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May 9, 2024

Hungarian businesses facing key decisions affected by Pillar Two implementation focus on accessing transitional safe harbor

With Hungary's Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two legislation now effective, and the Income Inclusion Rule (IIR) and a Qualified Domestic Minimum Top-up Tax (QDMTT) applicable from 1 January 2024, qualifying for one of the available safe harbors will be important for many businesses.

Executive summary

Hungary's Pillar Two legislation introduced a QDMTT at a minimum rate of 15% while Hungary retained its 9% statutory domestic corporate income tax rate. Hungary adopted transitional country-by-country reporting (CbCR) safe harbor rules and meeting one of the safe harbor tests in 2024 is the first step a multinational entity (MNE) must take to access a three-year long transitional safe harbor period delaying the impact of global minimum taxation on Hungarian operations. (For background, see EY Global Tax Alert, Hungary enacts local legislation on BEPS 2.0 Pillar Two, dated 15 December 2023.)

Detailed safe harbor rules will be determined by a separate Government Decree, but the expectation is that domestic rules will follow the respective guidance published by Organisation for Economic Co-operation and Development (OECD).

Accessing a safe harbor has several advantages for MNEs operating in low-tax jurisdictions like Hungary. It could delay the impact of Pillar Two, including top-up tax exposure, and administrative burdens would also be significantly reduced under a safe harbor.

However, there are several generally accepted accounting principle (GAAP) items in Hungary that could have an unexpected impact on jurisdictional profit before tax as shown on the country-by-country (CbC) Report and, thus, on the jurisdictional effective tax rate (ETR) calculated for safe harbor purposes. These items include the current year profit and loss (P&L) effect of tax authority assessments made for previous years (e.g., penalties levied may increase the ETR under the safe harbor rules while a tax refund may decrease). The recognition of deferred tax assets (DTAs) for local GAAP purposes and the timing of recognition could also interact with transitional safe harbor considerations.

Not identifying the relevant GAAP items in time could jeopardize access to the safe harbors.


In line with the OECD and European Union (EU) approach to ensure a smooth transition to the Pillar Two, CbCR-based transitional safe harbor rules are available for Hungarian companies. The Hungarian legislation provides the framework for the transitional safe harbor rules, and the details are expected to be published by the Government. MNEs meeting one of the safe harbor tests can be exempt from additional top-up tax liability in the year. Based on the design of the transitional safe harbor rules, qualification in 2024 will affect the applicability of the transitional safe harbor rules in the next two years.

There are three different safe harbor tests that can be met in a particular year to qualify for the safe harbor period: (1) the de minimis test, (2) the simplified ETR test and (3) the routine profits test. While MNEs can determine with ease whether they would qualify for the de minimis test, the other two tests should be analyzed in detail. Further, failure to qualify based on the simplified ETR test does not necessary mean that the routine profits test cannot be met.

While the simplified ETR test is modelling the general Pillar Two logic with a simplified calculation, the routine profits test is based on the substance-based income exclusion rule. Companies with economic substance in a jurisdiction should consider the routine profits test in line with their profit before tax as shown in the CbC Report.


Because CbC Reports are based on financial accounts, analyzing the impact of various GAAP items in time is crucial to secure access to safe harbor. Costs that are recognized for statutory book purposes under local GAAP but disallowed for local corporate income tax purposes may have a beneficial impact.

For example, ongoing tax audits resulting in findings — and taxes and penalties payable — during FY24 may have a significant impact on the safe harbor qualification of the MNE. Such expenses include penalties and late payment interest levied by tax authorities, for instance. Both the simplified ETR test and the routine profits test use profit-before-tax figures from the CbC Report. Therefore, findings of the tax authorities regarding cost accounting should be closely monitored, and analyzing different scenarios based on any findings that may occur could be helpful. In addition, tax refunds received in current year but concerning previous tax years could have a negative impact for safe harbor test purposes.

Hungarian Pillar Two legislation also modified the Hungarian Accounting Act, enabling companies for the first time to recognize DTAs and deferred tax liabilities (DTLs) under Hungarian GAAP in their 2023 year-end financials. Recognition of DTAs and DTLs has a significant impact on Pillar Two calculations and whether the jurisdictional operation could qualify for the transitional safe harbor period.

When considering the applicability of the transitional safe harbor rules, the deferred tax balance in the local books or in the consolidated financial statements should be used, but the recognition criteria could vary. Therefore, the recognition criteria of DTAs should be analyzed on a case-by-case basis with close cooperation with the statutory auditors. Also, the potential ETR effect should be considered.

As the Hungarian statutory income tax rate generally is 9%, DTAs and liabilities may be recognized at 9%. However, the Hungarian legislation — in line with the Pillar Two model rules — provides the opportunity to recast certain DTAs from 9% to 15% for Pillar Two purposes. In analyzing DTAs, recognizing the DTAs based on the applicability of the recast rule could be helpful, as recasting to 15% has a beneficial ETR effect in the future.

Key takeaway: Several facts and circumstances could have an impact on meeting any of the safe harbor tests — including the simplified ETR and routine profits tests — for transitional safe harbor purposes. Costs recognized for accounting purposes but not recognized for tax purposes could affect the transitional safe harbor tests. Analyzing the relevant facts and reviewing strategies available to access a transitional safe harbor is crucial before finalizing the FY23 statutory local financials in Hungary.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP (United States), Hungarian Tax Desk, New York

Ernst & Young Consulting Ltd., Hungary (Budapest)

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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