On 13 November 2018 the government approved the T/2931 draft legislation about the autumn tax package. In our current newsletter we are summarizing the major changes.
I. Changes in corporate income tax
One of the most significant changes in corporate income tax is the new possibility for entering into a group taxation arrangement regarding corporate income tax (CIT). According to the accepted draft legislation, at least two, Hungarian resident companies may create a group taxation arrangement – based on the permission of the Hungarian tax authority. This requires related undertaking relationship among the taxpayers, which is based on a voting right of at least 75 percent, additionally the balance sheet date based on the accounting policies of the group members should be the same.
Another important condition is that one taxpayer can only be a member of one group taxation arrangement at the same time.
Tax base of the group is the sum of individually assessed non-negative tax bases of the group members, which may be reduced by the loss carry forward based on the rules of carry forward losses. The loss carry forward equals to the sum of individual tax bases of group members with a negative tax base. This means, among others, that the accumulated losses of the members originated from previous years cannot be used by the group, and the losses incurring in the current period will be limited to up to 50% of the positive tax base, and also up to 50 % of “individual tax bases”. Particular attention should be paid also on the special rules for the use of tax credit.
The provisions on group taxation arrangement regarding corporate income tax will enter into force on 1 January 2019.
The implementation of the European Council’s directive (ATAD) into the Hungarian law has led to further modifications in the CIT act. One of the most important further amendment is the so-called thin capitalisation rule: the equity-proportional calculation is replaced now by a result-based calculation method, in addition bank loans cannot relieve in the future. However, important benefits may be that actual tax base may be decreased by the earlier thin cap increasing items (assessed from 2019) – up to the ‘capacity of interest deduction’, and group members might apply beneficial rules in some cases. For interest costs related to financing contracts entered into before 17 June 2016 the present rule may be applied in the future, as well. Nevertheless, due to the complexity of the rules, we recommend to involve experts during the calculations. This provision, as in the case of CIT group taxation arrangement, is valid from 1 January 2019, so the above mentioned calculation method is also to be applied from that date, if applicable.
Changes related to widely-used tax allowance on sponsorship of popular team sports may also be considered to be positive: in the future, operational costs of sport-purpose-properties may also be supported.
The approved draft law sets out further provisions regarding tax allowances: from 1 January 2019 all kinds of tax incentives provided to associations for the protection of performers’ rights will cease.
Based on to the further transposition of the directive of the European Council, the general tax avoidance principle of corporate income tax has been tightened. Due to the new provision, one tax advantage can be applied insofar as the underlying transaction or the series of transactions are in line with the objective of the tax advantage and are based on valid economic, commercial reasons. The tax advantage cannot be applied, if its main, or one of its main objectives is a tax advantage that is contrary to the purpose of the legislation.
This clause was adopted also in respect of small business tax. Further tightening for taxpayers subject to small business tax that there are two new cases when taxpayers lose the possibility for applying the small business tax:
- if they own shares in a controlled foreign company, or
- if the interest payable exceeding the interest receivable amounts higher than HUF 939.810.000 (cca. EUR 3 million), in a year.
Further significant modification is in the definition of controlled foreign company (CFC) and the amendment of the related tax base increasing item. In the future, the law shifts to the other regulatory option provided by the EU (ATAD directive). On this basis, the exemption that the entities conducting substantial economic activity do not qualify as CFC, replaces the condition that its income must come only from ‘real’ transactions. However, an important tightening is that the taxpayers have to prove this. The exemption caused by the presence on the stock exchange has been deleted, but under a certain level of profit, the entity could be exempt from the CFC qualification.
The CFC related corporate income tax base increasing item was considerably modified, as well: from now on, the tax base increasing item does not relate to income from certain activities, but a certain part of the ‘not real’ transactions.
As a transitional rule, the rules currently in effect can still be applied during 2019.
II. Changes in value added tax
The most significant, most expected modification related to the VAT Act is the increasing of the limit for VAT exemption: from the previous HUF 8 million to HUF 12 million has increased the upper limit for exemption.
The approved draft law contains transitional provisions for the 5% VAT rate of selling new (residential) real estate properties. According to this, the current (reduced) tax rate of 5% can be applied till 31 December 2023, if final building permit was available on 1 November 2018 (or in the case of constructions subject to notification, the notification was already performed by this date).
Further significant modification is that form 1 January 2019 50 % of the VAT of passenger cars’ lease costs is not deductible in principle, but if supporting documents are available for business related usage, VAT may be deducted in greater proportion. This new provision also implies, however, that 50% of input VAT will be deductible even if there are no supporting documents (e.g. travel recording).
In the case of telecommunication, radio-, audio-visual services and electronically supplied services provided to individuals, the exemption of invoicing obligation will cease - for those taxpayers, who have not settled for economic purposes domestically. Reason of this provisions is that the relevant regulations are not the ones of country of transaction, but the ones of the member state in which the taxpayer has registered in Mini One Stop Shop system (MOSS).
Choosing possibility of the tour operators will be ceased: tour operators in the future cannot apply the method based on a designated position number system to determine their VAT tax base.
As compared to the summer tax package, a further amendment for the so-called one-purpose vouchers is the clarification of the tax obligation in the case of vouchers provided for free (as a gift). From 2019, providing such vouchers as gift also qualifies as sale for consideration (except for its provision by the issuer) and may cause tax obligations (on the condition that the VAT of purchased goods/services was deductible in relation to the voucher).
As of 1 January 2021 in the case of labour lending the application of reverse charge mechanism is obligated in the case of (i) property transfer based on Point d) of Section 10 of the Act on VAT, or (ii) construction and other similar work related labour lending, secondment and provision of staff based on Point 1) b) of Section142.
III. Changes in personal income tax
The most significant personal income tax related change of the summer tax package was the simplification of the “cafeteria-system”, which predicted unfavourable conditions for both of the employees and employers. Contrary to expectations, there is no significant ‘cafeteria’ related change in the new legislation, therefore, from 1 January 2019 several in-kind benefits (fringe and special defined benefits), which could be provided as tax exempt or beneficially taxed in the past, will be abolished.
Further to the above, some of the tax-free benefits will still be available, e.g. the employer will be able to provide tax-free tickets to sport and cultural events. However, vouchers for the above listed events will become taxable.
Income from interest rate discount
Criteria in respect of reasonable housing requirement has been clarified – in relation to housing loans provided tax exempt up to a limit of HUF 10 million. Furthermore, several definitions related to the ceasing accommodation allowances (e.g. reasonable housing requirement, modernization, accessibility, etc.) will be transferred form section 9 of Annex 1 to the subheading ’Income from interest rate discount’.
Taxable insurance premium
The approved tax law will modify the definition of risk insurance, since from 1 January 2019, risk insurances provided by the employer to individuals will become taxable income. Due to the amendment, the proportionate part of the group insurance premium (per person) will be considered as taxable insurance premium – taxed as employment income. If proportionate part of the group insurance premium (per individual) cannot be determined on the basis of the insurance contract, the group insurance premium becomes taxable as specific defined benefit. Furthermore, the practise applied for years that the income occurs when the beneficial status is changed (not at the time of premium payment, but later) has also been regulated in the law.
Supplementary mutual (health-care) assistance services
Contrary to expectation, the autumn tax package will partially terminate the favourable taxation of the amounts paid for ‘target-specific services’ (i.e. services ordered by the employer from a voluntary mutual insurance fund for the benefit of the employees). Due to this change, if the employer orders this benefit from a voluntary mutual insurance fund (e.g. employers’ contributions, donation provided on behalf of the member) it will become taxable at the time of setting (i.e. payroll).
Amounts paid for target-specific services which do not qualify as supplementary mutual assistance services, will be taxable in the future as specific defined benefit, as well. In spite of it, amounts paid for target-specific services which qualify as supplementary mutual assistance services, will not be taxable at the time of the payment, since it will be taxable on the individual’s side at the time of using the service (as other income). The individual will be the subject to personal income tax and social contribution tax on 84% of the tax base.
Usage of target-specific services, which do not qualify as supplementary mutual assistance services, will be tax exempt in the future, as well.
Split of family tax allowance
The possibility to split family tax allowance will be extended, which means, that contrary to the current legislations, if certain conditions are met, besides applying increased family allowance, the family tax allowance may also be split due to single parenthood.
Further modifications:
The new tax law will amend the definition of workers’ hostel: those lodging places can be considered as workers’ hostel in addition to the current regulation, where the employee is entitled to use only one room (including collective accommodation other than hotel) – except if the payer accommodates a private individual, or a relative, with whom it maintains a relationship defined in the cases classified as affiliated companies in accordance with the Act on Corporate Tax. The catering service at this kind of accommodation cannot be tax-free.
IV. Changes in social contribution tax
The approved law will not modify the rate of social contribution tax, it will remain 19.5% from 1 January 2019 as well. Besides many amendments with clarification purpose, we would like to draw your attention to the introduction of the following two social tax allowances:
- In connection with R&D activities, a new social contribution tax allowance is introduced, which means that research organizations are entitled to 50% allowance of social contribution tax in connection to employees related to research activities. Accordingly, the wage costs of research organizations will significantly decrease. The related transitional regulations were also clarified, so the benefit may also be utilized from the training contribution, insofar they will be used until 31 December 2018. Additionally, if the employer is entitled to use both the current and the future benefit due to the same person, only one benefit can be applied.
- The draft law introduces a significant allowance in connection with employees employed formerly in public sector. Based on this, new employer of former public sector employees (above the age of 60 years) is entitled to social contribution tax and training contribution allowance up to four times of the minimum wage.
V. Changes in rules of taxation
According to the adopted draft law, sole traders are also involved in the definition of other organizations, which means that sole traders fall under the scope of Act on the Rules of Taxation, too, and qualify as payers.
Further significant amendment is that from 1 January 2019, the employer does not have to report the data about the employee’s educational and professional qualifications, the name of the institution issuing the certificate and the record of the document.
Due to the amended law, if co-workers of a foreign tax authority also participate in the tax inspection, the Hungarian tax authority is obliged to ensure interpretation and translation tasks during the tax inspection.
Obligatory inspection for companies making loss: from 1 January 2019, it is obliged to carry out tax inspection for an enterprise whose net sales in two consecutive business years reaches HUF 60 billion (for each business year), and the profit after tax in both business year is zero or negative. The inspection might be conducted after accepting financial report of the second (loss-making) year and newly established companies are exempt from this rule for 4 years.
The law amendment contains further significant modifications in connection with the Act on Tax Administration and the Regulation of Tax Administration. One of the most important is the modification/clarification of provisions on ‘new fact and circumstances’. From 1 January 2019, a new fact, evidence can only be presented before the deadline of the comments on the minutes of the tax inspection. This provision is to be applied both at appeals and repeated inspections.
Penalty on harming the ‘tax supplement obligation’ in relation to tax advance payment will decrease to 10% from presently applied 20% rate (of the difference between tax advance payment and 90% of the actual tax obligation).
Prior consultation (ensured in the law) in binding ruling procedures will not be available any longer.
Regulations in connection with tax inspections’ deadline was already significantly amended from 2018: many ‘possibilities’ for extending the inspection deadline (e.g. asking for further documents, ‘related inspections’) which could make the inspections last for years, do not affect any more the deadline. One of the last similar case was the request for Hungarian translation of the company documents (except English, German and French), i.e. this case triggered extension of the deadline. Current modification ceases this possibility, as well.
VI. Changes referring to accounting
The act on accounting determines the definition of line of business from 1 January 2019. Based on the approved draft law, the introduction of this definition is necessary, due to its economic substance, the difference is remarkable among sales of assets, taking over debts, and sale of line of business, therefore the conceptual clarification has become unavoidable.
Another important element is that the result of sales of line of business is to be recorded in net way: in the case of profit it qualifies as other income, in the case of loss, it qualifies as other expenses.
VII. Others
In the future, no financial transaction tax liability will apply to transfers between the individuals’ accounts at Hungarian State Treasury (used for government securities transactions) and their other payment accounts.
Individuals’ declarations in connection with tax allowances – submitted to the Hungarian tax authority - will be forwarded to the relevant employers only from 2020 (not from 2019) - due to the need for further IT development.
We would like to draw your attention, that in the light of the above-detailed modifications it could be worthwhile to investigate all the consequences in your enterprise, to make pre-calculations for the best choice (for instance when choosing group taxation arrangement, which is scheduled to expire on 15 January 2019). BDO tax advisors are at your disposal.