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.
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.
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.
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 extended
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 January 2021 (given that the deregulation is not extended), the reverse-charge mechanism will only apply 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.
VAT refund reciprocity with Serbia and Turkey
From 1 January 2019, taxpayers established in Serbia are able to reclaim the VAT passed on to them in Hungary. For Turkey, the new rules will enter into force with the decree issued by the minister in charge of tax policy after Turkey grants the same rights in line with the principle of reciprocity.
Reduced VAT rate on the supply of new residential property
The reduced VAT rate on the supply of new residential property was repelled as of 1 January 2020, but the reduced 5% VAT rate remained applicable for the supply of certain newly built real estates until 31 December 2023, given that the Building and Construction Authority issued the related final construction permit until 1 November 2018, or in case a construction permit is not required by law, the simplified registration procedure of the construction was initiated until 1 November 2018, at the latest. If the aforementioned criteria are not met, the standard VAT rate shall be applied for the supply of newly built real estates from 1 January 2020 until 31 December 2020.
As of 1 January 2021, a second phase of the reduced 5% VAT rate on the supply of new residential property was introduced which will be applicable between 1 January 2021 and 31 December 2022. Similarly to the previous phase, the reduced rate will be applicable for a longer period of time (until 31 December 2026) given that the Building and Construction Authority issues a final confirmation until 31 December 2022, or the simplified registration procedure of the construction was initiated until 31 December 2022.
Online data supply
As of 1 July 2018, taxpayers are required to report to the Hungarian tax authority certain data regarding business-to-business (B2B) invoices that are issued by invoicing software and have a VAT content of at least HUF 100,000. Such reports have to be made electronically, through an online connection, using a specific XML format. As of 1 July 2020, the HUF 100,000 threshold will be abolished and data shall be provided on all invoices issued by the company to a domestic taxable person for domestic transactions.
As of 4 January 2021, the range of invoices to be reported will be further expanded, as the data of issued invoices for which the Hungarian invoicing rules are applicable shall be reported towards the tax authority. The above mentioned amendment will result in that Intra-Community and Extra-Community transactions will have to be reported and - with a few exceptions – as well as invoices issued to non-taxable persons. Also, the scope of the data to be reported will further extend (indication of the currency-exchange rate used, or if the supply made outside the domestic territory of Hungary than the indication that the supply is outside of the territoriality of the Hungarian VAT Act, etc).
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 will be extended to the output VAT as well, if the conditions laid down in the VAT Act are met.
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 will be 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) would call into question the utility and cost-effectiveness of this provision.
Shortening deadline for the issue of invoices
According to the VAT Act, the taxable person shall ensure that the invoices in which VAT is or should be accounted for are issued by the chargeable event or in connection with payments on account before the VAT payable is charged or within a reasonable time frame. The VAT Act defined this reasonable time frame as a period that should be no longer than 15 days; however, effective as of 1 July 2020, the current 15-days deadline for the issue of invoices will be decreased to 8 days.
Additional rules for VAT groups
As of 27 November 2020, the VAT Act introduced several facilitations for forming a VAT group. It allows taxpayers to determine the date of forming, disbanding, joining or leaving the VAT group.
In addition to the above, a transitional rule is introduced for taxable persons who become related parties but are members of different VAT groups. An eight-month grace period is introduced during which businesses can take the necessary steps to allow members of a former VAT group to become members of the sole remaining VAT group without creating a period in which they are a member of neither group.
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.
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 introduction of the electronic authorization registration system (BIREG)
A recent amendment to government decree 216/2011 introduced the electronic authorization registration system (BIREG), which will affect all major international road transportation operations, i.e. those involving countries other than Hungary. The modification imposes new obligations on the parties involved in the international transportation of goods, economic operators transporting their own goods and consignors and consignees. In terms of domestic trade in goods, the so-called cabotage operations are affected.
The importance of the amendment is emphasized by the fact that failure to perform the obligation may result in the imposition of a fine of up to HUF 800,000 per delivery after the 1-month grace period, i.e. from 1 February 2021.
As of 1 January 2021, the tax rates applicable on certain tobacco products increased to the following levels:
- Cigarettes: HUF 24,000 per thousand cigarettes plus 23% of the retail sale price, but a minimum of HUF 37,300 per thousand cigarettes.
- Fine-cut and other tobacco: HUF 22,400 per kilogramme.
- Cigars and cigarillos: 14% of the retail price, but a minimum of HUF 4,400 per thousand cigars or cigarillos
- Refill liquid: HUF 25 per millilitre.
- Other consumables that contain tobacco or are consumed with tobacco: HUF 12,5 per each tobacco containing product or products consumed along with tobacco products for single use, HUF 70 for liquid per millilitre.
- Smokeless tobacco products: HUF 22,400 per kilogramme.
- Smoking-substitute, nicotine-containing tobacco products: HUF 22,400 per kilogramme.
As of 1 April 2021, the tax rates applicable on certain tobacco products will further increase 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 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.