The three-year moratorium period for the application of the increased HUF 12 million threshold for the individual tax exemption expired at the end of 2021. On 19 January 2022 the Council of the European Union allowed Hungary to keep the HUF 12 million threshold unchanged for the next three years, i.e., until 31 December 2024. This popular tax treatment method continues to provide a favorable opportunity for small and medium-sized enterprises (SMEs) in Hungary (the other conditions for opting for and applying the exemption remain unchanged).
However, for the SMEs concerned it is also worth looking ahead, as from 1 January 2025, the special regime for small businesses set out in the VAT Directive will change at EU level. The new system will be introduced as part of the so-called Action Plan on VAT, adopted in 2016, which aims to reduce the administrative burden on SMEs and to promote a tax environment that facilitates their growth and the development of cross-border trade.
Currently, under the special regulation, exemption is only granted to businesses established (in the absence of establishment, the place where the business has its permanent address or usually resides) in a certain Member State for those transactions where the place of supply is Hungary. This adversely affects competition in the internal market for businesses not established in that Member State. In order to eliminate this distortion and avoid further disadvantages, the new system is designed to allow this exemption for small businesses established in another Member State as well.
After the new rules enter into force, Member States will still be able to allow exemption to SMEs established in the Member State, in respect of transactions carried out in the territory of the Member State, whose annual turnover does not exceed the threshold set by such Member State. A single maximum exemption threshold, not exceeding EUR 85,000 or the equivalent in national currency, will be introduced in respect of transactions carried out in the territory of the Member State under a domestic tax number.
The threshold of EUR 85,000 appears to be significantly higher than the currently applicable threshold (EUR 35,000 in Hungary). The justification behind this significant difference is simply that the Council of the European Union considers the previous/current threshold to be outdated and would like to simplify the taxation process for SMEs.
It is important to emphasize that – according to the new regulation – businesses can opt for an exemption in a Member State other than the Member State of establishment. Under the amendment, businesses will be entitled to the exemption in another Member State, if:
their annual EU turnover is below a certain threshold (EUR 100,000), and
the value of their supplies of goods and services in the Member State other than the Member State of establishment does not exceed the exemption threshold applicable in that Member State.
During the transitional period – until the new regulation enters into force – upon request, setting a exemption threshold for Member States higher than the one currently set in the VAT Directive may continue to be allowed. As mentioned above, Hungary has also been granted this authorization, providing small and medium-sized enterprises with individual tax exemption until 31 December 2024, up to a revenue threshold of HUF 12 million.
PR Senior Manager, PwC Hungary