Tax law changes | Autumn 2022
Please be advised that the Government has submitted a draft bill (hereafter referred to as the Proposal or the Bill) comprising the autumn tax changes. Please see below the summary of the main tax change proposals.
Personal income tax
The Proposal would introduce a number of changes related to personal income tax and social security obligations (contributions, social tax) from 2023, the most important of which are the following.
Changes affecting private entrepreneurs subject to flat-rate taxation
If adopted, the Proposal would introduce significant administrative (and minor payment) relief in all three tax categories:
- Private entrepreneurs subject to flat-rate taxation would declare and pay his personal income tax, social security contributions and social tax obligations quarterly, but broken down by months, by the 12th day of the month following the quarter. This would reduce the administrative burden and would technically result in a deferral of payment for the first two months of the quarter.
- The amendment relating to the quarterly liability is that, if a private entrepreneur subject to flat-rate taxation wishes to benefit from a family tax credit, he would declare and pay his advance tax in the form of a flat-rate tax on a quarterly basis. The method of calculating the base for social security contributions and social tax payable by the flat-rate taxpayer would also change: the base for the liability would, as a general rule, be the personal income tax liability on the basis of the income subject to flat-rate taxation from the beginning of the year to the last day of the quarter concerned, less the amount already taken into account in the previous quarter, adjusted by the special rules for determining the tax base. The new calculation method aims at ensuring a distribution of the liability to pay the tax during the year, even in cases where, for example, no personal income tax liability would arise in the quarter concerned under the personal income tax exemption rule linked to half of the annual minimum wage (i.e. a roll-over rule is introduced to ensure that the distribution of income does not significantly affect the liability to pay).
- The option of opting for flat-rate taxation would be extended: it would be possible to opt for flat-rate taxation from 2023 regardless of the amount of income earned in the tax year preceding the tax year in question (although the income threshold for the tax year in question would remain), and the waiting period would be shortened, as the period that would have to elapse after the year in which flat-rate taxation ceased before flat-rate taxation could be opted for again would be reduced from four years to 12 months.
Other changes affecting personal income tax and contribution liability
- For the year 2022, the draft tax return prepared by the NAV would include the personal income tax relief for those under 25: on this basis, it would no longer be necessary to amend the draft return for those concerned solely to claim the relief or refund.
- Group passenger transport would also include the transport of passengers in a vehicle hired or leased by the payer, thus extending the scope of the non-monetary exempt benefits.
- For trusts set up by an individual for the purpose of providing an asset for the benefit of an individual as a beneficiary, the Proposal would create the possibility to enter into a long-term investment contract.
- In the context of the previous amendments concerning the flat-rate tax for small taxpayers (in Hungarian: KATA) and the simplified income tax contribution (in Hungarian: EKHO), the Proposal would abolish the mutually exclusive nature of the two forms of taxation: a taxpayer would be able to opt for KATA taxation for part of the tax year and EKHO taxation for the other part of the tax year for the same activity (as it should not be excluded that a small taxpayer would opt for EKHO before or after his new KATA tax liability).
- Foreign individuals (e.g. performers) who opt for taxation under Section 1/B of the PIT Act and are insured in a State subject to a social security convention would be exempt from social tax under the Proposal.
- Persons qualifying as foreigners under the Social Security Act who enter into an employment relationship with a public-benefit trust carrying out public service functions, a higher education institution maintained by a public-benefit trust carrying out public service functions or other higher education institution would be exempted from taxation and would not be subject to Hungarian social security contributions and social tax, provided that their stay in Hungary in this context does not exceed 30 days.
Value added tax
The Proposal affects the law on value added tax (VAT Act) in several respects.
On the one hand, the Proposal contains amendments and additions on several points concerning the VAT treatment of transactions relating to immovable property.
Accordingly, the Proposal would extend the category of “new immovable properties” for VAT purposes with the real properties created by a change of function (i.e. a change in the use or number of units of immovable property), and would update the procedures and documents that can be used to prove the creation or the first occupation of immovable property. In line with the changes in the category of the “new immovable properties”, the provision of the VAT Act relating to repeated sales of immovable properties would be supplemented.
The Proposal would also clarify and extend the cases in which the domestic reverse charge mechanism should apply in relation to construction and installation works. On the one hand, it is expressly mentioned that the reverse charge mechanism would apply in cases where such works, inter alia, involve a change of use of the immovable property and, on the other hand, in cases where a building permit or simple notification is not required but where the works require any other official authorisation or notification. The Proposal would also contain temporary provisions on the applicability of the above rules.
The above amendments would generally incorporate the previous interpretation of the law into the VAT Act, but in individual cases the clarification in principle at the legislative level may still raise questions, e.g. whether all types of notification give rise to the domestic reverse charge mechanism.
The rules on the applicability of the reduced VAT rate to the sale of residential property, as defined in the VAT Act, would also be amended.
On the one hand, the proposal would incorporate into the VAT Act a provision of a previous government decree that the reduced rate of 5% for specified residential properties applies to sales made before 1 January 2025. On the other hand, the government decree would be amended to extend the applicability of the temporary provision, thus extending the applicability of the reduced VAT rate. Under the transitional provision of the Bill, the reduced VAT rate will apply if the date of sale of the residential property falls between 1 January 2025 and 31 December 2028, provided that the relevant permit has become final by 31 December 2024 or the construction activity subject to simple notification has been notified by 31 December 2024 at the latest. In practice, this would extend the applicability of the reduced VAT rate for all elements compared to the government regulation.
The Proposal also contains provisions on the content of invoices. Under this provision, the amount of VAT charged should only be indicated in HUF on the invoice in the case of invoicing in a foreign currency if the supply of goods or services accompanied by the invoice is taxable in Hungary. This is important, for example, when using the EU’s One Stop Shop (OSS) in Hungary and the individual is in another member state and VAT is to be charged there, it is not reasonable to expect the invoice to include the tax in HUF.
The Proposal also supplements the procedural rules for distance sales where the taxable person opts to declare and pay tax through the EU One Stop Shop (OSS). The new provision would clarify that the one-stop scheme should also apply to the declaration and payment of VAT on intra-Community distance sales to Member States where the taxable person is otherwise established for business purposes, as opposed to services provided to a non-taxable person.
The proposal would also create an obligation to provide information on machine receipts in the case of machine receipts issued by any technical means other than a cash register which has been authorised in advance by the competent authority and would also empower legislation at ministerial level to lay down detailed rules on the general provision of information on receipts and on the use of techniques other than a cash register for issuing machine receipts.
In addition to the above, the proposal contains a number of provisions concerning the individual VAT exemption.
Among other things, the proposal would stipulate that the individual exemption would not apply to intra-Community distance sales and to distance import sales, so that these receipts would not be included in the threshold for the individual exemption. However, the Proposal would create the possibility for a taxable person who applies the individual VAT exemption to deduct input tax on taxable intra-Community distance sales and on distance import sales, subject to other conditions for deduction.
Finally, it is important to point out that the Proposal would allow the application of the domestic reverse charge mechanism until 31 December 2026 for the goods and services defined in Council Directive 2022/890/EU, including the transfer of a tradable right to emit greenhouse gases, the transfer of emission units, the sale of cereals listed in Annex 6/A to the VAT Act and the sale of metal products listed in Annex 6/B to the VAT Act (unless covered by the special provisions under Chapter XVI).
The Proposal would also change some aspects of the regulatory regime for advertising tax.
With regard to the advertising tax, the Proposal would extend the deadline for the application of the tax rate under the current legislation by one more year, so that the tax rate would be 0% of the tax base until 31 December 2023. In view of this, the issue of the obligation to pay advertising tax, both for the advertisers who order publication and publishers, may be relevant again in another year.
The proposal would introduce clarifications in the interpretative provisions on excise duties and would correct discrepancies resulting from changes in EU legislation.
In this context, the proposal would update the EU legal reference to the exemption certificate and would also amend the definition of marked diesel, which was made necessary by the change in the marking substance agreed at EU level.
EU customs law
The proposal aims to introduce modernising and efficiency-enhancing rules in the area of EU customs law.
In this context, the Proposal would eliminate the notices by posting on noticeboards, which is obsolete, ties up considerable human resources and runs counter to the legislative intention to promote electronic administration and paperless public administration.
The Proposal would specify that the criterion of “frequency of infringement” for the assessment of fines should be considered within a period of one year, i.e. the frequency of the infringement should be assessed by reference to whether a similar infringement has occurred within the year preceding the infringement.
Finally, the proposal would provide for the non-imposition of a fine and a warning to the person concerned in the event of a first offence or omission within one year of its detection in certain cases where a customs penalty may be imposed (such as document retention, accuracy of goods declaration data, etc.).
Corporate income tax
The Proposal would amend the rules on exemptions related to fiduciary arrangements in several areas. For the exemptions and simplifications relating to assets under management, a private foundation established by a natural person for the sole purpose of making a benefit to a natural person beneficiary would be treated in the same way as a natural person beneficiary. The provisions could apply already for the 2022 tax year.
The cases of termination of group membership in the case of a group corporate taxpayer would be supplemented, and in the case of voluntary dissolution, liquidation or compulsory deletion of a taxpayer, group membership would also be terminated on the day before the date on which the proceedings are to commence.
The rules for claiming and managing the tax base reduction for the installation of electric charging stations would be changed. The existing specific rules would be simplified somewhat, but the tax base reduction would be considered as de minimis aid for tax years covered by returns submitted after 31 January 2022 and for subsequent tax years. If the taxpayer is otherwise eligible to apply the reliefs set out in the so-called "Emergency Notice", it could, at its option, also count it as aid under the Emergency Notice. In cases where the taxpayer has taken such a tax base reduction into account in returns filed after 31 January 2022, a self-revision would be required with the above amendment. Since similar tax base reductions related to the installation of electric charging stations are also applicable to the income tax of energy suppliers (“Robin Hood tax”), the relevant rules for the income tax of energy suppliers would also be amended as described above.
It would be clarified that, in the event of the dissolution of a group taxpayer, members would be required to declare tax advances within 30 days of the date of the event giving rise to the dissolution, rather than the date of dissolution (as currently worded), which is the first day of the tax year retroactively.
In order to ensure uniform treatment, new transitional provisions would be introduced in the rules for the use of tax losses incurred in or before the 2014 tax year, the rules on which are specified separately from the general rules in the legislation. The 50% utilization limit for these losses would also be determined on the basis of the positive tax base without any tax base adjustments related to the interest deduction limitation. At the taxpayer's option, the rule would apply as early as 2022.
From next year, the tax deferral applied by shareholders on preferential exchange of shares would no longer be reversed only on the exit of the new interest, but also on any impairment loss recognised during the holding period. In the future, not only the reduction of the acquisition value, but also the reduction of the book value would trigger the obligation to increase the tax base.
Small business tax
There would be some tightening of the conditions for opting for small business taxation (in Hungarian: KIVA) and for falling out of KIVA taxation. Currently, the entry and exit conditions only require that the net financing cost is not expected to exceed the limit set in the corporate tax law. In the future, KIVA taxation would not be optional or would cease if any of the tax base adjustments (increasing or decreasing) related to the interest deduction limitation were expected to be applied by the taxpayer. A further tightening would be that the KIVA taxation would also cease to apply on the day before the first day of the tax year if the company have to make a tax base adjustment under the special provisions on capital withdrawals (subject to exit taxation) or the special provisions on tax avoidance in the Corporate Tax Code.
Local business tax
The Proposal would supplement the provisions of the Act on Local Taxes relating to the transfer pricing amendment. Currently, the tax base reduction is still subject to the taxpayer having a statement from the other party that its tax base has been increased by the amount of the modification. However, this may limit the possibility for the taxpayer to reduce the tax base in cases where the other party accounts or would account for the difference on the basis of income or costs or expenses that do not affect the tax base of the local business tax (e.g. services received). Therefore, the Proposal would create the possibility for a declaration on such circumstance to be also appropriate for the taxpayer to reduce the tax base.
The Proposal would close the current legal loophole whereby if a company is dissolved by a merger at the same time as a transition to IFRS, the transition difference must be taken into account by the successor in determining the tax base.
The Proposal would completely overhaul the rules for simplified tax base assessment, with different rules not per type of taxpayer but per income bracket, in principle up to HUF 25 million of income, and in some cases up to HUF 125 million. In these cases, the tax base would not even have to be allocated between municipalities, but would be subject to a blended tax liability.
If a taxpayer does not wish to apply the simplified tax base from 1 January 2023, it would have to notify the tax authority of its decision by 31 May 2023 at the latest, failing which it would be subject to the simplified rules.
The most significant amendment proposed is that the registered main activity of real estate sale or rental would not be the condition for exemption from real estate transfer tax when real estate is transferred between related parties, but the actual activity of the acquirer would be examined. The acquisition of real estate would be exempt if at least 50% of the turnover of the acquirer in the previous year was derived from the letting, operation or sale of own or rented property. If the accounts for the previous year are not yet available, the acquirer would have to declare that this condition is met. If the undertakings set out in the declaration are not fulfilled, the acquirer would have to report this to the tax authority, which would impose a 50% increase in the amount of the transfer tax. If the acquirer fails to make such a declaration and the tax authority identifies this during a tax audit, then double the original transfer tax would be imposed.
The Proposal would clarify that in case of financial lease liabilities only the amount in excess of the repayments due in the following financial year should be recognised as long-term liabilities.
The Proposal would incorporate into the Accounting Act the provisions on the disclosure of corporate tax information required by certain EU Directives. Accordingly, companies with revenues exceeding EUR 750 million at group level would be required to provide detailed information in their accounts on their corporate tax liabilities and practices. The legislation, which would be based on the Accounting Directive, would contain detailed rules on when stand-alone reporting would be mandatory, when reporting by the ultimate parent company would be sufficient, and on what and how much information on corporate tax should be disclosed. There would also be detailed rules on exemptions from disclosure.
The report containing corporate tax information would have to include, inter alia, information on the ultimate parent company, information on related companies, a detailed breakdown of income, profit before tax, the amount of tax payable and tax paid and, in the case of significant differences between the two, the reasons for the difference, as well as a presentation of retained earnings.
In line with EU directives, the report containing corporate tax information would first apply to tax years starting on or after 22 June 2024.
In addition to the above, the Proposal also contains minor amendments and clarifications related to the Accounting Act.
The fee for the application for advance pricing agreement (APA) procedure has already been amended with the summer tax changes: it has been increased from HUF 2 million to HUF 5 million for unilateral procedures and to HUF 8 million for bilateral or multilateral procedures. The current amendments contain further clarifications in this respect. The fee for procedures related to renewals and amendments would remain 50%, but would not be based on the fee for the original procedure, but on the fee rate established by this amendment. Unlike before, 85% of the fee paid would be refunded in the event of refusal, termination or rejection of the application.
The increase in the number of bilateral procedures may have justified the specific treatment of the procedural time limits for these procedures in the Proposal. Accordingly, a new paragraph would be added stating that in bilateral or multilateral procedures, the consultation with the competent authority of the foreign state should be completed within two years of the request being made, with the possibility of extending the deadline by one year in justified cases.
The Bill would also clarify the cases of the prohibition of tax audits under the APA procedure. Under the new text, the tax audit ban would apply specifically to the period for which the taxpayer has requested the APA to be in force.
It would also clarify the case of a so-called "roll-back" in the case of a bilateral or multilateral procedure. This would mean that binding force could be requested for tax years prior to the first day of the tax year in which the request is made, subject to the agreement of the competent authorities.
Under the Proposal, an extension of the APA decision would be requested for three tax years, whereas the previous wording only provided for three years.
Tax administration procedure
Obstacles to issuing a tax number in the tax registration procedure
One of the steps in establishing a company is the tax registration procedure, during which the tax authority checks whether there are any obstacles to the issuance of a tax number. These include cases where a person who was previously a director, officer, member or shareholder of a company whose tax number has been cancelled by a final and binding judgment is (also) a director, officer, member or shareholder of the company to be registered. Compared to the current rules, the Proposal would introduce a facilitation whereby there would be no obstacle to the assessment of a tax number if the person concerned held an office in a company which, although previously subject to cancellation, has had its tax number re-assessed by the tax authority.
If the conditions for a tax number issuance under the relief (in line with the Proposal) are met in respect of a proceeding that has been finally closed, a tax number determination could be requested within a 30-day limitation period from the entry into force of the Proposal.
Registration of a self-employed taxpayer
The proposal would create the possibility that if a taxpayer already has a tax number at the time of the declaration of the self-employed activity in respect of other taxable activities, the tax administration would not have to issue a new tax number. However, a new tax number would be required if the taxpayer who declared his self-employed activity had also previously held a VAT identification number.
Registration of non-resident natural person
The employment of non-residents for a shorter period is subject to the condition that they have a tax identification number. In the absence of such ID, they cannot start their activities under the current provisions. Previously, legal persons and other entities were required by law to have a tax identification number, but under the proposal, public trusts and higher education institutions with a public-service mission would be able to employ foreigners for shorter periods only under such conditions. Under the Proposal, the notification for the issuance of a tax identification number would have to be made to the tax authority within 30 days of the start of the activity, which would also reduce the administrative burden and simplify administration.
Changes to the rules on extraordinary tax returns
In the application for the establishment of a group taxable entity under the VAT Act, it is possible to indicate the date by which taxable persons request the establishment of a group taxable entity, and in the application for joining a group taxable entity, the new taxable person who is not joining or who joins may also indicate the date by which he or she requests to join. Under the Proposal, in such cases, the 30-day time limit for compliance with the outstanding tax return obligation would be calculated from the date of the creation of the group taxpayer or the date of the joining of the group (not from the date on which the decision becomes final).
Access to data of taxpayers with large tax deficits and large tax arrears
The Proposal would clarify that the list of persons with a large tax deficit and large tax arrears should include self-employed persons and natural persons with a tax number.
Data to be reported to the National Tax and Customs Administration
The Proposal would create the possibility that, if a taxpayer indicates the date of termination of insurance in the monthly tax and contribution return, the tax authority would, based on the tax return data provided by the taxpayer, make an ex officio notification of the termination of insurance and forward the data to the health insurance register, which would notify the employee and the employer.
A further novelty under the Proposal would be that, in the case of a taxpayer's cessation of insurance without legal succession, the tax authority would make up the missed notification obligation for employees ex officio within 15 days of becoming aware of the date of cessation of insurance without legal succession and would electronically transmit the data to the health insurance register. The date of termination of insurance in such cases would presumably be the date of termination of the employer or payer.
In the case of employment contracts of definite duration, the Proposal would also require the contractual end date of the employment relationship to be communicated when the notification to the insurer is made.
The Proposal would add the status of liquidator or wage guarantor as an employer and thus clearly identify these persons as the persons required to submit a notification of change.
Appeal against a request for justification
Under the Proposal, no further justification would be accepted against a decision rejecting a request for justification in the event of failure to comply with the time limit for appeal. This rule would apply to requests for justification submitted after the entry into force of the Proposal.
Confidentiality of data
The Proposal would create the possibility for an appeal against a decision rejecting a request for confidential data processing to be lodged not only by the taxpayer but also by other parties to the procedure.
Enforcement proceedings to be implemented by the tax authority
Implementation of enforcement - intermediary organizations
The proposal would introduce changes to the rules on enforcement. The current system, whereby the tax administration only asks for bids from three randomly selected contractors if it needs an organisation to assist in enforcement, unduly restricts the possibility to bid and often leads to the payment of a significantly higher fee than the real value of the task to be performed. To reduce unrealistically high costs, the tax authority could replace the companies by a central procurement body designated by law or by selecting the contractor on the basis of the rules of the Public Procurement Act. Intermediary organisations would receive a request for tenders for each task and each of the organisations invited would then be given the opportunity to bid, not just three. The tax administration would thus be able to select the lowest cost from a number of bids, with increased free competition, which would also ensure that the interests of the debtor are protected.
Intermediary organizations would have 30 days from the date of the invitation to tender to submit their bids, which would be time-barred. In the bid, the intermediary organization would specify the assistance fee, which should include all costs, as well as other details of the assistance (e.g. form of the enforcement, place, time).
The tax administration would always be obliged to choose the lowest cost offer from among the offers received. The tax authority would be obliged to take its decision in the form of an order.
In order to become an intermediary body and be entitled to bid for calls for tender, one would have to apply for inclusion in the register of intermediary organizations. In addition to being resident in Hungary, the condition for admission is that the organisation must be included in the database of taxpayers exempt from public debt. If the tax authority removes the organization from the database of taxpayers exempt from public debt, it would also remove it from the register. The tax administration would be obliged to publish the resulting register on its website on a quarterly basis. Organisations could be removed from the register if they fail to comply with the terms of the designation order through their own fault.
The work of the intermediary organization would be supervised by the tax authority during enforcement.