New transfer pricing decree

Introduction and context

Please be informed that a new Hungarian decree regulating the transfer pricing documentation requirements will soon be published. 

Understanding the changes introduced by the new decree is critical, as they bring new compliance requirements and practical implications that may substantially affect taxpayers’ documentation processes and audit readiness. In the sections below, we introduce the details of the new rules.

Moreover, we would like to highlight that transfer pricing is in the focus of the Hungarian tax authority. Special regional transfer pricing audit units have been established (namely: transfer pricing competence centres) which perform compliance verification audits and support comprehensive tax audits from a transfer pricing point of view. Based on our experience, these audits usually result in default penalties in cases where the Local File and the benchmarking studies are prepared centrally. Therefore, we would recommend paying special attention to formal compliance as it is the starting point for the tax authority to assess the pricing of the intercompany transactions against the arm’s length principle. 

In light of the frequent tax audits and the new transfer pricing documentation requirements we recommend paying special attention to the Hungarian Local Files. 

Summary of the key changes:

• Benefit test: For all intra-group services (including financial services), taxpayers must demonstrate that the service is fully necessary for the business of the recipient and that the same service would have been procured from an independent party under similar terms.

• Segmentation: The preparation of segmented P/Ls will become mandatory, and the actual returns achieved must be tested. Additionally, if the tested party is a foreign entity, it is also obligated to present segmented results. The importance of segmented P/Ls also increases in light of the changes to the safe harbour rules for low value-adding services.

• Benchmarking studies: The decree defines the acceptable search strategy for database searches, including geographical criteria. Centrally prepared studies often fail to meet these Hungarian-specific requirements, so local benchmarking will become necessary.

• Economic analysis expanded: Documentation must cover all five OECD comparability factors and include detailed DEMPE analysis for intangibles. 

The new decree is expected to be promulgated this year and may optionally be applied to tax years starting in 2025. It will be mandatory for tax years starting in 2026.

The new rules add numerous new content requirements and clarify that a related-party transaction can arise even if no invoicing occurs between related parties. All of this may impose significant additional burdens on taxpayers.

Beyond the above, tax authority practices and expectations will be implemented into law by the new decree. Taxpayers may need to adjust their documentation strategies and place greater emphasis on producing and extracting transfer pricing related accounting data from systems.

The changes introduced by the new decree are set out in detail below.

Changes affecting documentation obligations:

Under the new decree, no Master File is required if the aggregated transaction value does not exceed HUF 500 million (approx. 1,3 million EUR), while the content of the Master File remains unchanged. 

In parallel, the general threshold for preparing the Local File increases to HUF 150 million (approx. 380,000 EUR), and for third-party cost recharges the threshold will be HUF 500 million (approx. 1,3 million EUR).

The above thresholds continue to be interpreted on an annual, net, arm’s-length basis, taking into account the rules on consolidation.

Under the new decree, cash transfers are also subject to local documentation requirements. Therefore, besides the already applicable data reporting obligation that exists for this type of transaction, an explicit documentation obligation is added for these transactions.

The new decree codifies the previous tax authority practice that a transaction between independent parties may qualify as a related-party transaction if invoicing to the independent party is merely an administrative convenience and, based on the functional profiles and activities of the related parties actually participating in the transaction, a related-party transaction can be established. This can impose additional requirements particularly in certain manufacturing activities, where sales are made to independent parties; but under the new rules, the transaction may be recharacterized as a related-party transaction for transfer pricing purposes. In this case transfer pricing rules would apply not only in terms of documentation but also regarding the arm’s-length nature of the tax base. 

Changes to the content of the Local File: 

Previous practice already emphasized a more detailed presentation of financial information and clear traceability of transactions to accounting records. The new decree reinforces and clarifies that in warranted cases, full segmentation must be performed, meaning the company-level P/L must be fully segmented per transaction types. After allocation, no revenue, cost, or expense may remain unassigned. Furthermore, it is reinforced that the actual results achieved must be tested under the tested party’s accounting standards. This requirement applies even if a foreign entity is the tested party. As a result, testing transfer pricing policies or results under different accounting standards is clearly not accepted going forward.

The documentation must comprehensively cover the five comparability factors named in the OECD Transfer Pricing Guidelines: contractual terms; functional analysis; characteristics of goods or services; economic circumstances; and business strategy. The new decree places substantially more emphasis on detailed functional analysis, and for intangibles, the DEMPE functions must be presented.

Another change is that, when presenting the ownership structure, the details of indirect majority control must be described.

In line with transfer pricing data reporting, taxpayers must indicate the NACE code most characteristic of the transaction. This creates a link between data reporting and the transfer pricing documentation and simplifies the frequent compliance reviews conducted by the tax authority.

Benefit test: 

One of the most significant changes is that, for services, a benefit test must be performed to assess whether the service is fully necessary for the taxpayer’s business, and whether the taxpayer would have procured it from an independent party under similar terms.

The new decree does not lay out in detail the specific requirements of the benefit test, and it is not clear whether, on this basis, the deductibility of centrally provided support services could be challenged if similar services can be sourced on the Hungarian market at lower prices.

Corporate database searches: 

The new decree addresses the search strategy and steps of conducting benchmarking studies i.e. database searches. 

Based on the new rules, comparables must be active, independent companies that are individually identifiable. 

Furthermore, as a main rule, the review period covers the three years preceding the year under review and financial data must be available for all three years; however, exceptions may be justified. Regarding losses, one loss-making year is permitted over the three-year period among the comparables. When defining the tested period, only a single year’s result must be tested. 

Primary activity codes should be used, and keyword searches should generally be avoided but may be used as a supplementary measure in justified cases.

In line with the Hungarian Tax Authority’s prior guidance on comparable searches, the legislator places particular emphasis on geographic criteria, which must be broadened gradually: starting with Hungary, then the Visegrád countries (“V4”), then the V4 complemented with Bulgaria, the Baltic states, Croatia, Romania and Slovenia. As a last expansion, the search may be expanded to the countries of the European Union. Territorial expansion is permitted only in case of insufficient sample size.

Incorporating these conditions into the decree clearly signals to taxpayers that centrally prepared studies—if not compliant with the new decree—will not necessarily be acceptable for Hungarian documentation purposes.

Simplified documentation: 

The criteria for simplified documentation also change. Simplified documentation may be prepared for low value-adding services, cash transfers and cost recharges.

Simplified documentation can only be prepared if neither the taxpayer nor any related party in the group provides similar service to independent parties; the activity does not require and does not create unique, high-value intellectual property and the parties do not bear significant risks.

Furthermore, the service cannot be manufacturing, distribution, financial transaction or insurance services in nature. 

Additionally, under the new decree, a minimum actual mark-up of 5% must be applied for service provision, and a maximum of 5% for service receipt, and this must be supported by segmented P/Ls. 

It is particularly important to highlight that the above required mark-ups refer to the actual mark-up achieved, not the transfer pricing policy or the price stipulated in the intercompany agreement. Therefore, if the taxpayer wishes to use this simplification rule, a segmented P/L must be prepared. This also means that if, for example, the Hungarian party provides the service on a cost plus 5% basis, the simplification is only available if at least a 5% mark-up is applied on all actual costs; otherwise, the actual result will not reach 5% and the conditions will not be met. In the case of centrally provided services, the segmented income statement of the foreign related party will also be required.

Only if all of these conditions are met can the transaction be treated as a low value-adding intra-group service.

The previous requirements of the simplification rules for low-value adding services included activity codes and transaction amounts which were removed by the new decree. Therefore, this simplification rule will likely be applicable for more taxpayers. If the transaction meets the new rules, the Local File do not have to include information on the relevant market, business strategy, selection of transfer pricing method and identification of the tested party. Furthermore, and most importantly, no comparable search is required.

If one of the conditions is not met, full-scope transfer pricing documentation requirements apply.

Consolidation:

In line with previous practice, transactions in opposite directions must not be consolidated. Consolidation must be assessed on accounting grounds, i.e., transactions must be separated according to whether they appear on the payables (supplier) or receivables (customer) side in the books.

The new decree also states that transactions falling into the following broad categories are under no circumstances eligible for consolidation with each other: manufacturing, distribution, services and financial transactions, as well as transactions involving intangibles, including in particular sale, creation, purchase, license and franchise.

Practical approach:  

The practical consequence of the above changes is that the Hungarian transfer pricing regulations are deviating from the OECD Guidelines at several points and are being supplemented with additional specific local elements. As a result, a detailed, local-level review of Hungarian requirements become increasingly important.

Taxpayers will need to prepare in advance in several areas, as certain supporting information will likely be more difficult to access or will require additional preparation. This is particularly true for the segmented P/Ls of foreign related parties, the benefit test, and comparable searches focused on local specifics. With this in mind, it is advisable to prepare for the fulfilment of transfer pricing documentation obligations for the tax year 2025 (optional) and 2026 (mandatory).

Transfer pricing audits remain a priority for the Hungarian Tax Authority, supported by nationwide transfer pricing competence centres. With new regulation, it is expected that transfer pricing audits will not slow down but rather accelerate further, making it especially important to keep records up to date and to be prepared for official inquiries.