Foreign tax credit
Unilateral foreign tax credit is available for income taxes paid abroad, up to the Hungarian tax payable on the creditable income (at a maximum of 90% of income tax paid abroad).
The foreign income has to be classified by country of origin and revenue type. The deducted tax may not exceed the lesser of either the applicable foreign tax or the applicable foreign tax based on the tax treaty between Hungary and the given country.
If there is no available tax treaty, 90% of the tax payable abroad is credited against the tax liability, up to a hypothetical tax liability calculated by using the average Hungarian tax rate. Ordinary tax credit is applicable if so described by a tax treaty. The average tax rate is the CIT rate, reduced by the applicable tax allowances, divided by the tax base.
Indirect costs should be allocated in proportion to the revenue and income of the branch office to the total revenue and income of the whole company.
Special rules apply to the Hungarian CIT group.
Tax holidays may be granted, among others, in relation to developments and for small and medium-sized enterprises (SMEs).
Development tax incentive
Development tax incentive may be claimed for a 13-year period (beginning once the investment is completed or from the next year) in the CIT returns over a maximum period of 16 years from the following year of the original application for the incentive. In any given tax year, the tax incentive is available for up to 80% of the tax payable but is limited, in total, to the state aid intensity ceiling.
Claiming the tax relief is subject to a government decision, based on authorisation by the European Commission, if the total amount of state aid required for the investment project exceeds the amount that can be provided at the same county for an investment project with eligible expenses exceeding EUR 110 million. If the investment is below this threshold, taxpayers only need to notify the Ministry of Finance before starting the investment.
Tax incentives are available for investments if:
- the net present value of the investment is at least HUF 3 billion, or
- the net present value of the investment is at least HUF 1 billion in certain designated areas and provided that in the four years following the year in which the tax incentive is first utilised the average statistical number of employees (excluding those who are employed in foreign PEs) does not fall below the average statistical number of employees calculated from the data of the three tax years prior to the commencement of the project.
Besides the above, development tax incentives may be granted, provided that certain criteria are met, to companies that invest:
- at least HUF 100 million at present value in equipment for zoogenic food production
- at least HUF 100 million at present value in environmental protection projects
- at least HUF 100 million at present value in the production of films and videos
- at least HUF 100 million at present value in basic research, applied research, and experimental development projects
- in a project aiming at job creation
- at least HUF 100 million at present value in projects started after issuing stock market quoted shares
- at least HUF 300 million (for medium-sized enterprises) or HUF 200 million (for small-sized enterprises) in projects at present value, or
- at least HUF 100 million at present value in projects implemented and operated in a free entrepreneurship zone.
From 2022, medium-sized enterprises are eligible for development tax incentives, provided that the given investment’s present value exceeds HUF 100 million, while the minimum threshold for small-sized enterprises is HUF 50 million.
As mentioned above, tax incentives may also be granted for projects aiming at job creation. In this regard, there is no minimum investment value and there is no additional headcount requirement, although the conditions prescribed in the relevant government decree still must be met.
In addition, the law stipulates that a taxpayer will be required to disclose the details of the investment in their tax returns submitted for the tax year in which the investment is put into operation, including, in particular, the date of completion and the eligible expenses actually incurred at present value.
The legislative rules of that time should be considered when the notification form or the request for a development tax incentive was submitted to the Ministry of Finance in connection with the investment.
Regional aid map of Hungary
From 1 January 2022, investments of large enterprises in Pest county should be reviewed from a tax incentive point of view as the EU and Hungarian legislation is currently under harmonisation and their interpretation has a high importance. Investments located in Budapest are not eligible for regional investment aid.
Aid intensity is 30% in the Central and Western Transdanubia region effective from 1 January 2022. In Southern Transdanubia, Southern Great Plain, Northern Great Plain, and Northern Hungary the aid intensity remains 50%.
Free entrepreneurship zone
The free entrepreneurship zone contains over 1,200 settlements in the unprivileged areas of Hungary designated by the government and coordinated by the regional business development agency that is comprised of individual regions, separated by public administration, borders, and topographical lot numbers, that are treated jointly for regional development purposes.
Tax credits on investments to comply with energy efficiency targets
Companies carrying out investments aiming at increasing energy efficiency may be eligible to utilise a CIT incentive as of January 2017.
As a particular feature, the tax incentive, in contrast with the development tax incentive, does not have a territorial restriction, and investments carried out even in the capital of Hungary may be eligible, given that all other conditions are fulfilled. This type of tax incentive may be utilised at up to 70% of the calculated CIT liability decreased by the utilised development tax incentive for other investments (if any).
Investments become eligible for the incentive given that their initial energy-efficiency goals are met according to a certificate issued by energy auditors or auditing organisations listed by the Hungarian Energy and Public Utility Authority subsequent to the installation of the investment. Moreover, prior to the commencement of the project, a preliminary audit has to be carried out (also by an organisation described above) reflecting the rate of possible energy savings on the planned investment or reconstruction.
Investments aiming at renewal/renovation may be subsidised as well.
The rate of energy savings is to be measured considering the starting point/baseline regulations, or, in exceptional cases, against the energy consumption of a similar asset with the lowest energy efficiency (and attainable savings via installing the former) currently available on the market.
The tax incentive may be utilised at up to 45% of the eligible costs (calculated together with other incentives/grants) depending on the given region (but not more than the HUF equivalent of EUR 15 million at present value), which can be increased by 20% for small-sized enterprises, and 10% for medium-sized enterprises. The tax incentive can be used, at the earliest, in the tax year in which the investment is put into operation and in the subsequent five tax years.
The state tax authority will check the compliance with the requirements for the tax allowance at least once before the end of the third tax year following the date of utilising the tax allowance.
As an important limitation, an investment cannot benefit from this type of tax incentive and from the development tax incentive at the same time.
The investment must be maintained during the five years obligatory operation period.
In line with the changes to the general block exemption regulation, as of 1 January 2024 the amendment regulates separately investments and renovations for general energy efficiency purposes and energy efficiency projects in buildings. As regards investments and renovations for general energy efficiency purposes, the amendment provides detailed guidance on alternative investments and renovations that are significant in terms of eligible costs. In the case of energy efficiency projects in buildings, the amendment makes the eligibility for the tax credit conditional on a minimum increase in energy efficiency, measured primarily in primary energy.
In addition, the relevant aid intensities are reduced compared to the current rates. The extent of the reduction will depend on a number of factors and the new rates of reduction will need to be reviewed on a project-by-project and renovation-by-renovation basis.
Other tax incentives
Film and spectator sports incentives
In Hungary, companies are encouraged to subsidise film production and spectator sports through the high rate of tax savings available. As sponsors, companies are able to achieve effective net tax savings of 2.25% of the financial support they provide for film makers or sport clubs. Also, the option of allocating 80% of the monthly or quarterly tax advance payments and 80% of the payable CIT to support sports and film production is available with the maximum tax credit of 7.5%. These two regimes are not applicable in parallel within the same tax year.
From 2017, the period for applying the tax incentive for providing financial support to film productions and sports organisations for popular team sports is extended to include the eighth calendar year (previously it was the sixth tax year) following the year in which the support was provided. The tax incentive might be utilised at up to 70% of the CIT liability.
Rules for applying sports incentives have been amended as of 1 July 2017. The list of eligible sports, defined as spectator sports, now comprises football, handball, basketball, water polo, ice hockey, and volleyball.
Tax incentive for SMEs
A tax incentive is available for SMEs (basically, those with less than 250 employees; annual net revenue of a maximum of EUR 50 million; or a maximum annual balance sheet total of EUR 43 million). SMEs that take a loan from a financial institution for the acquisition or production of tangible assets may deduct the total amount of the interest paid on the loan from their tax due without any cap; however, certain limitations should be considered as per EU law.
Tax incentive for acquiring start-ups
From 2017, pre-tax profits may be decreased by three times the cost of shareholdings acquired in start-up companies, subject to certain requirements. This tax base decreasing item should be utilised in four equal instalments, in the tax year of the acquisition and in the three subsequent tax years, but only up to HUF 20 million per tax year and per start-up company. ‘De minimis’ related limitation should be considered as per EU law.
A start-up company shall mean a legal person registered according to the Government Decree on the Registration of Start-up Companies, and, additionally, the average statistical number of employees in the start-up company is two or more in the tax years when claiming the allowance.