Resident taxpayers are subject to all-inclusive or unlimited CIT liability. Non-residents are subject to CIT on their income from their Hungarian branch’s business activities.
From 1 January 2017, the CIT rate is a flat 9% of the positive CIT base. The taxable base is calculated by adjusting the accounting pre-tax profit shown in the taxpayer’s financial statements by the tax base increasing and decreasing items (e.g. tax depreciation, thin capitalisation, provisions, tax loss carry forwards) prescribed in the Act on Corporate Tax and Dividend Tax (CDTA).
Minimum tax base
Except in the pre-company period and in the first tax year of a company’s existence (or in the first tax year if separate financial statements are not required for the pre-company period), as well as in some other defined cases, certain rules apply if the profit before taxation or the general CIT base (the higher of the two) is below the minimum tax base.
The minimum corporate tax base is calculated as 2% of the total revenue with some increasing and decreasing items (e.g. transactions falling under the EU Merger Directive). In the above case, a company may decide to pay CIT based on the minimum tax base or may declare a statement in the CIT return. The statement provides additional details about the financials of the company, based on which the tax authority decides whether or not to initiate a tax audit.
Real estate holding companies
The foreign owner of a real estate holding company is subject to Hungarian CIT in the case of the alienation or withdrawal of its shares in the real estate holding company.
The tax base of the foreign owner of a real estate holding company is the positive amount of the consideration minus the acquisition price of the shares less the costs of acquisition. The tax rate is 9%, and the participation exemption regulations do not apply.
A company and its Hungarian taxpayer related parties are defined as real estate holding companies for CIT purposes if:
- more than 75% of the book value of their assets (on a standalone and/or group level) is in domestic real estate, and
- they have a foreign shareholder that is not resident in a country that has a double tax treaty (DTT) with Hungary or the treaty allows such capital gains (from real property rich shares) to be taxed in Hungary.
Hungary has concluded numerous tax treaties in the past that provide treaty protection for such transactions; however, renewed treaties usually allow for source country capital gains taxation in such cases.
Domestic shareholders are generally subject to 9% CIT on the above type of transactions; however, they may benefit from exemptions.
Energy suppliers’ income tax
Mines, energy producers, and energy distribution system operators are subject to energy suppliers’ income tax. The scope of the definition of 'energy suppliers' also includes universal suppliers and authorised distributors of electricity and natural gas.
The base of energy suppliers’ income tax is similar to the CIT base, however, with less adjustments applicable to the accounting profits. The tax rate is 31%.
If the energy supplier entity possesses a development tax incentive or a tax incentive in relation to investments aimed at increasing energy efficiency or renewal projects (see the Tax credits and incentives section), then it is possible to claim this tax incentive for up to 50% of energy suppliers’ income tax liability as well. Additionally, the settled amount of mining royalty can be claimed for up to HUF 1.5 billion from energy suppliers’ income tax liability.
In the case of group taxation for CIT purposes, further deduction opportunities may be available.
As of 30 June 2017, an extra deduction is available in connection with the instalment and maintenance of electric vehicle charging stations, unless the taxpayer has already opted for a CIT base deduction with respect to the investment.
From an accounting point of view, energy suppliers’ income tax falls under the same treatment as CIT (thus it is a non-deductible item for CIT purposes). DTTs also covers this type of tax.
Advertisement tax applies to certain advertising services, including advertising services made available over the Internet. The tax applies in respect of advertisements that are published in Hungarian, or where the advertisement is not published in Hungarian but is available on a website/webpage that is mainly in Hungarian.
In the case of primary taxpayers (see below), the tax base is based on total trading revenue. Till an amending act in June 2017, the advertising tax rate was 0% of the tax base up to HUF 100 million, and 5.3% above HUF 100 million. The amending act set a unified tax rate of 0% in the period from 1 January 2017 to 30 June 2017; however, from 1 July 2017, it is increased to 7.5%, while the tax base up to HUF 100 million, under certain conditions, is tax free. Furthermore, the amending act stipulated that taxes declared and paid by the taxpayers for tax years ended before 30 June 2017 are considered overpayments defined by the Act on the Rules of Taxation; consequently, the taxpayers can request a claim on refund, also defined in the Act on the Rules of Taxation, from 1 July 2017.
According to the latest amendments in 2019, the advertisement tax rate is 0% in the period from 1 July 2019 up to 31 December 2022, both for primary and secondary taxpayers. The previous tax rates (7.5% for primary and 5% for secondary taxpayers) are applicable in the period prior to 1 July 2019.
The amending act discontinues the tax liability on self-promotion as well; consequently, advertisement tax liability arises only for publishing as business activity.
Primary and secondary taxpayers
The company providing the advertising service is the primary taxpayer, and the rate above applies to the company's sales that are within the scope of the tax. The tax is not a withholding tax (WHT), and the customer is not obligated to withhold tax on payments made to the advertising service provider.
The person/company that orders and pays for the advertisement is considered to be the secondary taxpayer. Secondary tax obligation does not arise if:
- the secondary taxpayers are in possession of a declaration from the primary taxpayers stating that they are the primary taxpayers and that they will fulfil their obligations under the regulation
- the primary taxpayers apply for a registration to the database of the Hungarian tax authority, stating that they are primary taxpayers and that they fulfil their obligations on time or they do not have advertisement tax payment obligation in the tax year because they will not exceed the HUF 100 million threshold, or
- the secondary taxpayers notify the tax authority with the name of the primary taxpayer and the value of the services and they are able to prove that they requested the declaration but have not received it.
Otherwise, the secondary taxpayer is subject to a tax equivalent to 5% of the value of the advertising fee (provided that the secondary taxpayer spends at least HUF 2.5 million in a month for advertisement services). In addition, such advertisement expense would not be a CIT-deductible expense for the secondary taxpayer when filing its CIT return (upon the annual expense for advertisement service exceeding HUF 30 million).
The amended legislation clarifies that for online advertisements, the person or organisation that has the right of disposal over the advertising space qualifies as the publisher of the advertisement (i.e. subject of the advertising tax). In addition, the obligation to determine the advertising tax base from the consolidated data of related companies no longer applies.
Furthermore, if a publisher of advertisements fails to comply with its obligation to make a declaration to the advertiser in relation to advertising tax, the publisher is required, upon request, to fulfil such obligation to the national tax authority. Failure to comply with such request attracts default penalty of HUF 500,000. Repeated failure to comply with the obligation in respect of the same advertiser is subject to further default penalty of HUF 10 million, and any further instance of non-compliance is subject to a penalty equal to triple the amount of the previous penalty. The total amount of default penalty assessed by the tax authority for such reason cannot exceed HUF 1 billion altogether. Further, in the case of failure to file a return on advertisement tax, the tax authority levies a deemed tax liability of HUF 3 billion, which may be challenged by the taxpayer by submitting contrary evidence within a statutory deadline of 30 days.
Local business tax (LBT)
All municipalities are entitled to levy LBT. LBT is deductible for Hungarian CIT purposes and is not treated as ‘income tax’ in the application of the tax treaties.
The LBT base is the total net sales revenue reduced by the cost of goods sold, subcontractors’ work, material costs, mediated services, and research and development (R&D) costs. These items are deductible under a decreasing scale at taxpayers with larger turnover (with the effect that lower margin businesses may have higher effective LBT rates). In order to prevent tax avoidance, the tax base is calculated on a consolidated basis for affiliated entities that have a gross margin at less than 50% in Hungary in case the related-party relationship was formed as a result of a demerger carried out after 1 October 2016.
As LBT is payable in each municipality where the taxpayer is active, there are detailed rules to allocate the taxable base among these locations and a separate PE definition is applicable for LBT purposes. PE for LBT purposes shall also include solar power plants. The allocation is calculated based on a formula comprising tangible asset value (i.e. tax depreciation of the assets) and payroll cost figures.
General service fees, depreciation, and labour costs are typically not deductible for LBT purposes. Interest income, dividend income, and the LBT base of a foreign PE of a Hungarian company are exempt from LBT. Royalty exemptions, on the other hand, have been significantly narrowed down in line with the Organisation for Economic Co-operation and Development (OECD) nexus approach (from mid-2016, with an applicable grandfathering period).
The LBT rate may differ from municipality to municipality but is capped at 2% by law.
Companies are subject to LBT advance payment liability two times a year, and certain entities whose annual net sales revenues exceeded HUF 100 million in the tax year preceding the current year are subject to tax advance top-up payment liability by the 20th day of the last month of its financial year. In contrary with the top-up liability for CIT purposes, the top-up liability for the LBT purposes will not be abolished.
From 1 January 2019, local governments have the possibility to introduce tax allowance or tax exemption aimed at encouraging investment projects carried out within the territory of the municipality. Tax advantage may be provided from the LBT payable by the taxpayer for its taxable activities performed within the territorial jurisdiction of the municipality in the year in which the investment project is carried out or, depending on the local government’s decision, also in subsequent years. According to the new rules, once a local government introduces a regulation on investment related tax allowance, such regulation cannot be repealed at least for three years nor be amended it any way that would be detrimental to taxpayers.
Companies defined as such in the Accounting Act, except for small and medium-sized enterprises (SMEs) and branches of foreign entities, are subject to innovation contribution. As of 1 January 2019, the SME thresholds should be calculated on a group level basis, which may significantly widen the number of taxpayers. The tax base of the innovation contribution is, in general, the same as their LBT base. The tax rate is 0.3%.