What’s new in the autumn tax package?

Tax & Legal Alert | Issue 602 | 25 October 2018

On 19 October 2018, the Government submitted a draft tax package to the Hungarian National Assembly. In addition to a couple of restrictive provisions, the package contains a number of new benefits available to taxpayers. The most significant changes include amendments to the cafeteria system, a transitional provision related to the reduced VAT rate on new apartments, a substantial increase in the threshold for VAT exempt status, as well as the introduction of a group taxation regime for corporate income tax purposes.

We summarize below the key elements of the draft tax package. It is important that the package should be considered as a proposal only, pending approval of the National Assembly. Once finalized and ratified, we will prepare a detailed newsletter reflecting the final wording of the tax law changes.

 

Changes related to corporate income tax

Introduction of a group taxation regime

As of 1 January 2019, taxpayers will be able to opt for a group taxation regime for corporate income tax purposes. Group taxation will be available to affiliated companies resident in Hungary for tax purposes, provided that such affiliated companies have at least 75 per cent direct or indirect control over each other. By opting for group taxation, group members will be able to offset their operating losses against the positive tax base of another group member, as well as simpler transfer pricing rules will be applicable to their intra-group transactions. However, eligible group companies have a particularly short time period to decide whether they want to opt for the above group taxation as of 2019 – the respective declaration will have to be submitted to the Tax Authority by 15 January 2019.

Considering the rather short decision period, we advise companies with at least two legal entities present in Hungary as well as those who will acquire shares of at least 75 per cent in another Hungarian resident company in the near future to contact us for further discussion.

Restrictions in interest limitation rules

In order to be compliant with the corresponding European Union Directive, interest deductibility rules for tax purposes (thin capitalisation rule) will also be amended as of 1 January 2019. Instead of testing the taxpayer’s debt-to-equity ratio (currently 3 to 1) to determine the amount of deductible interest expenses, the proposal essentially links the interest deductibility to the profit before tax modified with certain items. In accordance with the new provisions, the net borrowing costs of a taxpayer will be deductible in any tax period up to 30 per cent of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA). This 30 per cent limit will only apply if the amount of net borrowing costs exceed HUF 939.810.000 per year; and further exemptions may be available.

Changes in controlled foreign company (CFC) rules

According to the draft legislation – effective from 1 January 2019 – an entity will no longer be automatically exempt from being deemed as a controlled foreign company solely on the basis that one of its related parties is listed on a recognized stock exchange. On the other hand, a non-resident permanent establishment will not be deemed a controlled foreign company if it is located in a third country which has concluded a double tax treaty with Hungary, and pursuant to the provisions of that treaty, Hungary exempts the income attributable to the permanent establishment from Hungarian corporate taxation. It may also be a restriction that passive investment activity (e.g. holding activity) will not be explicitly included in the list of activities being exempt from the Hungarian CFC rules.

Other changes

The proposal provides for more tax benefits related to R&D activities. Pursuant to the amendment, 100% of direct R&D costs applied as a corporate income tax base decreasing item – and resulting in a negative tax base – can be carried forward as tax loss, which can be utilised against the positive tax base of future tax years subject to the general conditions.

As per the current rules, the tax base decreasing item related to R&D activity – if it results in a negative tax base – can only be carried forward as a tax loss up to 50 percent.

 

Changes concerning the energy suppliers’ income tax

According to the proposal, income realized by taxpayers due to reversal of extraordinary depreciation – where the extraordinary depreciation was accounted for prior to the date of becoming subject to energy suppliers’ income tax –will not be subject to energy suppliers’ income tax liability. This amendment may be applied from the tax year beginning in 2018.

 

Changes affecting the financial sector

As of 1 January 2019, the tax rate of special tax for financial institutions will decrease in the case of credit institutions from the currently effective 0.21% to 0.20% - on the tax base exceeding HUF 50 billion.

The scope of financial transactions that do not trigger financial transaction tax liability will be further expanded. For example, from 1 January 2019, no financial transaction tax liability will arise upon payments executed between a private individual’s private bank account and their private account at the Hungarian State Treasury kept for the purchase of government securities.

 

Changes in fringe benefits

The changes to the Hungarian fringe benefit system – generally called ‘cafeteria’ – adopted in the summer will remain in effect. Consequently, from 2019, employers may only provide SZÉP Card vouchers to their employees with beneficial taxation; and other widely used fringe benefits – e.g. repayment of housing loan or public transportation ticket benefit – will be taxed the same way and rate as wage income. Due to these changes, two types of reaction can be expected from employers. Companies may „abolish” their whole fringe benefit system from 2019 and pay the yearly ‘cafeteria’ amount as wage; or they may pay the previously granted amount as SZÉP Card vouchers only. As per the Hungarian Government expectation’s, the latter option can have a positive impact on Hungarian tourism.

There will be a minimal change in the area of „targeted services” – services ordered by the employer for the benefit of their employees from a voluntary fund – regulation. According to the new regulation, employees have to pay taxes after these benefits when they receive the actual services from the fund if the employer order these services from a voluntary supplementary fund. The treatment of services from voluntary pension and health funds will remain the same.

From an administrative point of view, a new and useful change will be introduced from the beginning of the next tax year. In case of group life insurances, employers will have the chance to ‘distribute’ premiums of these insurances – as an income element – among their employees equally. The legislation accepted in the summer included a more complicated system where the employers had to take into account for example the employees’ salary and age during the distribution of income. With the new regulations, this nearly impossible administrative task is averted.

 

Changes concerning social tax

According to the autumn tax package, the social tax rate will remain 19.5% as of January 2019. (This tax is payable by employers after the income of employees.) The first possible date for the introduction of the new, lowered tax rate of 17.5% is 1 July 2019.

Nevertheless, the package introduces two significant tax benefits.

Firstly, research centers will have to pay only half of the social tax after the employees who work in the field of research and development. Therefore, the wage cost of these research centers may decrease by 10% from 2019.

Secondly, the package contains incentives in connection with dismissed senior state employees. Namely, a business that will hire an employee who used to work for the government before and who is over 60 years of age, will not have to pay social tax up to four times of the minimum wage. Thus the employment of formal government employees could be cheaper by HUF 110 000 – 120 000 per month.

Employment of retired persons

The regulation adopted in the summer has not changed concerning the employment of retired persons. It means that pensioners and their employers will not have to pay social security charges if they entered into an employment relationship. A minimal change is that in case of the suspension of old age pensions – which happens in case of employment by the government – the retired persons still does not have to pay contributions. As a result of this provision, employers may provide a 45% higher net salary to retired persons from 2019 from an unchanged budget.

 

Changes concerning micro businesses’ tax (‘KATA’)

Based on the planned new regulations of the micro businesses’ tax, students will have to pay only a monthly tax of HUF 25 000 – instead of the normal rate of HUF 50 000 – even if they suspended their education provided that they did not reach the age of 25. However, most taxpayers – especially businesses providing services to the public – will regard the increase of the threshold for VAT exempt status an even more beneficial change in the regulation.

 

Changes concerning value added tax

The draft law proposes a significant administrative simplification in the VAT deduction regarding passenger car rental services. Similar to the special rules for the maintenance costs of passenger cars, 50% of the input VAT charged on the incoming rental invoices automatically becomes deductible, without tracking the ratio of the private and business use of the rented passenger car in road records (given that all other requirements of VAT deduction are met). However, it remains possible to reclaim the VAT based on road records; therefore, it is important for the companies concerned to assess which option is more beneficial for them, taking also the administrative burden into account.

Regarding the planned repeal of the reduced VAT rate of the supply of apartments, the draft law provides transitional arrangements, which clarify the terms of use of the reduced rate after 31 December 2019. The reduced 5% rate will remain applicable for the supply of such newly-built real estates, if the following conjunctive conditions are met: the application required for registration of the real estate’s ownership in the real estate register is duly submitted before 31 December 2019, the apartment is regarded as (at least) structurally complete, and the seller declared the fulfilment of the aforementioned two criteria to the tax authorities using the official form until the end of 2019.

In addition to the new rules of the former tax modification regulation issued during the summer, the draft law complements the rules of the vouchers’ VAT treatment applicable from 2019. It states clearly that the free of charge transfer of single-purpose vouchers may be regarded as a taxable transaction.

In connection with the lease of workforce, the proposed rules restrict the applicability of the reverse charge mechanism. According to the draft wording, in case of workforce rental services, reverse charge mechanism will only be applicable in relation to certain construction and other similar works from 2021. In any other cases, VAT should be charged as per the general rules.

The threshold of opting for VAT exempt status will become significantly higher, it will be raised from HUF 8 million to HUF 12 million. Consequently, this threshold will correspond with the upper threshold of the special taxation scheme for small enterprises („KATA”).

 

Changes concerning custom rules

The proposal aims to resolve the long-standing issue concerning the release by the customs authorities of comprehensive security provided in the form of an undertaking. According to the proposal, the customs authority would retain the funds provided for such security for a period of one year, compared to the current 3 years.

The draft legislation proposes to allow customs representatives to engage ‘subcontractors’, who, in addition to the special provisions introduced by the bill, would have to comply with the provisions on subcontractors and agents within the meaning of Act V of 2013 on the Civil Code.

Authorised Economic Operators would receive further benefits: under the proposal, the customs authority could supply certain Authorised Economic Operators with information on risks concerning their customs operations to reduce administrative burdens and expenses for both the economic operators and itself.

Changes concerning the Accounting Act

According to the proposal, the Accounting Act – following the international practice – will handle the business unit transfer as one transaction from the beginning of FY19. Hence, income (profit) generated upon the business unit transfer will need to be recorded as other income from 1 January 2019, while on the other hand, if a loss is realised, it will need to be shown as other expense. The company should document the book values of derecognised assets and liabilities by balance sheet items in the notes to its annual financial statements. In this context, the Accounting Act will be amended with a business unit definition similar to the ones of the corporate income tax and VAT legislation.

 

Changes related to Employee Share Ownership Programs

Effective from 1 January 2019, the following major changes can be expected regarding the regulation related to Employee Share Ownership Programs (“ESOP”):

1. It is made clear that the subject of the ESOP may only be ordinary shares representing ownership rights or other securities vested with similar investor risks (and rights connected to the aforementioned two categories);

2. Several changes aim to underline the long-term employee incentive motive of the scheme (e.g. it is set forth that the ESOP has to be in force for at least 12 months and furthermore, a minimum security holding period – by the ESOP company – of 12 months is also implemented and may only be overridden on an exceptional basis). Such obligatory minimum holding period will be extended to 2 years by 1 January 2021;

3. From now on, the ESOP's founder may transfer its ESOP shareholding to the employees for no consideration;

4. Subject to the nature of the vesting conditions, their fulfilment has to be supported by disclosed financial statements; and it is also made certain that it is the founder that can modify (or cancel) the remuneration policy;

ESOPs initiated before the above amendments enter into force are granted a 6-months grandfathering period, meaning that they have to comply with the new rules by 30 June 2019.

 

Changes to tax procedures

The most important changes regarding tax procedures are the following:

1. According to the proposal, the maximum amount of default penalty – to be levied due to failing to fulfil; or insufficient fulfilment of the top-up liability for corporate income tax, local business tax and innovation contribution purposes – will decrease from the current 20 per cent to 10 per cent.

2. As of 1 January 2019, performing a tax audit will be compulsory in the case of companies – where companies established without a predecessor within 4 years are not included – whose net sales revenue exceeds HUF 60 billion per year in two consecutive tax years, while having zero or negative profit before tax in the respective years.

3. According to the proposal, in certain special cases, administrative deadlines will change e.g. the time period of performing the supplementary information request will not be included in the normal 30-day tax administrative deadline. Other changes concerning tax procedures will be released in our next newsflash upon acceptance of the tax modification package.

 

Contact us

Dr. Tamás Lőcsei

Dr. Tamás Lőcsei

Country Managing Partner, PwC Hungary

László Deák

László Deák

Partner, PwC Hungary

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