The following significant changes were recently introduced in the Hungarian tax system. The changes are mainly related to corporate income tax (CIT), personal income taxes (PITs) and related contributions, and indirect taxes.
Corporate income tax
Permanent establishment (PE) for CIT purposes
As of 1 January 2021, a PE may be created if a foreign person furnishes services through an employee or other personnel engaged by the foreign person for a period exceeding 183 days in any 12 months period starting or ending in the tax year (with or without interruptions).
Additionally, a foreign company shall be deemed to have a PE in Hungary, if its activity meets the PE definition of the relevant DTT. This means that DTTs shall override the rules set forth by the Hungarian legislation with respect to creating a PE in Hungary.
Controlled foreign companies (CFCs)
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.
Reversed hybrid structures
From 1 January 2022, the respective rules of the ATAD II will be implemented in relation to reverse hybrid mismatches.
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 which 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 portfolio of securities and whose investors are subject to investor protection regulations in Hungary.
Starting from 1 January 2021, the dividend received from a CFC may be exempted to the extent it is associated with genuine arrangements carried out by the CFC.
Development reserve may be created at up to 100% of the pre-tax profit and the annual maximum value of the reserve is also abolished.
Development tax incentive
As of 1 January 2021, the minimum investment volume requirements for small and medium sized enterprises decreased to HUF 200 million and HUF 300 million, respectively, which will further decrease up to 2022.
Real estate transfer tax
The qualification of real estate holding companies for transfer tax purposes shall be determined based on the latest available balance sheet, but the book value of properties acquired between the latest balance sheet date up to the date of the transfer shall also be included.
Special tax on financial institutions
With effect from 2022, venture capital fund managers and stock exchanges are exempted from the special tax liability of financial institutions.
Local business tax (LBT)
Tax advance top-up
With effect from the tax year starting from 1 January 2020, in line with other taxes, top-up liability for LBT purposes was abolished.
Temporary business operations
Starting from 1 January 2021, the definition of a PE for LBT purposes has been extended to the case of construction operations exceeding 180 days. However, other business activities carried out temporarily are not subject to LBT.
In the tax year ending in 2021, micro, small and medium-sized businesses have been granted with a preferential local business tax rate. The maximum level of the local business tax rate is 1 percent, even if a higher tax rate is set forth in the municipal decree.
Advertising media placements
As of 1 January 2021, advertising media placements on real estate properties are not subject to building tax.
Value-added tax (VAT)
New rules regarding e-commerce
In line with Council Directive (EU) 2017/2455, additional simplification has been introduced regarding the VAT rules on electronically supplied telecommunication and broadcasting services (‘distance services’) for non-taxable private individuals. If certain conditions are fulfilled, the service provider taxpayer is allowed to determine its VAT liabilities according to the regulation of the member state where it is established instead of the member state of the service recipient, up to a threshold of 10,000 euros (EUR), which as of 1 July 2021 will be consolidated with the intra-Community distance sales performed by this taxpayer as well. As a result of this simplification, the service provider taxpayer will be able to avoid VAT registration in each of the affected member states of the service recipients.
However, the new regulation sets out that the service provider taxpayers still have the right to decide to determine their VAT liabilities according to the rules of the member state of their service recipients instead of applying the new simplification rules. In this case, taxpayers will remain bound to their decision until the end of the second calendar year subsequent to the calendar year of their decision.
The new rules apply to supplies performed after 31 December 2018.
In accordance with the VAT Directive, the VAT Act will define “intra-Community distance sales” and the “distance sale of goods imported from a third country.” Both definitions stipulate that the goods must be supplied to non-taxable persons. Distance sale means a transaction in which a private individual resident in an EU Member State buys goods at a distance from a taxable person in another EU Member State or from a third country, and the goods are delivered directly to that individual.
The VAT on the supply of goods at a distance must be paid in most cases (i.e. for intra-Community distance sales above a certain threshold) in the Member State of consumption (which, in practice, means that the taxpayer selling the goods must register for, declare and pay VAT in that Member State). Therefore, in order to reduce the administrative burden on taxpayers carrying out such activities, the following arrangements and special rules will be introduced:
Extension of the One-Stop Shop
The One-Stop Shop (OSS) that currently applies to telecommunications, broadcasting and electronically supplied services will be extended to include all other services provided to non-taxable persons in EU Member States, and will also cover the obligation to declare and pay tax on intra-Community distance sales. The use of the One-Stop Shop is optional but as it can significantly reduce taxpayers’ administrative burden, many taxpayers are expected to opt in.
Taxpayers will be able to use the system after 1 July 2021, subject to prior registration.
Introducing the Import One-Stop Shop
A separate Import One-Stop Shop (IOSS) will be introduced for declaring and paying tax on intra-Community distance sales of goods imported from a third country. In addition to reducing administrative burdens, another advantage of this system is that the goods concerned will be exempted from import VAT.
The conditions for using the IOSS system are stricter: it can only be used for the distance sale of low-value consignments of a value up to EUR 150 (i.e. the duty exemption threshold), and non-resident taxpayers must also usually authorise an intermediary. The intermediary must meet the same requirements as those imposed on financial representatives and will be jointly and severally liable with the taxpayer giving the authorisation for fulfilling the tax obligations.
However, it is important to note that the one-stop shops described above will continue to allow tax payments only.
Special rules for paying import VAT on low-value consignments
As of 1 July 2021, the VAT Act will lay down simplified rules for the payment of import VAT on imports of low-value consignments worth less than EUR 150, if the seller does not use the import one-stop shop.
Under this simplification, as a rule, the person initiating the release of the goods for free circulation should collect the import VAT from the consignee and pay it to the tax authority. However, the above simplification may only be used by taxable persons registered in Hungary who initiate the release for free circulation and hold an authorisation for deferred payment of customs duties.
Under the above simplified import VAT payment, the rate of import VAT will be 27% in all cases, regardless of the VAT rate applicable to the imported goods.
In addition, the tax exemption of consignments of a value up to EUR 22 will be abolished.
Platforms as new quasi-taxpayers
The rules effective as of 1 July 2021 will treat platforms and online marketplaces as taxable persons acting as intermediaries in the supply of goods. This change will primarily affect platforms, and taxable persons selling through these platforms, rather than the customers.
If certain criteria are met, platforms will qualify for VAT purposes as “both the buyers and sellers of the goods.” These criteria include facilitating the distance sale of goods imported from a third country with a value not exceeding EUR 150 or facilitating the sale of goods already in the territory of the Community, provided that the seller is not established in the Community.
Under the new rules, taxable online platforms are required to record transactions that have been carried out for non-taxable persons with their participation in the territory of the Community. The purpose of this obligation is to make sure that taxes are paid on supplies of goods and services in electronic commerce. These records must be retained for ten years.
Application of the reverse-charge mechanism
The application of the reverse-charge mechanism in relation to certain cereal or steel products is extended to 30 June 2022. Furthermore, as of 1 April 2021, the reverse-charge mechanism only applies to worker leasing, temporary assignment, or supply of staff services in relation to certain construction and other similar works. In any other cases, VAT should be charged as per the general rules.
Special VAT refund procedure
Taxable persons, first in 2020, may request a refund from the tax authority of the input VAT charged to them if they, for reasons beyond their control, are unable to recover it in any other manner, which is contrary to the principle of fiscal neutrality. Requests will be possible to be submitted to the tax authority no later than six months prior to the end of the period of limitation concerning the tax to be refunded.
As of 1 January 2021, the rules for the special VAT refund procedure are extended to the output VAT as well, if the conditions laid down in the VAT Act are met.
Further to the above as of 1 July 2021 the rules of the special VAT refund procedure will change slightly as if the occurrence of the reason for the refund request is within six months to the end of the period of limitation or after the period of limitation has lapsed, the taxpayer is entitled to submit this request within one year from the occurrence of the reason for the request.
Deducting bad debts from the tax base
From 1 January 2020, taxable persons shall be able to retroactively deduct bad debts from their tax base through self-revision. Subject to certain conditions, it shall be possible to reduce the tax base by the net amount of receivables recognised as bad debt. The VAT Act shall specify in detail the claims that may qualify as bad debt under the VAT rules, i.e. the cases in which the above option could be invoked. Under the transitional provisions, taxpayers will first be able to exercise this option in cases in which the date of supply of the goods or services forming the basis of the claim falls after 31 December 2015.
As of 1 January 2021, VAT refunds on uncollectible debts extended to debts owed by non-taxable persons. However, an overly strict interpretation of the eligibility criteria for the VAT refund (for example, if a debt settlement procedure for private individuals must also be carried out in order to collect the debt) might call into question the utility and cost-effectiveness of this provision.
Starting from 1 July 2021, if the occurrence of the reason for the deductibility of bad debts (e.g. the date when the dab debts become definitively irrecoverable) is after the period of limitation has lapsed, the taxpayer is entitled to deduct bad debts within one year from the occurrence of the reason for the request. As a transitional rule, if the occurrence of the reason for VAT deductibility of bad debts is prior to the entry into force of this rule (which will be 1 July 2021) – and the one year deadline has not been lapsed – taxpayer can apply for deduction if he submits a request within 180 days after the date of entry into force of this legislation.
Additionally, as of 1 July 2021 the strict requirements in relation to the person receiving the invoices from the applicant of the bad debt deduction request (e.g. the non-paying receiver of the services or goods) will be abolished.
Tax authority to prepare draft VAT returns
Starting from 1 July 2021 taxpayers will have the option to have their VAT returns prepared by the tax authority, which is a significant change. Taxpayers can modify, supplement, accept and submit the data provided by the tax authority via an online interface. It is important to note that, in contrast to personal income tax returns drafted by the tax authority, the filing of VAT returns will still require taxpayers’ active involvement. If a taxpayer files a VAT return using the standard form and also submits a draft return prepared by the tax authority, the return submitted first will be the taxpayer’s official VAT return.
Exemption of the invoice issuing obligation
As of 1 July 2021, it will be not mandatory to issue an invoice even if the consideration is not settled in cash, or using a cash-substitute payment instrument, non-cash payment instrument or a multi-purpose voucher in full. As a result of this the applicability of the exemption of the issue of invoices will expand.
VAT refund reciprocity with the UK
Based on the principle of reciprocity the VAT reclaim procedure will be available for taxpayers established in the United Kingdom (taking into account the provisions of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community and the Northern Ireland Protocol).
New reporting obligation on the payment service providers
Starting from 1 January 2024 payment service providers shall keep records of certain intra-Community transactions and report this data to the Tax Authority.
Administrative simplification to the VAT refund claims made by a foreign traveller
According to the new rules the VAT reclaims made by a foreign traveller could be underpinned by a stamped electronic invoice. Going forward this means that there will be no need to present a paper-based invoice to the customs authorities in this procedure, thus the stamped electronic invoices will serve as the electronic certificate. As the former rules prescribe that in order to apply this procedure the seller shall issue the standardized VAT return application form in three copies (one of which shall be retained by him and two copies are handed out to the foreign buyer), this modification will certainly decrease the administrative burdens of the procedure.
Major changes in the Electronic Road Freight Control System (EKAER)
As of 1 January 2021 the range of product to be reported has narrowed since EKAER numbers need to be requested only in case of transportation of risky products on road. This means that if a product not included on the list of risky products is being transported on road, EKAER obligation will not arise. Going forward as of 1 January 2021 simplified reporting could be made on risky products as well.
New rules are coming into force in terms of sanctions: the 40% penalty on the transported goods might only be assessed in case of incomplete reporting or when the reporting is made incorrectly regarding the weight or value of the goods (other mistakes in the reported data results in a default penalty of HUF 500.000).
As per 1st of January 2021 reliable taxpayers are not required to provide EKAER risk deposit, furthermore no risk deposit is required for requesting EKAER numbers for products with 5% reduced VAT rate.
Also, from 1 January 2021 individual road exemption can be requested for all traffic directions, and the permit will be valid until revoked.
The Advance Electronic Licence Registration System (BIREG) – obligations for all members of international carriage of goods by road
At 1st January 2021, the amendment to the government decree 261/2011 introduced the Advance Electronic Licence Registration System (BIREG), which require electronic registration of all international carriage of goods by road under bilateral or multilateral (CEMT) licences and the registration of inland cabotage carried out under Community licence. (The BIREG registration is mandatory in case of vehicles with a maximum laden mass of more than 3,5 tonnes.)
The mandatory use of BIREG system has introduced administrative tasks for the transporters (even if they are not registered in Hungary), for economic operators transporting their own goods and for the places of loading and unloading.
From 1st of July 2021, not just the transporters (and economic operators transporting their own goods) must use the BIREG system, but the places of loading and unloading as well. The places of loading and unloading must make firm registration in the BIREG system and upload data and documents in connection with the single carriage registrations indicated by the transporters.
The importance of using BIREG system is emphasized by the fact that failure to perform the obligations may result in the imposition of a fine of HUF 800,000 in case of transporters and HUF 300,000 in case of places of loading and unloading.
As of 1 April 2021, the tax rates applicable on certain tobacco products increased to the following levels:
- Cigarettes: HUF 26,000 per thousand cigarettes plus 23% of the retail sale price, but a minimum of HUF 39,300 per thousand cigarettes
- Fine-cut and other tobacco: HUF 23,600 per kilogramme
- Refill liquid: HUF 30 per millilitre.
- Other consumables that contain tobacco or are consumed with tobacco: HUF 15 per each tobacco containing product or products consumed along with tobacco products for single use,
- Smokeless tobacco products: HUF 23,600 per kilogramme
- Smoking-substitute, nicotine-containing tobacco products: HUF 23,600 per kilogramme.
The excise legislation will introduce changes applicable from 2023 in connection with the cross-border trade in free excise circulation:
- Besides excise licence traders, in certain cases other licensees, e.g. tax warehouses, registered traders, registered consignees and authorized consignors will also be authorized to transfer excise goods in free circulation between Member States.
- Such shipments will have to be accompanied with an electronic administrative document initiated in the EMCS system.
Environmental protection product fee
As of 1 July 2021, a separate fee rate of HUF 500 / kg will be introduced for plastic carrier bags made of biodegradable plastic.
The social tax is 15.5%.
From 1 July 2019, provisionally until 31 December 2022, the advertisement tax rate is reduced to 0%, and taxpayers subject to the advertisement tax do not have to fulfil their reporting and filing obligations during this period.