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.