Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

February 6, 2020
2020-5194

Hungarian Minister of Finance proposes local business tax cut for manufacturers, principals and R&D activities

The Hungarian Minister of Finance announced proposed local business tax changes at a press conference during the first week in February.

It has been the clear intention of the Hungarian government during the last decade to make Hungary one of the most attractive Central European destinations for foreign investors by establishing one of the most competitive and business-friendly tax environments in the European Union. Hungary reduced its statutory corporate income tax rate to a flat 9% in 2017 and carried out significant payroll tax cuts in recent years. The current proposal concerning local business tax (LBT) is a further step which follows this trend.

Background

LBT is a local tax in Hungary which is regulated at the national level but levied by the local municipalities where the businesses that are subject to this tax operate. In general, businesses with trading revenues are subject to LBT.

In summary, trading revenues of businesses, i.e., net revenue from the sale of products and provision of services, are subject to 0% – 2% LBT. The actual rate is determined by the given municipality by taking into account the 2% cap. Under the current rules, the following costs are deductible:

  • Costs of goods sold (COGS)
  • Costs of services which were purchased by the taxpayer and sold to customers in an unchanged form
  • Sums paid to subcontractors by the taxpayer
  • Costs of materials purchased by the taxpayer
  • Costs which are directly attributable to R&D activities carried out by the taxpayer. This generally includes fees for R&D services purchased

Following from the above, Hungarian holding and financing entities with dividend, interest and other types of financial income were never subject to LBT, which would remain unchanged in the future. Furthermore, companies with IP income are only partially affected by LBT as only a portion of their income – which derives from marketing intangibles – may be subject to LBT.

Proposed changes

The current proposal would significantly increase the amount of deductible costs for LBT purposes. Specifically:

  • Depreciation and amortization costs would become deductible; and
  • Direct R&D costs would be deductible five times the amount.

The proposal includes another simplification concerning the payment mechanism of LBT. Currently, taxpayers are obligated to estimate their annual LBT liability and pay the difference between the estimated annual tax liability and the tax advances paid by 20 December each year, while the annual return is due by the following 31 May, i.e., in the year which follows the given tax year. The proposal would abolish the payment obligation currently due in December, which provides administrative relief.

Furthermore, according to current assumptions, the changes above would also impact companies’ innovation contribution obligations in Hungary. Companies registered in Hungary which do not qualify as small enterprises are subject to innovation contribution. The tax rate is 0.3% while the tax base is calculated the same way as the LBT base. Thus, most likely, the proposed changes would result in the decrease of innovation contribution liability as well.

Conclusion and next steps

The implementation of the proposed changes would further strengthen Hungary’s position as an attractive location for manufacturing, principal and R&D activities.

The expectation is that the administration will prepare a draft bill on the proposed changes in the foreseeable future which, however, could be subject to change in the coming months. According to current expectations, simplification of the payment mechanism may take place this year while the actual tax cut would be effective from the beginning of 2021.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Advisory Ltd., Budapest
Ernst & Young LLP (United States), Eastern European Business Group, New York
Ernst & Young LLP (United States), Eastern European Business Group, San Jose

ATTACHMENT

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more