In the last decade Hungary has significantly decreased the corporate tax rate and offered favourable conditions for companies doing business in Central Europe. Beside the 9% tax rate which is currently the lowest in Europe, Hungary introduced a wide scale of tax base reducing items and a number of tax allowances which can be very attractive for foreign investors.
As of 2019, further measures have been taken to encourage business activity in Hungary.
According to the new rules it is possible to create corporate tax groups which will be an advantageous tax planning opportunity for Hungarian corporate taxpayers. A summary of the expected benefits and main conditions of this new method of taxation is as follows.
Group corporate taxation might be chosen by affiliated companies whose combined tax base would be less than the total amount of individually calculated tax bases.
This new tax method may be preferred if:
- profitable and loss-making companies are both among the group members, since in this case the profitable companies can also reduce their tax burden, or
- among the group members there are parties eligible for tax allowance which can not be used fully at individual level, or
- group members have many transactions with each other being subject to transfer pricing documentation which is no longer necessary within the group.
Group corporate taxation can be chosen by companies, branches or permanent establishments of foreign companies without a branch, which:
- are each other’s affiliated entities on the basis of at least 75% of the voting rights,
- have the same balance sheet date and accounting currency, and
- use the same accounting principles (Hungarian GAAP or IFRS).
Group members have to appoint a group representative company which is responsible for reporting and comminication with the tax authorities on behalf of the group.
Corporate tax groups have to be registered and approved by the tax authorities.
The application form has to be filed by the end of year before starting the group taxation with the following attachments:
- decision about the establishment of the tax group signed by all members
- description of the method of accounting tax liabilities within the group
- certification about the fulfilment of the conditions above (public company information usually does not refer to voting rights)
The application has to be filed by the group representative to the tax authorities.
Tax calculation and filing
The tax group members have to calculate their individual tax base which has to be reported as well.
At group level you have to summarise the positive tax bases of profitable members and reduce it by the negative tax bases of loss-making members by max. 50%.
From the second year also accumulated losses of the group can be taken into account if there are any, can be carried forward until 5 years similar to general rules for individual taxation.
Tax allowances of a group member can be used at group level (even at a higher amount), but the group member entitled for that specific tax allowance has to fulfill the conditions of the tax allowance individually as well.
The group tax liability has to be split among group members proportially according to their individual tax bases.
The group has to apply the general 9% tax rate and the filing deadline of the end of 5thmonth following the final date of the business year.
Further aspects to be considered
Before making the decision, it is recommended to take into consideration that:
- transfer pricing documentation is still necessary for business transactions with affiliated companies out of the group,
- accumulated individual losses of group members from the years before joining to the group can not be taken into consideration during the group years (except in the first year with limitations), and
- loss-making companies may not use the option of payment of minimal corporate tax instead of reporting the reasons of their losses to the tax authorities (which often gives rise to a tax audit). If they still use this option, they will lose the advantage of offsetting their losses with profits within in the group.
Group taxation cannot be opted for 2019 anymore (the deadline was 15 January 2019) but new groups for 2020 can be created by end of 2019 and new companies can join to an existing group in November 2019.
ABT Treuhand Group, Hungary
E : firstname.lastname@example.org
ABT Treuhand Group, Hungary
E : email@example.com