reasons for the delay and establishes that the tax return is being filed within 15 days after the reason for the delay expires, and if the company pays any balance of tax due shown on the return.

If an extension for filing is granted, no late filing or payment penalties are imposed, and no interest is charged on the late pay­ment. If an extension for filing is not granted, a penalty of up to HUF500,000 (approximately USD1,720) can be imposed. In ad­dition, interest is charged on the late payment of tax at a rate equal to twice the National Bank of Hungary prime interest rate (on 12 December 2015, the prime interest rate was 1.3%). Inter­est is charged beginning on the date the payment is due, and it may be charged for up to three years.

In their corporate income tax returns, taxpayers also declare the tax advances that they will pay for the 12-month period begin­ning in the second month after the filing deadline. The total of these advances equals the amount of tax payable for the year covered in the corporate income tax return. For calendar-year taxpayers, which have a filing deadline of 31 May, advances are payable over a 12-month period beginning in July of the year fol­lowing the year covered in the corporate income tax return and ending in June of the subsequent year. For companies with a corporate income tax liability exceeding HUF5 million (approxi­mately USD17,200) in the preceding year, advance payments are divided into 12 equal monthly installments. Other companies make quarterly advance payments. In addition, by the 20th day of the last month of their tax year, companies must make a “top-up payment” if their net sales revenues exceeded HUF100 million (approximately USD345,000) in the preceding tax year. The amount of the payment is the difference between the installments paid during the tax year and the anticipated tax liability for the tax year.

Dividends

Dividends paid by Hungarian companies. Withholding tax is not imposed on dividends paid to foreign companies.

Withholding tax at a rate of 15% is imposed on dividends paid directly to resident and nonresident individuals. Tax treaties may override Hungarian domestic law with respect to the withholding tax on dividends.

Dividends received by Hungarian companies. In general, divi­dends received by Hungarian companies are exempt from corpo­rate income tax. The only exception applies to dividends paid by controlled foreign corporations (CFCs; see Section E).

Interest, royalties and service fees

Interest, royalties and service fees paid by Hungarian companies. Withholding tax is not imposed on interest, royalties and service fees or any other payments made to local or foreign companies.

Hungary imposes a withholding tax at a rate of 15% on interest paid directly to individuals (this rule does not apply to interest paid to individuals resident in certain countries if the payment falls under a reporting obligation under the European Union [EU] Savings Directive).

Interest and royalties received by Hungarian companies. A tax in­centive may apply to royalties received by Hungarian companies (see Tax incentives). Interest received by a Hungarian company is taxable according to the general rules.

Foreign tax credit. Foreign taxes paid on foreign-source income may be credited against Hungarian tax. Foreign dividend withhold­ing tax may be credited for Hungarian tax purposes if the dividend or the undistributed profit is subject to tax in Hungary.

Determination of trading income

General. Taxable income is based on financial statements prepar­ed in accordance with Hungarian accounting standards. These standards are set forth in the law on accounting, which is largely modeled on EU directives.

Effective from 1 January 2016, nonbank entities with securities listed on a stock exchange and entities whose direct or indirect parent prepares a consolidated report under International Finan­cial Reporting Standards (IFRS) can elect to use IFRS for the purposes of preparing their stand-alone Hungarian financial state­ments. In this case, the starting point for the determination of the corporate income tax base is the IFRS result.

Taxable income is determined by adjusting the profits shown in the annual financial statements by items described in the Act on Corporate Income Tax. Different adjustments apply to companies reporting under IFRS. The purpose of these adjustments is to ar­rive at a tax base that is largely similar to the tax base of compa­nies reporting under Hungarian accounting standards.

Some items are not subject to tax as income, such as dividends received (but see the controlled foreign corporation rules in Sec­tion E).

Some items, such as transfers without consideration, are not deductible for tax purposes.

Tax depreciation. In general, depreciation is deductible in accor­dance with the Annexes to the Act on Corporate Income Tax. Lower rates may be used if they are at least equal to the amount of the depreciation used for accounting purposes. The annexes specify, among others, the following straight-line tax depreciation rates.

Asset Rate (%)
Buildings used in hotel or catering businesses 3
Commercial and industrial buildings 2 to 6
Leased buildings 5
Motor vehicles 20
Plant and machinery
General rate 14.5
Automation equipment, equipment for environmental protection, medical equipment and other specified items 33
Computers 50
Intellectual property and film production equipment 50

Relief for losses. Pre-2015 losses can be applied in any tax year until 2025. Losses incurred in 2015 and subsequent years may be carried forward for five years only. The losses can be applied against only 50% of the tax base for a particular year. Certain special rules apply to losses incurred before 2009.

Change-of-control restrictions have been introduced with respect to the availability of previously incurred tax losses after corporate transformations, mergers and acquisitions.

Groups of companies. The Hungarian tax law does not allow the filing of consolidated tax returns by groups of companies.

Other significant taxes

The following table summarizes other significant taxes and pro­vides the 2016 rates for these taxes.

Nature of tax Rate (%)
Value-added (sales) tax, on goods, services, and imports
Standard rate 27
Preferential rates 5 / 18
Bank tax; imposed on various entities in
the financial market; the tax base and
tax rate varies by financial activity
Various
Levy on energy suppliers (“Robin Hood tax”) 31
Social security contributions, on gross salaries; in general, expatriates do not participate; paid by
Employer 27
Employee (the contribution represents the
sum of the 8.5% health-care contribution
and the 10% pension fund contribution)
18.5
Excise duty, on various goods, including
gasoline, alcohol, tobacco, beer, wine
and champagne
Various
Local business tax; imposed on turnover or
gross margin
2
(A decision of the European Court of Justice
held that this tax was compatible with EU law.)

Miscellaneous matters

Foreign-exchange controls. The Hungarian currency is the forint (HUF). Hungary does not impose any foreign-exchange controls; the forint is freely convertible.

Companies doing business in Hungary must open a bank account at a Hungarian bank to make payments to and from the Hungarian authorities. They may also open accounts elsewhere to engage in other transactions.

Payments in Hungarian or foreign currency may be freely made to parties outside Hungary.

Transfer pricing. For contracts between related companies, the tax base of the companies must be adjusted by the difference between the market price and the contract price if the application of the market price would have resulted in higher income for the com­panies.

Taxpayers may also reduce the tax base in certain circumstances if, as a result of not applying market prices, their income is higher than it would have been if market prices had been applied. This does not apply if the transaction involves companies deemed to be controlled foreign corporations (CFCs; see Controlled foreign corporations).

The market price must be determined by one of the following methods:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost-plus method
  • Transactional net margin method
  • Profit split method
  • Any other appropriate method

These methods reflect the July 2010 update of the Organisation for Economic Co-operation and Development (OECD) guide­lines. A decree issued by the Ministry of National Economy de­scribes the requirements for the documentation of related-party transactions. Transfer-pricing documentation must be prepared for all related-party agreements that are in effect, regardless of the date on which the agreement was concluded.

The transfer-pricing rules also apply to in-kind capital contribu­tions (including on foundation) and the withdrawal of assets in kind (in the case of capital reduction and possibly in the case of winding-up) by the majority shareholder. The transfer-pricing rules also apply to in-kind dividend payments. Advance pricing agreements (APAs) are available.

Hungary has ratified and is applying the Arbitration Convention.

Controlled foreign corporations. A controlled foreign corporation (CFC) is defined as a nonresident company that meets one of the following two conditions, provided that one of the additional con­ditions mentioned in the next paragraph is also satisfied:

  • It has a Hungarian resident individual shareholder who directly or indirectly owns at least 10% of the shares or the voting rights, or has a dominant influence in the company.
  • The majority of the revenues of the company in the tax year derives from a Hungarian source.

In addition to the satisfaction of one of the conditions mentioned above, for a company to be a CFC, one of the following additional conditions must be satisfied:

  • The effective corporate tax rate for the company is lower than 10%.
  • Even though the company’s pretax profit is positive, it does not pay tax because it has a zero or negative tax base.
  • The company has a negative or zero pre-tax profit, and the for­eign state applies a tax rate that is less than 10%. If the foreign state imposes multiple tax rates, the lowest rate applies in the application of this condition.

A nonresident company is not a CFC if its registered seat or resi­dency is in an OECD or EU member state, or in a state with which Hungary has a double tax treaty (provided that the foreign com­pany has real economic presence in that state; this condition ap­plies in all three cases). Also, the foreign company does not qual­ify as a CFC if an entity that has been listed on a recognized stock exchange for at least five years or a related party holds at least 25% of the shares of the foreign company on every day of the tax year.

If a Hungarian company holds at least 25% of the shares of a CFC, the company must increase its tax base by an amount equal to its proportionate share in the undistributed after-tax profit of the CFC. This adjustment does not apply if an individual deemed to be a Hungarian tax resident holds shares in the Hungarian company.

Dividends received from CFCs do not qualify for the participation exemption regime and, accordingly, are treated as taxable income to the Hungarian shareholders (except for dividends that were already taxed as undistributed after-tax profits in previous years). Capital losses on investments in CFCs are not deductible for tax purposes.

Debt-to-equity rules. A Hungarian company’s taxable income is increased by the interest payable on the amount of net debt in excess of three times the amount of the company’s average net equity during the tax year.

Liabilities can be calculated on a net basis; that is, only the pro­portion of liabilities that exceeds the amount of certain receiv­ables needs to be taken into consideration in the thin-capitalization calculation.

The thin-capitalization rules are extended to non-interest-bearing liabilities if a transfer-pricing adjustment has been applied to them. Consequently, when calculating thin capitalization, both interest accounted for in the books and deemed interest imputed as a re­sult of transfer-pricing adjustments must be taken into account.

Foreign investment. No restrictions are imposed on the percent­age of ownership that foreigners may acquire in Hungarian com­panies. Some restrictions exist with respect to the ownership of farmland.

Treaty withholding tax rates

Hungary does not impose withholding taxes on payments to for­eign entities. However, it does impose withholding tax on the pay­ment of dividends and interest to foreign individuals (for details, see Section B).

Hungary has tax treaties in effect with the following jurisdictions.

Albania                            India                          Portugal

Armenia                          Indonesia                  Qatar

Australia                          Ireland                       Romania

Austria                            Israel                         Russian Federation

Azerbaijan                       Italy                           San Marino

Bahrain                            Japan                         Saudi Arabia

Belarus                            Kazakhstan                Serbia (b)

Belgium                           Korea (South)           Singapore

Bosnia and                      Kosovo                     Slovak Republic

Herzegovina (a)               Kuwait                      Slovenia

Brazil                               Latvia                        South Africa

Bulgaria                           Lithuania                   Spain

Canada                            Luxembourg             Sweden

China                               Macedonia                Switzerland

Croatia                             Malaysia                   Taiwan

Cyprus                            Malta                         Thailand

Czech Republic               Mexico                      Tunisia

Denmark                           Moldova                  Turkey

Egypt                                Mongolia                 Ukraine

Estonia                              Montenegro (b)       United Arab

Finland                              Morocco                  Emirates

France                               Netherlands             United Kingdom

Georgia                             Norway                   United States (c)

Germany                           Pakistan                   Uruguay

Greece                               Philippines              Uzbekistan

Hong Kong SAR              Poland                     Vietnam

Iceland

a) The 1985 treaty between Hungary and the former Socialist Federal Republic of Yugoslavia is applied with respect to Bosnia and Herzegovina.

b) The 2001 treaty between Hungary and the former Federal Republic of Yugo-slavia is applied with respect to Serbia. In practice, Hungary and Montenegro also apply this treaty, but no formal announcement has been made to confirm this practice.

c) This treaty was renegotiated in 2010, but the new treaty is not yet in force.

Hungary has signed double tax treaties with Iran and Liechtenstein, but these treaties are not yet in force.

Hungary is negotiating double tax treaties with Algeria, Chile, Cuba, Iraq, Jordan, Kyrgyzstan, Lebanon, Oman, Panama, Sri Lanka and Turkmenistan.