Summer tax legislation package

Investment tax allowance

From 1 January 2019, local governments will be able to introduce a tax allowance or tax exemption aimed at encouraging investment projects carried out within the territory of the municipality. This tax advantage may be provided from the local business tax 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 they have introduced a regulation on the investment tax allowance, local governments will not be able to repeal this regulation for at least three years or amend it any way that would be detrimental to taxpayers.

Top-up obligation

In line with the laws on tax proceedings introduced from 2018, the local taxes act will be amended to include the provision that taxpayers subject to the corporate income tax top-up obligation will also have to top up their local business tax advances to the amount they are expected to pay for the tax year. According to the relevant transitional provisions, companies using a non-calendar business year will first have to apply the top-up rule for the tax year starting after 1 January 2018. It is important to note that the above amendment is only a legal clarification of an existing rule rather than an entirely new rule, as the local business tax top-up obligation is already prescribed by the tax laws currently in force.

Job creation tax base allowance no longer available

From 1 January 2019, the local business tax base allowance aimed at increasing employment will no longer be available. According to a transitional rule, companies that used the job creation tax base allowance in the 2018 tax year but their average statistical headcount decreased by more than 5% in the following year, will have to increase their 2019 tax base by the amount of the allowance used.

Changes related to IFRS

As a result of the introduction of the new standard on leases, a number of definitions and provisions have been amended in the local taxes act.

According to the amendment, micro- and small enterprises will continue to be exempt from the obligation to pay the innovation contribution. However, from 1 January 2019, in order for a business to qualify as a micro- or small enterprise, it will have to be examined once again whether the business in question has any affiliated or partner enterprises, and if so, micro- or small enterprise status will be determined according to the aggregate company data (net revenue, number of employees). If the number of employees or the net revenue exceeds in two consecutive years the threshold specified by the act on SMEs, the business in question will no longer qualify as a micro- or small enterprise. If the number of employees or the net revenue stays below the statutory threshold for the same period, the business may qualify as a micro- or small enterprise.

There have been several amendments to the rules on regulated real estate investment companies. Accordingly, the permitted scope of activities of such companies has been extended to include the development of building projects (TEÁOR 4110). In addition, the relevant rules on dividend payment have also been relaxed. In the future, it will be sufficient for the company’s management to make a proposal on the expected dividend or, in the absence of that option, the proper amount of uncommitted funds to be disbursed. The changes concerning regulated real estate investment companies will take effect from the day following the promulgation of the Amending Act.

The accident tax charged on compulsory motor vehicle insurance will be abolished, and the act on insurance tax will be amended to include the insurance tax liability related to the compulsory motor vehicle insurance. Further to this change, the tax payable on compulsory motor vehicle insurance services will be reduced from 30% to 23% (but may not exceed HUF 83 per calendar day per motor vehicle). In addition, the subject of the tax will be the insurance company, rather than the insured.

The most important amendment affecting credit institutions is that from 1 January 2019, the special tax on credit institutions will be abolished. The special tax on financial institutions (“special tax”) will remain in effect.

Credit institutions under the supervision of Magyar Nemzeti Bank (the National Bank of Hungary) had to adopt IFRS from 1 January 2018. As a result, the act on the special tax on credit institutions and financial institutions has been modified to include the provision that credit institutions that prepare their financial statement according to IFRS must take as their special tax base the adjusted balance sheet total according to IFRS. This amendment also affects other financial enterprises, such as investment firms, stock exchanges and clearing houses, that prepare their annual financial statements under IFRS. However, commodities exchange service providers and venture capital fund managers will not be affected.

From 1 January 2019, financial organisations preparing annual financial statements will have to decrease their pre-tax profit by the amount of special tax. Financial organisations required to prepare an interim closing trial balance for supervisory disclosure must account for the special tax in their interim profit and loss account on a time-proportionate basis.

The transition of financial organisations to IFRS has made it necessary to change the definitions of balance sheet total and adjusted balance sheet total. The new definitions will take effect from the beginning of 2019.

Moreover, the different rules for determining the tax base for leasing activity will be abolished from 2019.

Late-payment interest reintroduced

From the day following the entry into force of the Amending Act, if the tax authority unlawfully passes a resolution and, as a result, the taxpayer becomes eligible for a tax refund, the tax authority will pay interest on that amount equal to the rate of default interest unless the error in tax assessment was due to reasons within the control of the taxpayer or of the person subject to the compulsory data disclosure. This is a return to the state of regulations in effect before 31 December 2017.

Increased rate of default interest

From 1 January 2019, the default interest will be calculated, for each calendar day, at 1/365 of the base rate of the Hungarian National Bank (prevailing at the date when the default interest is charged) plus 5 percentage points. As the current base rate is 0.90%, the rate of default interest will increase to 5.90%. The new default interest will apply to liabilities becoming due after the Amending Act has entered into force.

The rate of the self-revision fee will remain unchanged (i.e. the base rate of the Hungarian National Bank). For a repeated self-revision, the self-revision fee will be 150% of the fee initially charged.

For high-risk taxpayers that qualify as such at the time the default interest is charged, the rate of the default interest will be, for each calendar day, 1/365 of 150% of the default interest calculated according to the general rules. The new default interest will apply to liabilities becoming due after the Amending Act has entered into force.

According to the amendment, amounts transferred to Széchenyi Recreational Card accounts will not be subject to this tax, effective from 1 December 2018.

The rules on the transaction tax base have also been amended: private individuals transferring amounts from a bank account held for non-business purposes will only be subject to the transaction tax for the part of the amount exceeding HUF 20,000. Accordingly, bank transfers of up to HUF 20,000 by retail customers will be exempt from financial transaction tax as of 1 January 2019.

Changes related to IFRS

The Amending Act makes it clear that companies that prepare their financial statements in accordance with the IFRS will have to determine the funds available for distributing dividends under the same rules as set out in the Hungarian Accounting Standards. Further, in addition to items accrued during the period of preparing financial statements in accordance with the IFRS, items accrued before the transition to IFRS should also be taken into account with respect to retained earnings. Retained earnings must also include any amounts transferred from the registered capital or capital reserve to cover losses, as well as any amounts transferred from other reserves that are required or allowed to be transferred under the IFRS, adjusted by the amounts directly credited or charged to retained earnings in accordance with the IFRS. The above amounts must be reduced by the amount of additional capital contributions recognised as assets under the IFRS and the amount of unused development reserves net of deferred tax.

From 1 January 2019, businesses that prepare their annual financial statements or consolidated financial statements according to the IFRS must also prepare a business report or consolidated business report.

Also, from 1 January 2019, the definition of after-tax profit/loss for companies applying the IFRS will include items that are recognised through profit/loss under the Accounting Act but are recognised through equity under the IFRS, including in particular financial support or non-repayable cash provided or received.

To determine whether a company is to be regarded as a parent company required to prepare consolidated annual financial statements and qualifying as a public interest entity, company data will have to be examined in respect of the two consecutive years preceding the financial year concerned.

Accounting treatment of assigned claims

The Amending Act has clarified the accounting treatment of the assignment of original (own) claims. The assignor (seller) of the original claim must, upon assignment of the claim, recognise the amount of the claim as acknowledged by the assignee – shown in current assets – in other income, and the book value of the claim in other expenses. There will be no change in that, for acquired claims, the positive or negative difference between the selling price of the assigned claim (i.e. its amount as acknowledged by the assignee) and its book value must be shown in other income from or other expenses of financial transactions upon assignment of the claim. These rules may also be applied with respect to financial statements for 2018.

Accounting treatment of subsidies

Companies may also choose to apply with respect to their financial statements for 2018 the rule that the expected, i.e. not yet accounted amount of non-repayable financial support to be received to cover costs and expenses may be shown in accrued other income, if the company is able to demonstrate that it will meet the requirements for, and is likely to receive the support concerned. The accrual must be released upon recognising the financial support, or failing to receive it, as applicable.

Other changes

From 1 January 2019, the provision on the principle of materiality will be amended as follows: the materiality of an item will have to be determined in the context of other similar items. The change can also be applied to the 2018 financial statements.

The amendment makes it clear that the reporting and bookkeeping currency must be the same as the currency specified in the company’s deed of foundation. The period after which the bookkeeping currency can be changed has been reduced from five years to three years. The changes can already be applied to the 2018 financial statements.

Contributions in kind

From 1 January 2019, in addition to contributed assets, the difference between the book value of intangible property rights and their value specified in the deed of foundation (depending on whether it is a positive or a negative sum) will have to be shown in the financial statements (at the company’s choice, also in the 2018 financial statements) under other gains or other expenses.

Goodwill in the event of mergers

In the event of mergers, the amendment makes it possible for the absorbing company to recognise goodwill (subject to certain conditions). The new rule will be applicable to mergers and takeovers started after the entry into force of the Amending Act.

New rules regarding the supply of vouchers

According to the amendment – in line with Council Directive (EU) 2016/1065 – a difference will be distinguished between single and multi-purpose vouchers. This difference will also apply to their VAT treatment, as of 1 January 2019. The aim of the new regulation is – if possible – to consider the vouchers’ date of issuance (supply) as the taxable event from a VAT perspective.

Accordingly, the taxable event of single purpose vouchers will be the date of issuance (supply), whereas the tax point of the multi-purpose vouchers will be the date of redemption.

New rules regarding e-commerce

In line with Council Directive (EU) 2017/2455, additional simplification will be introduced regarding the VAT rules on electronically supplied telecommunication and broadcasting services (‘distance services’) for non-taxable private individuals. The new rules state that, if other conditions are fulfilled, the service provider taxpayer will be allowed to determine its VAT liabilities according to the regulation of the Member State where it is established instead of the Member State of the service recipient, up to a threshold of EUR 10,000. As a result of this simplification, the service provider taxpayer will be able to avoid VAT registration in each of the affected Member States of the service recipients.

However, the new regulation sets out that the service provider taxpayers still have the right to decide to determine their VAT liabilities according to the rules of the Member State of their service recipients instead of applying the new simplification rules. Based on this amendment, taxpayers will remain bound to their decision until the end of the second calendar year subsequent to the calendar year of their decision.

Furthermore, it will be possible for taxpayers established in a third country to register at the Tax Authority for the provision of distance sale services.

The new rules apply to supplies performed after 31 December 2018.

Extending the scope of the reduced VAT rate

The scope of goods subject to the reduced VAT rate will be extended. From 1 January 2019, the VAT rate on ESL and UHT milk will be reduced from 27% to 5%.

Application of the reverse charge mechanism extended

The application of the reverse charge mechanism in relation to certain cereal or steel products will be extended to 30 June 2022. Furthermore, as of 1 January 2021 the reverse charge mechanism will only apply to worker leasing, temporary assignment or supply of staff services that are supplied in connection with the supply of real-estate within the meaning of Section 10 d) of the VAT Act or with construction services within the meaning of Section 142 (1) b) of the VAT Act.

Changes in nomenclature for Vtsz. and SZJ numbers

From 1 January 2019, the classification systems included in the Commercial Customs Tariff (Vtsz.) as in force on 31 July 2002, and the List of Services (SZJ) of the Hungarian Central Statistical Office as in force on 30 September 2002 will be applicable.

From 1 July 2019, an up-to-date version of the goods nomenclature (customs tariff numbers) will have to be used as laid down in Commission Implementing Regulation (EU) 2017/1925 amending Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff, as in force on 1 January 2018. For SZJ numbers, the TESZOR’15 classification as in force on 1 January 2018 will apply, also from 1 July 2019.

VAT refund reciprocity with Serbia and Turkey

In line with the principle of reciprocity, taxpayers established in Serbia and Turkey will be able to reclaim the VAT passed on to them in Hungary. For Serbia, the new rules will take effect on 1 January 2019, while for Turkey they will enter into force on the day after their publication by the minister in charge of tax policy in Magyar Közlöny (the Hungarian Official Journal).

Rules regarding online invoice reporting

The new rules make it clear that online invoice reporting will be effective for the first time regarding invoices issued after 1 July 2018. Furthermore, those invoices that are issued prior to 1 July 2018 with a date of supply indicated as after 1 July 2018, are not subject to online invoice reporting.

Excise duty

The tax rate of cigarettes, and fine cut smoking tobacco and other smoking tobacco will increase in three steps: from 1 September 2018, 1 January 2019, and 1 July 2019.

Registration tax

The registration tax of small- and middle category motorcycles (up to 500 cm³) will decrease from 2019. The electrical and hybrid motorcycles will be exempt from the tax (0 HUF tax rate).

Public health product tax

The tax rate of all taxable product groups will increase from 1 January 2019, typically by approximately 20%.

Fruit spirits and herbal alcoholic drinks will become taxable.

The tax allowance relating to health programs will be abolished. Taxpayers will be entitled to offer up to 10% of their payable tax for the purpose of all activities, promotional campaigns, programs of the government body in charge of the healthcare system promoting a healthy diet or life style, or facilitating or encouraging to engage in sports activities.

Cafeteria benefits

Changes to the rules on the taxation of cafeteria benefits will affect nearly every employer and employee, and will considerably narrow the range of tax benefits.

Among fringe benefits, only the benefits available through Széchenyi Pihenőkártya (“SZÉP accommodation, hospitality and leisure cards”), trade-union-supported recreation, and benefits provided by cooperatives to their members will continue to enjoy low tax rates. All other benefits that are currently subject to a zero or low tax rate will lose their tax advantage from 2019. For example, it will no longer be possible for employers to provide cash benefits up to HUF 100,000 per year as fringe benefits. Instead, such benefits will be regarded as part of the recipients’ wages, meaning that the corresponding tax charge will increase by up to HUF 48,000.

Two popular cafeteria elements, employer-assisted housing benefits and housing assistance for labour mobility purposes, will no longer be tax exempt. As a result, the tax charge on such benefits to employers and employees will increase by 82% next year. Similarly, tickets and season tickets to sports and cultural events will be taxed from 2019, and so will employer-paid health and accident insurance premiums.

The range of certain specific benefits subject to a low tax rate will also be greatly reduced. For example, employers will no longer be able to provide low-tax non-cash benefits (e.g. gift vouchers or Christmas turkeys), whether under an internal policy or as benefits available to all employees. Similarly, Erzsébet meal and food vouchers, local travel passes, back-to-school vouchers, employer’s contributions to voluntary funds, personal insurance premiums paid by payers will no longer qualify as certain other benefits subject to a low tax rate. Instead, from next year such benefits will be treated as wages, meaning that the tax charge on benefits corresponding to a net amount of HUF 100,000 received will increase by HUF 32,000.

Family tax allowance

The amount of family tax allowance for persons raising two children will increase from HUF 17,500/month to HUF 20,000/month per child.

Draft tax return

From 2019, the tax authority will prepare draft tax returns for private entrepreneurs as well. However, such tax returns will only become final if approved, modified or amended by the private entrepreneur concerned.

Declaration on tax advances

Private persons registered for electronic tax filing will be able to submit their declarations on tax advances electronically, and the tax authority will forward them to payers electronically.

Letting real property

The administrative burdens associated with the letting of real property will be reduced as a result of a legislative change under which lessors will no longer be required to account as income (as well as an expense) utility bills issued to them, provided that they are able to recharge the same to their tenants.

In another change, persons letting their property to a payer may declare not to be subject to tax advance deductions, provided that they rent property at another municipality for a period exceeding 90 days.

Parliament has adopted a new law on social tax, under which the social tax rate will remain at 19.5% from 1 January 2019.

However, two popular social tax allowances, for employing persons under the age of 25 or over 55, respectively, will be discontinued. This measure will result in an increase of HUF 9750 per month in payroll costs for employers of such persons. The social tax allowance for businesses operating in a free entrepreneurship zone will also be discontinued.

Under the new law, healthcare tax will be replaced by social tax, meaning that from next year income that is currently subject to healthcare tax (such as, for example, dividend income) will instead be subject to social tax. This change will result in a slight increase in the tax burden on income from investments, such as dividends or capital gains.