Posted by: Ernst-Jan de Roest Posted on: Saturday 25 July 2009, 23:20

On 22 May the new Hungarian Prime Minister, Gordon Bajnai, submitted the 2010 tax law amendment bill to Parliament. This tax package contains a number of significant changes. Some of the announced taxation proposals are reduced corporate tax, personal income tax, and social security contribution rates. However, this would be offset by increases in VAT and excise tax rates, as well as by the elimination of some tax allowances.

 

The shift in taxation from income to consumption – according to the expectations of the Hungarian government – will encourage new investments, increase employment and improve Hungary’s competitiveness in the region, and is also in keeping with past OECD recommendations in this area. The proposed measures are expected to keep Hungary’s budget deficit below 3% of GDP for 2009.

 

In this article I will highlight only the most important ones which could be relevant for the readers of this business magazine. At the end of this article a list of the most important changes is included.1 Significant changes1.1 Solidarity taxThe draft bill submitted by the Government puts forward the cancellation of the 4% solidarity tax of companies and private individuals from 1 January 2010. However, practically the solidarity tax would be incorporated into corporate income tax and personal income tax. I emphasize that the planned amendment does not effect the bank surtax, which continues to apply. 1.2 Corporate taxGeneralThe draft bill contains several relevant changes of the corporate income tax, which will enter into force as from 1 January 2010. From 1 January 2010 the general rate of corporate tax would increase from the current 16% to 19%. The 10% tax rate applicable up to the HUF 50 million tax base would continue to be in effect, provided that the conditions set out in the law are met. This in harmony with the abolition of the solidarity tax for companies, as mentioned above. Next to the increase in rate, the bill contains several changes in the tax base and the modifying items. Transitional provisions may apply.Development tax allowance - more favorable conditionsSmall and mid-size enterprises could become eligible to development tax allowance with respect to investments implemented in any regions of Hungary, if the value of the investment is at least HUF 500 million at present value, and the number of employees increases by 20 person (or the wage cost increases by the fiftyfold amount of the annualized minimal wage) in the case of a small size enterprise, and by 50 person (or the wage cost increases by the hundredfold of the amount of the annualized minimal wage) in the case of middle size enterprise.

 

Taxpayers, who deduct the development tax allowance for the first time in the 2008 tax year, would get deferment for the fulfillment of the condition relating to the number of personnel, and they would only have to comply with the number of personnel set forth in the law only in the third tax year (currently first tax year) following the year of the first deduction of the tax allowance, and in the subsequent three tax years. The simplifications could be applicable in the 2009 tax year already.

 

1.3 Local Business Tax

• The most important change would be that from 2010 the tax administration with respect to local business tax would be transferred from the Local Municipalities to the State Tax Authority. As a temporary provision, the 2010 tax year would be still a transition year; accordingly, the first local business tax advance payable in 2010 would still have to be remitted to the local tax authority and the tax authority administration (including tax inspections as well) relating to the tax years prior to 2010 would remain at the local municipalities. According to the draft bill the statute of limitation would reduce to 2 years instead of 5 years, which also shortens the self-revision period allowed.

• From 1 July 2010, taxpayers would have to self-asses the local business tax advances (the due date of the advances remains unchanged).

• The tax base allocable to the foreign branch would no longer be subject to local business tax.

• The current definition of permanent establishment would slightly change for universal natural gas and electricity service providers, gas and electricity traders.

 

1.4 Personal Income Tax (‘PIT’)Super-grossing, new tax brackets and tax rates

• From 1 January 2010 super-grossing would be introduced in personal income taxation. It means, that the personal income tax base (in the case of income that are included in the consolidated tax base) would be the amount of gross income increased by the employer’s/disburser’s social security contribution, and health tax. In general it means, that the personal income tax would be payable on 127 unit gross wage instead of the current 100 unit.

• From 1 January 2010, the lower tax rate would decrease from 18% to 17%, while the upper tax rate from 36% to 32%. Furthermore, the 4% solidarity tax would cease.

• The 17% rate formally would be applicable up to HUF 5 million (super-grossed) tax base, for the part exceeding this limit, a 32% tax rate would be applicable. Nevertheless, due to super–grossing, the limit of HUF 5 million corresponds to a gross income of HUF 3,937,000, and the new tax rates – due to the higher tax base – in fact mean higher tax rates (21.6% and 40.6% respectively).

• The proposed amendments – presuming wage payment – are summarized in the following table:

 

At present From 1 January 2010 Gross income Tax rate Gross income Super-grossed Tax rate(tax base) wage (tax base) 0 – 1,900,000 18% 0 - 3,937,008 0- 5,000,000 17%1,900,001 – 7,446,000 36% 3.937,009 - 5,000,001 - 32%7,446,000 - 36+4%

 

Analyzing the combined effect of the changes, the following conclusions can be drawn:

• Under a yearly gross wage of about HUF 18 million the tax liability would decrease, while above this wage-limit the tax burden somewhat would increase.• The amount of the actual net wage – presuming that similarly to the previous years the pension contribution cap would increase by 4-5% again from 2009 to 2010 – would increase under a yearly gross of HUF 12 million per year, while above HUF 12 million it would decrease in some extent.

1.5 Social SecurityChanges to contributions

• The 5 percentage point decrease in employers’ social security and unemployment fund contributions (i.e. from 32% to 27%) introduced from 1 July 2009 up to the double of the minimum wage would be extended to the entire income from 1 January 2010.

• From 2010, the employer’s contribution to the unemployment fund (1%) and the employee’s contribution to the unemployment fund (1.5%) would cease. However, these provisions do not mean effective relief, since these contributions would be merged into the social security contribution and the individual health care contribution.

• The currently 6% individual health care contribution payable by the insured private individual would increase to 7.5% (this is because the employee’s contribution to the unemployment fund would be merged into this contribution).

• The fixed health tax (currently HUF 1,950 per month per employee) would be abolished.

•The percentage based health tax would increase from 11% to 27%. This change is detrimental to the situation of private individuals realizing other income.

• The amount of rehabilitation contribution would increase to fivefold of the current amount (in 2009 HUF 192,900 per capita per year, in 2010 HUF 964,500 per capita per year). This may result in significant increase of employment costs, especially in companies where the average wage is relatively low. (The contribution is payable after 5% of the headcount, less number of disabled employees). 1.6 Property TaxFrom 2010, new property tax would be introduced in Hungary, which would be payable on four different types of properties (residential property, water vehicles, aircrafts and heavy duty passenger cars). In this article I discuss the residential property tax, which affects the larger group of taxpayers.

 

• Subject: apartment, holiday home (or part of a building qualifying as apartment or holiday home) together with the building site (or part of the building site belonging to it), with a market value exceeding HUF 30 million (if the value is above threshold then the entire value falls under taxation).

• Taxpayer: the owner of the residential property on the first day of the calendar year. In the case of multiple owners, the owners are subject to tax according to their ownership rate.• Tax rate: up to tax base of HUF 50 million and 0.5% on the part of tax base exceeding HUF 50 million.

• Allowance: Taxpayers with three of more children may decrease the tax payable by 15% of the tax with respect to the third and further children.

• Reporting obligation: Private individual taxpayers would have to assess and report property tax in their personal income tax return, non-individual taxpayers would have to assess and report property tax in their corporate income tax return. Private individuals subject to property tax would have to prepare their personal income tax returns themselves (i.e. they may not request tax assessment by the employer).

 

1.7 Value Added TaxNew place-of-supply rules – still not in the billDespite the new place-of-supply rules are to be applied in all EU member states from 1 January 2010, the present bill still does not contain the amendment of the Act on VAT in this respect. According to the new place-of-supply rules, as a main rule, the place of performance of services will be determined by the registered seat of the recipient of the service (currently the registered seat of the service provider determines the place of supply). Therefore, further amendments of the Act on VAT can be expected this fall. 1.8 Transfer Tax and Gift TaxTransfer tax rates to decreaseThe general real estate transfer tax rate would decrease from 10% to 4% (the current rate is exceptionally high in comparison with international practice). Furthermore, if the market value of the real estate property exceeds HUF 1 billion, the transfer tax rate on the exceeding part would be 2%, but maximum HUF 200 million. Acquisition of residential property would be subject to 2% transfer tax up to HUF 4 million, and 4% (instead of the current 6%) on the market value exceeding the above limit. Sale of companies holding real estate to be taxableFrom 2010 the acquisition of shares/quotas in companies holding real estate in Hungary would fall under the scope of the Act on Stamp Duties, provided that ownership reaches or exceeds 75% in the company holding real estate. Shares owned by close relatives or related party enterprises would have to be consolidated. The base of the transfer tax would be the portion of the value of real estate properties that falls on the shares of the acquirer. (The acquisition of shares in the frame of preferred transfer of assets could remain exempt from transfer tax if certain conditions are met.) 2 Last remarkThe information in this article is correct to the best of my knowledge and belief at the time of going to press. Please note that the information in this article is not intended to be relied on as tax advice and cannot replace consultation with tax advisors.

 

For further information please contact Ernst-Jan de Roest, Ernst & Young, Central and Eastern Europe desk, office Amersfoort, the Netherlands by e-mail Ernst-Jan.de.Roest@nl.ey.com.

 

3 Attachment The planned tax law changes for 2010 contain several significant changes. In this overview only the most important ones are highlighted:

• The base of the personal income tax would be the ‘super gross income’. At the same time, however, the personal income tax rates would be lowered, and the solidarity tax of private individuals would be cancelled.

• Several currently tax-free in-kind and in-cash benefits would become taxable.

• From 2010, the taxation of business entertainment costs and business gift would become more favorable. On one hand, these benefits would be exempt from personal income tax, but on the other hand they would not be deductible for corporate income tax purposes (i.e. 19% CIT would be applicable instead of the current 54% PIT +11% health tax).

• The lower employer’s social contribution rate (27%) already partly applicable from 1 July 2009 would apply to the total income from 2010.

• The rehabilitation contribution would increase dramatically (fivefold of the current amount) and it would be HUF 964,500 per capita per year. (The basis of the contribution would not change, i.e. it would be payable on 5% of the total number of employees which could be decreased by the number of disabled employees).

• To reduce the number of small taxes from 2010, the employer’s (1%) and the employee’s contribution (1.5%) would be incorporated into the social security and the individual health care contribution. Further, the cultural contribution would cease.

• The 4% solidarity tax of corporate enterprises would cease, but at the same time the corporate tax rate would increase and the taxpayers would be allowed to apply less tax base reductions.

• Corporate tax rules for financial enterprises would change favorably, e.g. they would be entitled to carry forward their tax losses already for the 2009 tax year.

• A new property tax would be introduced (four different tax types would be created within it, to separately tax real estate properties, high value vehicles, water vehicles and aircrafts).

• The transfer tax rates would significantly decrease, but the acquisition of shares in companies owning real estate properties would become subject to transfer tax.

• The gift tax on free transfer of movable properties between business associations would be cancelled (including the liability forgiven, receivables transferred free of charge and assumed debts).

• The rates of excise duty, vehicle tax and energy tax would increase.

• The administration of the local business tax would be transferred from the local municipalities to the state tax authority.

• Withholding tax would again be introduced for certain types of Hungarian source income of foreign residents.

• Compared to the current liabilities, stricter and higher tax liability would apply to income accumulated in the “offshore” companies, and income deriving from companies owning real estate properties for private individuals and business enterprises as well. As a result of the proposed changes, five current tax types would cease or would be incorporated into other tax types, while four new tax types would be introduced in order to tax properties. The system of payroll calculation may somewhat become more complicated, since the base for personal income tax and the contributions would become different. However, the calculation of the corporate tax base would be somewhat simpler.

If Parliament passes the tax law changes, the amendments would come into effect– as a main rule – on the day following the date of promulgation, but a number of amendments would become effective as of 1 January 2010, and some changes would come into effect from a different date.

Gepubliceerd in het magazine Hongarije in Zaken editie: 16. Bestellen? KLIK HIER.