As of 1 January 2019, taxpayers are able to opt for a group taxation regime for CIT purposes. Group taxation is available to affiliated companies resident in Hungary for tax purposes, provided that such affiliated companies have at least 75% direct or indirect control over each other, have the same year-end, and prepare their financial statements in the same way (as per Hungary GAAP or IFRS).
By opting for group taxation, group members are able to offset their operating losses up to 50% against the positive group tax base if certain conditions are met, as well as apply simpler transfer pricing rules to the intra-group transactions between the CIT group members.
Eligible group companies have to submit an application to the Hungarian tax authority between the first and 20th day of the month before the last month of the tax year in order to benefit from the group taxation regime for CIT purposes in Hungary. The procedural rules regarding group taxation regime are included in the Act on the Rules of Taxation.
As of 24 July 2019, businesses that commence operations during the year are able to join existing corporate tax groups. Such businesses are deemed to become group members on the date on which they become subject to corporate tax in Hungary.
As of 1 January 2022, non-profit companies, social cooperatives, general interest associations of pensioners, and school cooperatives cannot be a member of a corporate tax group.
As an OECD member, Hungary’s legislation is in line with the OECD Transfer Pricing Guidelines, acknowledging that the arm’s-length principle is the international transfer pricing standard to be used.
On 11 February 2020, as part of the Base Erosion and Profit Shifting (BEPS) project, a new chapter has been added to the OECD Guidelines on the transfer pricing aspects of financial transactions, which will contribute to consistency in the interpretation of the arm’s-length principle and help avoid transfer pricing disputes and double taxation. In line with this development, the new chapter could also be applied in Hungary.
The latest edition of the OECD Transfer Pricing Guidelines (published on 20 January 2022) includes the revised guidance on the application of the transactional profit method and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020.
If parties qualify as related parties (as defined in the Hungarian CDTA) and the price applied differs from the arm’s-length price, the CIT base must/may be modified by a transfer pricing adjustment. In addition, the foreign PEs of a Hungarian company and the Hungarian head office also qualify as related entities and are subject to transfer pricing regulations.
Taxpayers are obligated to prepare transfer pricing documentation for every transaction between related parties (including in-kind contributions provided by related parties), subject to certain exemptions.
Transfer pricing documentation is not required to be prepared:
- For transactions between a resident taxpayer’s PE and a related company if the resident taxpayer under the provisions of an international treaty adjusts the corporate tax base ensuring that it does not include the foreign taxable income.
- For transactions covered by an advanced pricing agreement (APA) issued by the state tax authority.
- If the consideration due for goods or services supplied by a third party is recharged in full to a related party.
- In the case of cash transferred without consideration.
- If the value of the transaction does not exceed HUF 50 million during the tax year.
- In the case of individuals, small or micro enterprises, transactions conducted on the stock exchange, or at an officially set price.
Taxpayers are allowed to consolidate transactions for transfer pricing analysis purposes if the consolidation does not jeopardise comparability, and:
- the subjects of the contracts are identical, all material conditions for fulfilling the contracts are identical and fixed in advance, or the differences in the conditions are not significant, or
- the contracts are closely related.
In the case of consolidation, taxpayers are obligated to include arguments for the consolidation (i.e. why the taxpayer believes that criteria of consolidation are met).
When determining transfer prices applied between related companies, taxpayers are allowed to apply traditional transaction methods or transactional profit methods. If the above methods are not applicable, companies may use any other method.
The formal and content requirements as included in Base Erosion and Profit Shifting (BEPS) Action 13 were implemented in Hungary in Decree No. 32/2017 of the Ministry for National Economy, which has replaced, as of 1 January 2018, the Decree No. 22/2009 of the Ministry of Finance, the former decree governing the details of the transfer pricing documentation requirements.
According to Decree No. 32/2017 of the Ministry for National Economy, taxpayers have to prepare a Master File and a Local File as transfer pricing documentation. The new rules have to be applied in the documentation to be prepared for financial year (FY) 2018 first.
According to Decree No. 32/2017 of the Ministry for National Economy, the Local File must include, but is not limited to, the following:
- Functional and risk analysis.
- Industry and company analysis.
- Economic analysis (including financial analysis, benchmarking analysis, and the process of selecting the most appropriate transfer pricing method).
- Copies of APAs and advance tax rulings issued by foreign tax authorities that concern the local company’s documented transactions.
According to Decree No. 32/2017 of the Ministry for National Economy, the Master File must include the following:
- The organisational structure and the presentation of the group (including the supply chain, inter-company agreements, functional and risk analysis, and business reorganisation, if any).
- Information about the intangible assets, the financial transactions, the financial performance, and the taxation of the group.
- A list of APAs and advance tax rulings issued by tax authorities.
In addition to the above, taxpayers are allowed to prepare a so-called simplified documentation for certain low-value adding services if criteria set in the Hungarian legislation are met. Decree No. 32/2017 of the Ministry for National Economy allows the preparation of the simplified documentation.
The transfer pricing documentation does not have to be submitted to the tax authority but has to be available no later than the filing date of the CIT return in any given year; otherwise, a default penalty may be assessed.
As of 1 January 2020, based on an amendment, transfer pricing rules shall be applied in the event of a capital increase as a result of contribution in kind provided by a shareholder who, prior to the contribution, did not have majority ownership in the company but acquires majority ownership through the contribution. The application of transfer pricing rules is also required in case of repurchasing of own shares, or transfer of such shares free of charge.
According to certain articles of the Act LXIX of 2021 on the Amendment of Certain Tax Laws, the competence of the Hungarian Tax Authority (HTA) moved to the authority of the Hungarian Ministry of Finance with an effective date of 1 October 2021 in the case of APAs and transfer pricing related mutual agreement procedures (TPMAPs). From 1 October 2021, the Ministry of Finance handles the ongoing APAs and TPMAPs, and any new submission should also be made to the Ministry of Finance. Tax audits and international inquiries, however, continue to be performed by the HTA.
Act XXIV of 2022 on the grounding of the 2023 central budget of Hungary was promulgated in the Official Gazette of Hungary on 27 July 2022, which affects the applicable transfer pricing rules on several points.
First, taxpayers will have to meet a new data provision obligation as part of the annual corporate tax return. The detailed rules related to this are not yet known. However, the act on the grounding of the central budget authorizes the minister responsible for tax policy to lay down the details in a decree. This is expected to take place during 2022, given that this data provision obligation will be applicable for tax returns submitted after 31 December 2022.
The amounts of the default penalty related to the preparation or the record-keeping of transfer pricing documentation will increase from the previous default penalty of up to HUF 2 million per documentation to HUF 5 million, and in the case of repeated infringements from the previous default penalty of up to HUF 4 million per documentation to HUF 10 million.
As part of the modification, the fee for the APA procedure will be increased to HUF 5 million in the case of a unilateral procedure, and to HUF 8 million in the case of a bilateral or a multilateral procedure.
In addition, when determining the arm's length price, should the taxpayer take into account data that is stored in a database or obtained from other sources for comparable products, services or companies, then it will now be mandatory to further narrow the elements of the resulting sample to the interquartile range (the use of the interquartile range has so far only been prescribed by the legislator in the presence of certain circumstances as defined in Decree No. 32/2017 of the Ministry for National Economy). Another change is that if the consideration applied by a taxpayer in a transaction concluded with its affiliated company falls outside the arm's length range, in connection with the arm's length principle, the adjustment of the profit before tax must be made to the median value of the arm's length range unless the taxpayer proves that a value within the arm’s length range other than the median value corresponds best to the transaction under review. In such cases, this value should be taken into account as the arm’s length price instead of the median value. Therefore, as a general rule, it is no longer sufficient to make the correction only to the nearest value of the arm’s length range.
The amendment also stipulates that if the consideration applied by a taxpayer in a transaction concluded with its affiliated company is already within the arm’s length range, it is not possible to modify the profit before tax in connection with the arm’s length principle.
The changes related to the application of the interquartile range and the modification of the profit before tax must first be applied when determining the tax liability for the tax year starting in 2022.
Finally, the strict rules on banning tax inspections that have been in force until now in relation to APA procedures, will also change: except for tax audits focusing on the correctness of the VAT deduction, only tax audits in connection with the arm’s length price to be determined by the APA procedure will be prohibited. The ban on tax inspections applies from the submission of an APA application until the deadlines set by law have expired. This amendment gives the tax authority more leeway with respect to tax audits, since previously it could not conduct any audits in relation to transactions affected by the procedure. In relation to APA procedures, the section of the Act on the Rules of Taxation which prevents taxpayers who are not obliged to prepare transfer pricing documentation from submitting an APA request, will be repealed. In accordance with this, for example, members of a corporate tax group will also be entitled to initiate APA procedures in connection with transactions concluded among themselves.
Country-by-country (CbC) reporting
In addition to the above, Hungary has implemented CbC reporting legislation. The new statutory obligation pertains to Hungarian resident companies that were, in the fiscal year preceding the reporting fiscal year, members of a multinational company group with a total annual consolidated group revenue exceeding EUR 750 million (or an amount in HUF approximately equivalent to the same, calculated according to the monthly average Hungarian Central Bank exchange rate for January 2015).
Under the general rule, a Hungarian resident ultimate parent entity must file a CbC report with the Hungarian tax authority within 12 months of the last day of its reporting fiscal year. The ultimate parent entity must also notify the tax authority about the last day of the fiscal year and that it is a reporting entity (i.e. an entity required to file a CbC report).
Hungarian resident entities that do not qualify as reporting entities are obligated to notify the tax authority about the name and tax residence of the reporting entity.
As a general rule, however, notifications must be made no later than the last day of the reporting fiscal year. Any change in the information reported must be reported within 30 days of such change occurring. The CbC reports and notifications must be submitted electronically.
Failing to submit reports or notifications, late submission, or providing incorrect, false, or incomplete information may be subject to a default fine of up to HUF 20 million.
Thin capitalisation / interest limitation rule
As per the prior years, interest related to liabilities exceeding three times the equity (3:1 debt-to-equity ratio) is non-deductible for CIT purposes. When calculating the ratio, debts from financial institutions shall be disregarded and the amount of liabilities could be decreased by the amount of cash receivables (to exempt back-to-back financing from this rule). On the basis of the prior rules, the non-deductible amount of interest qualifies as a permanent tax base modifying item.
According to the new legislation, which is implemented on the basis of the EU's Anti-Tax Avoidance Directive (ATAD) and entered into force in 1 January 2019, the non-deductible interest should be calculated using the tax EBITDA, instead of the debt-to-equity ratio. Based on the general rule, the net borrowing costs are deductible up to the higher of 30% of the tax EBITDA or HUF 939,810,000. A major point of the amended law is that any interest paid to financial institutions will also be subject to the thin capitalisation rules.
For this purpose, tax EBITDA means an adjusted corporate tax base, i.e. the current year's tax base modified with the net borrowing costs, tax depreciation, and utilisation of carried forward unused interest capacities/exceeding borrowing costs (if any).
On the basis of EU's ATAD, Hungary implemented certain derogation rules that could result in a higher interest deduction (i) if the taxpayer's standalone equity/asset ratio is higher than the group’s ratio or (ii) the net interest expense/tax EBITDA ratio is higher than the taxpayer's standalone respective ratio.
We note that a grandfathering rule is also introduced, which states that in the case of loan agreements concluded prior to 17 June 2016 the old rules (i.e. thin capitalisation debt-to-equity approach) could be applied until there is no increase in the amount of debt or the maturity date is not prolonged.
Controlled foreign companies (CFCs)
Under the new CFC rules, effective from 1 January 2019, a Hungarian taxpayer shall treat a foreign entity as a CFC where the following conditions are met:
- A Hungarian taxpayer entity alone or together with its related parties holds a direct or indirect interest therein, which entitles for:
- more than 50% of the voting rights
- more than 50% of the registered capital, or
- more than 50% of the after-tax profits.
- In the foreign entity's given financial year, the actual CIT paid by the foreign entity is less than 50% of the CIT that would have been charged on the entity under the applicable CIT rules in Hungary (i.e. less than 50% of the Hungarian CIT rate of 9% that is 4.5%, unless the foreign entity earns income that would not be subject to tax in Hungary either, e.g. dividend, capital gain).
According to the recent changes, an entity will no longer be automatically exempt from being deemed as a CFC solely on the basis that one of its related parties is listed on a recognised stock exchange.
In order to avoid the qualification as a CFC, the foreign entity must meet the following conditions:
- its income arises purely from genuine arrangements or series of such arrangements, which the Hungarian taxpayer will need to evidence
- its accounting pre-profit does not exceed HUF 243,952,500 and its non-trading income does not exceed HUF 24,395,250, or
- its accounting profits amount to no more than 10% of its operating costs for the tax period.
From 1 January 2021, it shall also be considered whether the foreign entity is tax resident or the PE is located in a 'non-cooperating state' when determining the CFC status of a foreign entity or PE in terms of the Hungarian legislation. The list of non-cooperating jurisdictions is expected to be determined in line with the list issued by the European Council.
Implementation of hybrid mismatch rules and related anti-avoidance provisions
As of 1 January 2020, the respective provisions of the ATAD II (EU Directive 2017/952) have been incorporated into the Hungarian CIT legislation regarding hybrid mismatches in order to meet the implementation requirements as set out in the Directive.
For this reason, among others, the following were introduced: (i) hybrid mismatch rules under financial instruments, (ii) hybrid payments made to a hybrid entity or to a PE, (iii) hybrid payments made by a hybrid entity, and (iv) double deductions achieved by payments made by a hybrid entity or PE.
In the above cases, the respective costs deductions must be denied, or the income shall be taken into consideration when calculating the tax base.
With effect from 1 January 2022, the respective rules of the ATAD II will be implemented in relation to reverse hybrid mismatches as well.
If a hybrid entity does not qualify as a tax resident in Hungary under the general rules but it has an establishment or a registered office there, it will become a Hungarian tax resident provided that the hybrid entity’s majority owner or shareholder has tax residency in a state that considers the Hungarian hybrid entity as a taxpayer of corporate tax or other equivalent tax.
The income of such a hybrid entity is taxed to the extent it is not taxed by the Hungarian or other country’s tax legislation.
The rules are not applicable for investment funds or other collective investment fund vehicles that have wide, diverse portfolios of securities and whose investors are subject to investor protection regulations in Hungary.
Introduction of exit taxation rules
As of 1 January 2020, the Hungarian CIT regime introduces exit taxation provisions. The implementation of such rules serves the purpose to be in compliance with the harmonisation requirements of the EU’s Anti-Tax Avoidance Directive (ATAD I).
Accordingly, a Hungarian taxpayer is subject to 9% CIT at the time of the exit/transfer of its assets and at the amount equal to the positive difference between the fair market value of such assets (to be determined in line with the general transfer pricing guidelines) and the tax book value of those assets, in certain cases (e.g. in the case of transferring the effective place of management to a foreign jurisdiction, transferring assets to its foreign PE).
Note that asset relocations in the frame of a voluntary liquidation procedure is/was also covered by the Hungarian legislation.