Spring tax package

We would like to take this opportunity to inform you that on 20 June 2017 the spring tax package (the ‘Act’) was announced in the Official Journal. The Act contains modifications affecting the remainder of 2017 in addition to 2018.

The Act and the amendments promulgated in a separate act contain only minor changes compared to the Bill, the text of which was also previously communicated to our clients.

• Amongst others, the number of sports, which qualify as popular team sports has increased,
• along with the number of cases, which are exempted from duty fines.
• The 5% VAT rate will be applicable to a greater number of goods
• and changes have been made to the options for exemption from the reporting requirement in regards to vending machines compared to the Bill.

For the sake of clarity, the amendments to the Bill and the major legislative changes, which are identical to the text of the Bill are set forth below in a consolidated manner, along with the amendments passed in separate acts.

Personal income tax and contributions

Income from real estate rental

One of the most important changes concerning individuals is that the 14 per cent health tax liability on income (exceeding HUF 1 million per year) deriving from real estate rental will be abolished as of 2018.

Housing subsidy to promote mobility

In 2018 several favourable amendments will be made to the provisions introduced in 2017 on housing subsidy to promote mobility. However, rules limiting repeated claims of the subsidy from the same employer have been established.

• The amount of the subsidy will increase significantly. An amount equal to 60% of the minimum wage in the first 24 months of employment, 40% in the 24 months thereafter, and 20% in the next 12 months may be tax exempt.
• The total amount of the subsidies may be provided to those employees whose employment contract was signed prior to 2018 (the 24+24+12 months are counted from 1 January 2018).
• The tax exemption will also be available to individuals with employment contracts concluded for a definite period, as opposed to the current rule which states that having an employment contract for an indefinite period is one of the pre-requisites for claiming the subsidy.

Other provisions

The Act also contains amendments to the definitions, which will enter into force in 2018.

• The definition of formal education will be regulated by the Personal Income Tax Act (clarifying that studies abroad may also qualify as such).
• The definition of dividend will also be amended in order to be in line with the definition currently set forth by the accounting rules.

The monthly amount of the health care service contribution will increase to HUF 7,320 (i.e. HUF 244 per day) as of 2018.

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Accounting Act

Accounting of modified tax authority audit findings

The Act sets forth that if findings of a tax authority audit, which had previously been treated as material errors and, as a result, had to be presented in a separate column in the income statement and the balance sheet relating to the previous years, were subsequently modified by an authority or court through a final resolution before the balance sheet preparation date, then the modification must be recorded in the current year.

Release of deferred income from development grants

According to the Act, the deferred income recognised in connection with development grants will have to be released when the repayable amount of the grant is recognised as an expenditure, rather than on the date on which the grant is repaid.

Valuation of assets acquired through derivative contracts

The Act provides that assets (both financial and non-financial) acquired as part of derivatives with physical delivery will have to be revaluated at fair market value as of the date of acquisition regardless of prior classification even if the company did not apply the fair value assessment in its accounting policy. Such assets must continue to be revaluated against other income and expenses from financial transactions.

The Act provides the option for the application of the above changes in the rules also to the financial year started in 2017.

IFRS rules

The Act refines certain details of the tax rules applicable to taxpayers operating under IFRS rules. Information about the modifications to the IFRS related rules will be provided in a subsequent newsletter.

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Corporate income tax

Participation exemption

The 10% threshold for capital gains participation exemption will be abolished thus substantially extending the scope and applicability of Hungary’s holding regime.

Controlled foreign company

The Act includes clarifications related to the new CFC rules (that were introduced early 2017).

In particular the conditions related to shareholders of the CFC are considered to be fulfilled, if such shares are held for the majority of the taxpayer's tax year.

When calculating a controlled foreign company's profit to be added to the tax base, the amount of profit to be taken into account must be proportional to the ownership share in the controlled foreign company or proportional to the percentage of the after-tax profit to which the taxpayer is entitled. The new rule may be applied by taxpayers at their own discretion for the year 2017. For profits earned in periods prior to 2017, the rules effective on 31 December 2016 may be applied optionally.

Rental flats built for employees

The amount recorded as the historical cost of rental flats built for employees, or as an increase in such historical cost, may be deducted from the pre-tax profit in the tax year of the completion of the renovation / construction project. The requirements for claiming the tax base allowance are as follows:

• The flat must accommodate an employee working a minimum of 36 hours a week and a close relative living with him or her.
• The employee may not have a domicile in the town where the workplace is located.
• The employee's domicile must be located at least 60 kilometres from the workplace or the duration of the journey by public transport must exceed 3 hours (for a return journey).

The tax base allowance cannot be claimed if the taxpayer accommodates an employee of one of its related parties or a relative.

Construction of electric vehicle charging stations

When constructing charging stations for electric vehicles, the historical cost of the charging stations will be deductible from the corporate income tax base. The maximum amount of allowance that may be claimed is the difference between the estimated operating profit for the 3-year period following the completion of the construction project and the historical cost, or the HUF equivalent of EUR 20 million for each charging station. The Act provides a definition of electric vehicle charging stations. The allowance can be claimed in the tax year in which construction is completed and is available for construction projects launched after 30 June 2017.

Tax credit for growth

If a taxpayer defers its tax liability, then it must pay interest at a rate equal to the prime rate of the Hungarian National Bank. The interest payment obligation must be determined on the basis of the rules pertaining to the self-revision surcharge. The interest payment obligation applies to declarations made after 1 January 2017.

Popular team sport support

The Act adds volleyball to the list of sports, which qualify as popular team sports.

It clarifies the definition of foundation established for the development of popular team sports.

Based on the Act, the requirement for issuing the sponsorship certificate is that the construction / renovation project subject to the support must be carried out by the beneficiary of the support on its own real estate or real estate under its management, or that the beneficiary must submit the agreement on the use of the real estate to the authority authorised to issue the certificate.

The provisions regarding the registration of a mortgage for the Hungarian state are not applicable if the construction project is implemented on real estate owned by the state or a municipality and is transferred to the owner (the state or a municipality) within 30 days from commissioning.

The Act contains the following provisions aimed at ensuring harmonisation with EU regulations:

• It defines the concepts of professional athletes and facilities with limited commercial activities.
• The amounts of basic and supplementary support must be aggregated for all legal titles (e.g. investments in fixed assets, renovations, tasks relating to training, staff costs) when calculating support intensity, even in the case of professional sports organisations.
• If the beneficiary of the support qualifies as a business based on the competition laws of the EU, then the rules pertaining to state aid must be applied.
  

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Local taxes

The Act grants additional tax assessment rights to municipalities. Municipalities may increase definite period tax rates, from the third year of a definite period. However, they will be authorised to do so only if their tax revenue decreases significantly (by at least 50%) during that definite period, and only for the period of the significant decline. In order to improve predictability, the Act also contains limitations regarding the cases in which and the extent to which an increase in tax rates may have an unfavourable impact on taxpayers.

According to the Act, taxpayers will be entitled to declare and pay tax in advance for tax liabilities, which will become due in the future. When these taxes become due, the payments will be offset by the municipality against the amount of payable tax assessed by the taxpayers.

In line with the Act, during the company registration/change registration procedure, data pertaining to the company that are sent by the court of registry to the state tax authority will be forwarded to the municipality of the company's registered office. Thus the company's reporting obligation in respect of the forwarded data toward the municipality will be fulfilled.

As of 1 January 2018, outdoor advertising signs will also be subject to building tax. Similarly to wind farms, solar farms will also qualify as permanent establishments for local business tax purposes.

As of 1 January 2018, the rules related to the determination of sales revenue for taxpayers preparing IFRS financial statements are amended under the Act, and these new rules will be explained in detail in a separate newsletter.

In addition to the above, the Act clarifies the definition of owners and introduces a separate definition of sales revenue for those engaged in typically non-profit-oriented activities.

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Duties

Under the currently effective regulations, twice the amount of the transfer tax allowance available in the case of financial leases is payable if the financial lease contract is not effectuated within the prescribed timeframe. Based on the Act, if an entity providing financial lease services provides evidence that the contract was not fulfilled due to the fact that the acquirer has passed away, has been dissolved without succession or the lease contract has been terminated due to the lessee's failure to meet its contractual payment obligation, transfer tax penalty will not be applicable.

The Act modifies the rules for determining market value without making substantial changes to the content. It clarifies the valuation methods that may be applied by the tax authority and defines the records necessary for the process. Acquirers are still permitted to report market value, and such information may be taken into consideration by the tax authority when determining the market value. Market value is calculated by the tax authority primarily on the basis of comparative values included in a database of property transfers for consideration reported for transfer tax purposes. However, in the absence of comparative values, other methods may also be applied.

Based on the Act, the category of transfer tax exempt acquisitions where the acquirer is not required to report the acquisition of property will be expanded to include preferential transformation and acquisition through a preferential exchange of shares, as well as the transfer tax exempt transformation of law firms.

In addition to the above, the Act also clarifies the definition of a business organisation, making it clear that foreign persons also qualify as business organisations for the purposes of the Act on Duties. The Act provides further amendments regarding the rules on the transfer tax liabilities and exemptions of individuals in connection with the exchange of apartments.

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Value added tax

According to the Act, the VAT rate applicable to edible fish, fish products, pork offal and internet services will be reduced to 5%. The modified tax rates will be applicable as of 1 January 2018.

Furthermore, the Act will amend the definition of internet access services. Network services will not qualify as internet access services, which means that the preferential VAT rate will not be applicable to such services.

According to the Act, the provision that would reduce the minimum threshold for the submission of domestic sales and purchase lists to HUF 100 thousand will not enter into force on 1 July 2017. The introduction of the real time data provision regarding invoices issued by an invoicing software will also be delayed. The reporting will be on a voluntary basis for a transitional period of one year.

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Special taxes concerning the financial sector

The Act provides that the entities subject to the bank tax will be able to deduct the amount of support provided for preferential purposes (up to 50% of the special tax of financial institutions) from the amount of special tax payable.

The Act lists the conditions for claiming such allowance, as well as the purposes which may qualify as preferential (e.g. supporting amateur sports organisations and work with youth teams). It is important to note that the provisions on claiming the allowance may be applied by the taxpayer in connection with the 2017 tax year at the taxpayer's discretion.

The Act introduces the concept of ‘facilities with limited commercial activities’ and stipulates that, in the case of support relating to sports infrastructure, only the support of facilities with limited commercial activities may qualify as a preferential purpose.

In addition to the above, credit institutions, which are members of voluntary institutional protection fund or a mandatory institutional protection organisation, as defined by the Act on Credit Institutions and Financial Enterprises, may reduce their special tax by the amount paid to such voluntary institutional protection funds or mandatory institutional protection organisations during the tax year, provided that certain criteria are fulfilled.

The scope of exemption from the financial transaction duty will be amended. The payment transactions on a client account or, in connection with investment services, on any other account will not give rise to any financial transaction duty liability if the payment service provider and the party providing investment services were members of the same mandatory institutional protection organisation.

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Excise tax

The scope of financial security will be expanded, as a result of which a certificate of coverage will also be acceptable as a form of security in the future.

For the purpose of ensuring harmonization with the relevant EU Directive, the Act will clarify the scope of controlled energy products. Furthermore, the Act stipulates that a tax liability arises even if other controlled mineral oils and monitored products are imported for own use.

In terms of the authorisation procedure, the Act provides a list of the documents that need to be provided to the authority in original copies. Accordingly, three types of documents must be submitted to the authority as part of the procedure: documents containing financial commitments, a certificate verifying the lack of a criminal record and a specimen signature for issuing hard copies of customs documents.

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Customs regulations

The amendment to the provisions of the Customs Act clarifies the definition of customs deficiency and stipulates that the form for customs representation may be filed by electronic means only.

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Vehicle tax

The Act provides that municipal tax authorities are not be required to pass a resolution if during the tax year a taxpayer satisfies a criterion for exemption and is thus exempted from the payment of vehicle tax.

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Regulated real estate investment companies

The main goal of the amendment to the Act on Regulated Real Estate Investment Companies is to facilitate the establishment and widespread operation of such entities, which could contribute to the expansion of the real estate market and, due to their presence on the stock exchange, the capital markets.

The Act includes various amendments to the detailed rules related to the Hungarian REIT regime which is expected to become a well applicable option for publicly traded Hungarian property investments.

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Amendments relating to the rules of taxation

The pre-requisite for an allowance is the lack of a net tax debt

As of 1 January 2018, taxpayer requests for a favourable divergence from the general rules in connection with the payment of tax liabilities (not including payment facilitation and tax reductions), may only be approved if the taxpayer does not have a net tax debt on the date the request is filed.

Reporting of foreign bank accounts

Companies must report all foreign bank accounts existing on 1 January 2018 (the name of the foreign financial institution managing the account and the date of opening and closing the account) in writing to the Hungarian Tax and Customs Administration (the ‘HTCA’) prior to 31 January 2018. This must be done by means of a special form. Failure to comply with this reporting obligation or late, incorrect, false or incomplete reporting carries a default penalty of up to HUF 600 thousand.

Reporting of office service providers

Entrepreneurs registered for the purpose of obtaining a tax number prior to 1 January 2017, as well as taxpayers required to register with the company registry, must report the details of their provider of corporate headquarters services to the HTCA prior to 29 September 2017 if they engage a provider of corporate headquarters services and their provider has not changed since 31 December 2016.

Email communication for foreign taxpayers

If a taxpayer who does not have a business registration, domicile or residence in Hungary is otherwise not required to communicate by electronic means, then it may opt for communication by electronic mail at his own discretion. In order to do so, the taxpayer must submit his electronic mail address to the HTCA along with a special declaration.

Introduction of tax deposits

As of 1 January 2018, the HTCA would require taxpayers to make a tax deposit after their tax number is issued if either the person authorised to represent the taxpayer or its member or shareholder possessing more than 50 per cent of the votes or qualified majority control is a former senior officer, member or shareholder of another taxpayer which was terminated without succession during the five years preceding the date of filing of the request for the issue of a tax number and had a net tax debt exceeding HUF 1 million (HUF 2 million in the case of the taxpayers with the highest tax performance), provided that the legal relationship existed on the 360th day preceding the date of liquidation or forced deregistration procedure or any other day thereafter.

Furthermore, the Act also requires making a tax deposit for persons who join a functioning company and fulfil the above criteria.

The amount of the tax deposit is equal to the tax debt recorded by the HTCA and reduced by any overpayments. If there are several grounds for simultaneously requiring a tax deposit, then the amount of the tax deposit would be the value of the largest tax debt. A tax deposit can be made by transferring one lump sum payment to the HTCA's separate deposit account or by submitting a guarantee certificate issued to the HTCA as the beneficiary, which is valid for 12 months from the date of issue.

The HTCA may, without issuing a request to the taxpayer to pay his tax debt, pass a resolution on using the tax deposit in full or in part. Otherwise, the deposit is retained for 12 months after receipt, and the deposit or its remaining amount is returned to the taxpayer within 30 days after this period has passed.

The obligation to make a tax deposit also applies in cases where, after the final resolution on the deposit is issued, the reason for requiring a tax deposit no longer applies due to a change in the senior officer, member or shareholder. However, the person from whom the tax deposit is required may file a request for exemption. Additionally, the taxpayer has a right to appeal against the resolution requiring a tax deposit and the resolution on the use of such deposit.

Limiting the prohibition of aggravation

Under the previously effective rules, disadvantageous modifications could not be issued more than one year after the entry into force of a given resolution or, for audits concluded without a resolution, one year following the completion of such audit. However, the Act provides that if the adoption of the new resolution is preceded by an audit (re-audit) and the report on such audit (re-audit) is delivered or dispatched within the one-year period, then resolutions which contain findings that are more adverse to the taxpayer may be adopted even after the one-year period has passed, but within 18 months at most.

Exemptions from the reporting requirement for vending machines

Operators of vending machines without operating personnel are exempted from their reporting obligation concerning data stored in the vending machine supervision unit (hereinafter: AFE) until 31 December 2017 if they sign the relevant contract with a supervisory service provider before 31 July 2017. In addition, an operator is exempted from the reporting requirement until 31 December 2017 if all supervisory service providers issue a statement that they are unable to install an AFE on the given vending machine.

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Transfer pricing – International cooperation on taxes and other public dues

As announced on 15 March 2017, the Act on the International Cooperation on Taxes and Other Public Dues has been amended. Multinational groups will be required to prepare country-by-country reports if the group's consolidated revenue exceeds EUR 750 million.

As a general rule, the country-by-country report must be prepared by the ultimate parent company of the multinational group and must be filed with the tax authority of the state of which it is a tax resident.

It is important to note that, if certain criteria are fulfilled, the reporting obligation may be passed on to the Hungarian tax resident member of the group. Such criterion may be when there is no active exchange relationship between the HTCA and the relevant authority of the country in question. In addition to the reporting obligation, group members which are Hungarian tax residents must report to the HTCA, using a special form, if they are subject to the reporting obligation. If they are not subject to this obligation, then they must specify the group member required to provide information. The above notification obligations must be filed before the last day of the reporting financial year.

Failure to comply with the reporting and/or notification obligation or incorrect reporting or notification may result in a severe default penalty of up to HUF 20 million.

The data included in the country-by-country reports will be periodically shared among the competent authorities in the form of an automatic exchange of information. The data received will be used by the HTCA for risk assessment purposes relating to base erosion and profit shifting. As a result, country-by-country reports are expected to substantially increase the transparency of corporate and tax structures, which may improve the identification of tax avoidance strategies.

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