On October 12, 2012, the Hungarian government presented to the Parliament the proposal No. T/8750 concerning the modification of some tax regulations. The final modifications were accepted recently; the Tax Bill incorporating the above-mentioned modifications (hereinafter the “Bill”) was passed on November 19, 2012 by the Parliament.

CORPORATE INCOME TAX

Losses carried forward

Based on the new rules on losses carried forward, the criteria of the minimum 2 years activity for the possibility of corporate restructuring will not to be taken into consideration, if the successor company ceases to exist without legal successor within 2 years following the restructuring.

Taxation of intangible assets

As the definition of reported intangible assets will be extended to cover cases in which the taxpayer has produced the given intangible asset itself, rather than purchasing it, there will be a greater opportunity to report intangible assets.

 Miscellaneous

As for the promotion of development, taxpayers will be obliged to report the end date of the development project for the Minister of National Economy, which will report to the tax authority on a yearly basis.

As from 2012, while calculating liabilities, the amount of receivables is (was) deductible. However, based on the Bill, receivables from supply of goods and providing of services will be qualified as not deductible.

The definition of a controlled foreign corporation (“CFC”) will be extended: if a foreign state applies more tax rates, than the lowest rate will have to reach 10%.

VALUE ADDED TAX

Harmonization of invoicing

The Council Directive 2010/45/EU (“Invoicing Directive”) shall be applied in connection with the amendments in invoicing rules as of January 1, 2013. Amendments in harmony with the „Invoicing Directive” concern the following points:

For intra-Community transactions, invoices will have to be issued by the 15^th day of the month following the month of supply.

The mandatory data content of invoices will be extended. Currently, the invoice only has to show the tax number of the buyer or the user of the service if this party is obliged to pay the tax (i.e. in the case of reverse taxation) also including intra-Community acquisitions of goods. From 1^st January 2013, the tax number of the taxpayer acquiring the goods or services must also be indicated on the invoice in the case of comprehensive transactions if the amount of the recharged VAT reaches or exceeds HUF 2 million in a domestic VAT transaction.

In line with the Invoicing Directive, the application of electronic invoices will be subject to the consent of the party receiving the invoice. The requirement for electronic invoices will be amended so that a qualified electronic signature will have to be placed on electronic invoices instead of an advanced electronic signature and a time-stamp.

Recapitulative report and the compulsory data content of VAT return

In line with the above-mentioned amendments, in case the amount of VAT reaches or exceeds HUF 2 million, a new special recapitulative report shall apply as of 1^st January 2013.

Therefore, taxpayers acquiring goods and services must also indicate the tax number of the supplier of the goods or services, as well as the amount of the VAT recharged if the limit (i.e. HUF 2 million) is achieved as the aggregate amount of invoices accepted in a certain period from the same partner.

The VAT return must include in detail (1) the tax number of the partner; (2) the serial number of the invoice; (3) the tax base and recharged tax indicated on the invoice; and (4) the due date of the invoice or, in the absence of a due date, the date of issuance.

Miscellaneous

As an important simplification, as of 2013, in case of fulfilment of special conditions required, business line sales are to be considered as non-taxable transactions for VAT purposes.

In case of VAT refund for foreigners, it is possible to provide the necessary information and statements in Hungarian, in English, in German or in French as well.

PERSONAL INCOME TAX

Apart from two important changes, the Bill contains only minor amendments concerning personal income taxation.

Supergrossing will cease

As already indicated in the Bill on the Budget for 2013, the tax-base adjustment system (the so called “gross-up” or “supergrossing”) will cease completely as of 2013. Therefore, According to the Bill, as of 2013, personal income tax rate will be 16 % uniformly.

The adjusted tax base exceeding HUF 2.424 million will be eliminated; the modification will only have favourable effect on the incomes over HUF 202,000 per month, because gross-up has been applied over this threshold in 2012.

Insurance policies related personal income tax rules

The other important amendment concerns the almost complete transformation of the insurance policies related personal income tax rules; tax liability of business insurances will dramatically change. As of 2013, risk insurance paid by a payee will exclusively be tax-exempted (in respect of risk insurance, policy shall mean a personal policy – i.e., life, accident or sickness policy – that does not have a sum assured or a surrender value).

However, savings type insurances (that do not qualify as risk policies), where money can be withdrawn without a risk materializing or where the insurance company pays back the premiums plus a return when the policy expires, will be taxed, in contrast with the current rules.

Miscellaneous

The determination of tax assessment and the payment of tax on dividends received from foreign companies will be extended until the date of the tax return.

The scope of the family tax credit will be extended and – according to the general rules – the concerned provisions also shall apply to foreign nationals from outside the European Union.

DUTY

Transfer duty

Based on the Bill, the current double rate system, applied for the acquisition of residential property (2% up to a market value of HUF 4 million and 4% above the threshold) will cease and there will be a single, 4% levy rate.

Duty on inheritance and gifts

The Bill simplifies the current system of transfer duties: inheritance and gift duties will no longer have a progressive rate. According to the proposed amendment, the general rate of both inheritance and gift duties will be 18% next year. The rate will be 9% for immovable property.

The exemption from inheritance duty will be extended to the spouse of the deceased without regard to value. (Currently, exemption is granted only to the direct lineal relatives of the deceased, i.e., children and parents).

Procedural duties

Some of the procedural duties will be increased, as follows:

Enterprises applying for payment facilities or tax relief from the tax authority will have to pay HUF 10,000 (currently HUF 3,000).

The duty on liquidation procedures will be increased to HUF 80,000 (currently HUF 50,000) and to HUF 50,000 for bankruptcy procedures (currently HUF 30,000).

Registration in the register of liquidators will attract a duty of HUF 8,000 (currently duty free).

Young people purchasing their first immovable properties

The proposed changes are also favourable to young people purchasing their first residential properties. In the future, first time buyers under the age of 35 will receive an allowance from the transfer tax liability if the purchase price of the residential property is less than HUF 15 million. In this case the current allowance will be 50% of the tax liability. (Currently, the threshold value is HUF 8 million.)

LOCAL TAXES

Built-up of a national register

The Bill defines the built-up of a national register, also publicly available, that would contain information in connection with local tax rates, as well as tax allowances applied by the local municipalities. Based on the data provided by municipalities, taxpayers will be able to request information from this national register, to be set up by the Hungarian State Treasury.

Accounting in foreign currency

As for the tax declaration obligation of taxpayers keeping their books in a currency other than the Hungarian Forint, similarly to corporate income tax, the data of the declaration shall be converted by using the Hungarian National Bank’s exchange rate valid as of the last day of the tax year.

FLAT TAX OF SMALL ENTERPRISES and SMALL BUSINESS’ TAX

As the Parliament already approved the proposal introducing the above-mentioned two new taxes, aiming at the easement of small businesses’ operations, let us also summarize to you in the chart herein below the main characteristics of (1) the Flat Tax of Small Enterprises (“KATA”) and (2) the Small Business’ Tax (“KIVA”), which the concerned taxpayers can choose as of 2013.

Flat Tax of Small Enterprises

Taxpayers subject to the taxes

Companies with yearly revenue not exceeding HUF 6 million (i.e. private entrepreneurs, individual companies, limited partnerships or unlimited liability companies with only individuals as members).

Amount of the taxes

HUF 50,000 per month for taxpayers reported as full-time engaged person. HUF 25,000 for taxpayers with non-full-time engagement. (If the taxpayer enterprise’s yearly revenue exceeds HUF 6 million, the part of the income above the threshold is taxable by 40%.)

Declaration, payment

Payable by the 12^th day of the following month. Taxpayers have to keep analytical records on their revenues and are obliged to report them by February 25^th in the following year.

Taxes to be replaced (exemptions)

Entrepreneurial personal income tax, entrepreneurial dividends base tax or flat tax, corporate income tax, personal income tax, healthcare contribution, social contribution tax and vocational training contribution

Reporting the choice of the taxes

Between December 1 and December 31^st, 2012

Small Business’ Tax

Taxpayers subject to the taxes

Individual enterprises, unlimited liability companies, limited partnerships, limited liability companies, privately held companies, co-operatives and building societies, forest management associations, bailiff offices, law offices, notary’s offices, foreign companies, and foreign persons with a domestic place of management. (Criteria: (1) the number of employees cannot exceed 25 persons; (2) the income realized is not more than HUF 500 million; (3) the use of the company’s tax ID was not suspended during the previous 2 years; (4) the company’s Balance Sheet date is December 31^th; (5) the value of the total assets for the last financial year was not more than HUF 500 million.)

Amount of the taxes

The tax base shall be determined as the adjusted sum of the company’s cash based profit and the personnel payments. The tax rate is 16% of the tax base.

Declaration, payment

The company has to file its tax return till May 31^th in the year following the tax year in question.

Taxes to be replaced (exemptions)

Corporate income tax, social contribution tax and vocational training contribution.

Reporting the choice of the taxes

Between December 1 and December 20, 2012

ACT ON THE RULES OF TAXATION

Belated appeal

As of 1^st January 2013, the Hungarian Tax Authority will not judge the belated appeals as supervisory measure. Therefore, appeals will automatically be rejected without substantive examination if the appeal was handed in after the deadline or the appellant was not entitled to hand it in.

Tax authority certificates

The execution period for issuing tax authority certificates will be reduced from 8 days to 6 days.

Self-revision fee

According to the Bill, the self-revision fee may not exceed the total amount of default fines that would be assessed for the period between two filing deadlines (if the self-revision does not concern any additional tax liability).

Representation rules

The amendment introduces the institution of the mandatory representation (by an attorney, tax advisor, tax expert or certified tax expert) in the following proceedings: (1) binding ruling procedures; (2) procedures to determine the applicability of a binding ruling procedure; (3) procedures aiming at determining arm’s length prices; as well as (4) those initiated based on a request for a supervisory procedure by the minister responsible for tax matters.

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The newsletter contains general information. Therefore, its content may not be regarded as professional advice or comprehensive information for decision-making.

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