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 the Hungarian participation exemption regime for capital gain taxation purposes.
Energy suppliers’ income tax
Energy producers and energy distribution system operators are subject to energy suppliers’ income tax. The scope of the definition of 'energy suppliers' also includes mines, 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.
Special rules apply in this regard for CIT groups.
As of 1 July 2017, an extra tax base deduction is available in connection with the establishment 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.
However, currently the advertisement tax rate is 0% in the period from 1 July 2019 up to 31 December 2022, both for primary and secondary taxpayers.
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 (COGS), 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 shall be calculated on a consolidated basis for affiliated entities that have a gross margin (net sales revenue - COGS and mediated services) of less than 50% in Hungary provided 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. Starting from 1 January 2021, a PE is deemed to exist in the case of construction operations exceeding 180 days. However, other business activities carried out temporarily are not subject to LBT. In general, 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. In the tax year which ends in 2021, 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. However, this rules only applies to micro, small and medium-sized businesses.
With effect from the tax year starting from 1 January 2020, in line with other taxes, top-up liability for LBT purposes was 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.
Companies defined as such in the Accounting Act, except for micro and small-sized enterprises (MSEs) and branches of foreign entities, are subject to innovation contribution. As of 1 January 2019, the MSE 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%.