Introduction:
Hungary is poised to introduce a groundbreaking legislative proposal that could reshape its economic landscape in 2024. The draft regulation, which has recently been finalized but is yet to be submitted as a legislative proposal to the Hungarian Parliament, aims to establish the concept of a Tax-Preferred Digital Enterprise. This ambitious initiative holds significant potential for digital service providers and Shared Service Centers (SSCs) within the European Union (EU), particularly those employing non-EU or European Free Trade Association (EFTA) citizens. As we explore the key aspects of this proposal, it becomes evident that Hungary is strategically positioning itself to attract digital businesses and foster innovation in specific sectors.
Overview of the Tax-Preferred Digital Enterprise:
The proposed regulation introduces the notion of a Tax-Preferred Digital Enterprise, creating an exceptional opportunity for digital service providers and SSCs to operate within the EU but employing citizens from non-EU or non-EFTA countries. This opens the door for these entities to consider establishing their operations in Hungary or further developing them following the acquisition of the required qualifications.
Favorable Tax Burden:
One of the most compelling aspects of this regulation is the exceptionally favorable tax burden it places on these enterprises. The tax structure extends beyond the traditional scope, encompassing not only employer and employee taxes and contributions but also corporate and local taxes. This holistic approach aims to create an environment conducive to the growth of digital businesses.
The corporate income tax applicable to these companies is 9% (with no additional local taxes), while employment charges are due only at 9,5% or 15%, which includes personal income tax and social charges.
Eligibility Criteria for Companies:
To qualify for the Tax-Preferred Digital Enterprise status, companies must meet specific conditions related to their core activities. The eligible activities include the manufacturing of electronic components, electronic circuit boards, computers, peripheral devices, communication equipment, electronic consumer goods, electronic medical devices, magnetic and optical data carriers, household electrical appliances, other electrical equipment, office machinery (excluding computers and peripherals), and also computer programming, IT consultancy, computer operation, other IT services, data processing, web hosting services, and web portal services. Moreover, any additional activities must solely support the primary activity, and the revenue generated from such supplementary activities cannot exceed 20% of the total revenue.
Furthermore, in addition to the above, a company supporting a Tax-Preferred Digital Enterprise can also get the tax-preferred status. The activity of such company supporting the digital company should be to ensure the infrastructural and other conditions of the IT research and development for innovation, for the application of smart contracts, as well as the certification of high-level cyber-security requirements, or domestic and international marketing support.
Workforce Requirements:
For a company to qualify as a Tax-Preferred Digital Enterprise, at least 60% of its workforce (calculated in terms of total headcount) must comprise citizens from third countries. These rules are in line with the light immigration rules applicable to third country citizens and recently accepted by the Hungarian Parliament.
Qualification Process and Strategic Planning:
To obtain the Tax-Preferred Digital Enterprise designation, a Hungarian-registered company must develop a strategic plan tailored to support digital activities, including research and development and the application of smart contracts. This plan must also ensure the fulfillment of infrastructural and other prerequisites, along with demonstrating a commitment to high-level cybersecurity standards. Preliminary qualification hinges on the company's ability to devise strategies and business plans that contribute to the growth of digital enterprises. The above plans and documents should be submitted to the Hungarian authority, which will issue an official decision when the documents are accepted, and the tax-preferred status is given.
National Security and Professional Requirements:
In addition to strategic planning, companies must meet national security and professional requirements, such as maintaining a clean criminal record, possessing higher education qualifications, and satisfying other criteria indicative of competence and integrity.
Tax Benefits:
Upon achieving qualification, companies stand to gain significant tax advantages. The income tax on employees is capped at 15%, or in the case of employees from third countries, a reduced rate of 9.5%. This includes both employer and employee taxes, as well as social charges. Furthermore, qualified companies are exempt from local business and innovation tax obligations, making the Tax-Preferred Digital Enterprise an appealing prospect for businesses seeking to optimize their tax liabilities.
Conclusion:
While the proposed legislation has yet to be presented to the Hungarian Parliament, the details are subject to potential modifications. It is crucial for businesses and stakeholders to closely monitor developments related to this initiative. If enacted, the Tax-Preferred Digital Enterprise framework could become a catalyst for economic growth, innovation, and increased foreign investment in Hungary. As the situation evolves, we will promptly update our readers with the latest information.
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.