Corporate Tax In Hungary (Part 1): Basic Framework – Corporate Tax

Determining taxable corporate income and subsequent
taxation is a fundamental aspect of any business’s financial
planning. This article is the first in a
seven-part series of articles covering the important rules of
corporate taxation in Hungary. The series will
cover issues such as the basic and special rules of corporate tax,
extra profit tax, cross-border treatment, anti-avoidance,
investment in corporate assets, and penalties for
non-compliance.

In Hungary is a unilateral state, having no federal level.
Corporate profits are generally taxed at state level, being subject
to Corporate tax (Társasági
adó) and to Municipality tax at
regional level on business activities (Iparűzési
adó).

The ordinary Corporate tax rate is 9%; however as
a global minimum rate of 15% is applied – accordance with
OECD-EU legislations – to company groups having a consolidated
turnover exceeding 750 million euro.

The ordinary Municipality tax rate is
2%. It may be reduced by specific regional tax
regulations on municipality level.

In principle, as a rule, the Corporate and Municipality tax
rates do not change depending on either the nature of the income or
the size of the taxpayer.

Corporate tax and Municipality tax are levied on
different taxable bases:

• Corporate taxation is based on the
  net profit/loss resulting from the annual financial statement of
  the taxpayer; and




• The Municipality tax is based on the
  turnover of the taxpayer resulting from business activity from
  which however expenditures of the labour costs as a main item
  cannot be deducted. Small entrepreneurs with a turnover not
  exceeding 25 MHUF or small retail traders with a turnover not
  exceeding 120 MHUF enjoy a preference lump sum Municipality
  tax.

In principle, income earned by a corporate entity is qualified
as business profit and making the base of the Corporate tax and
Municipality tax, notwithstanding the nature of such
income (eg, trading income, dividends, capital
gains).

Hungarian resident companies are subject to Corporate tax on
their income realized in Hungary. Worldwide income is counted into
its base only if it is realised abroad through foreign branches of
the Hungarian mother company.

Non-resident taxpayers are subject to taxation
only as concerns profits realised in the Hungarian territory,
if

a) he carries out business activities at a domestic
location,

b) he earns income by trading his share in a company that owns
real estate (shareholder of a company that owns real estate).

As a general rule, tax losses can be carried
forward for 5 subsequent financial year and can be used to offset
future Corporate tax profits up to a limit of 50% of the amount of
Corporate tax base of the year to which the offset is used for.
Real estate investment enterprises may not use this set off option
since they are privileged taxpayers.

According to the limited worldwide taxation principle, tax
losses suffered abroad (ie, through a foreign branch of a Hungarian
resident company) can be used to offset domestic taxable profits
(if any).

As a general rule, the recipient/legal owner of income is
subject to taxation. However, the tax benefits for
group corporate taxpayers can be
established.

The group corporate tax subject is considered as a single
taxpayer from the point of view of applying the tax benefits, so
the group corporate tax subject uses the tax benefit and not the
individual group members. Only the group representative can make
legal declarations related to the tax discount.

A group corporate tax subject can take advantage of a tax
discount if one of its group members undertakes to meet the
necessary conditions and this group member actually fulfils them.
Film productions and spectacle team sports are supported by group
members.

Especially following entities other than companies are
also subject to corporate taxes: entrepreneurs,
cooperatives including European cooperatives, state run companies,
law firms and notary offices, public trust foundations and private
bodies different from corporates, privet trusts whose principal
purpose is the carrying out of business activities.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.