EY Tax News. The autumn tax package is before Parliament 10/2013

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1 10/2013 EY Tax News The autumn tax package is before Parliament On 18 October 2013, the Government submitted its proposal on amendments to tax and contribution rules with respect to 2014 to Parliament. Final votes are expected for the second half of November. In this newsletter we summarize the most important proposals relating to companies. However, these may change in the course of the Parliamentary debate.

2 income tax Amendments to the corporate Taxpayers will have the opportunity to decrease their pre-tax profit by the direct costs of R&D activities carried out by their related (within the scope of their own activities) subject to the Act on CIT. This is conditional on the R&D activity carried out by the related enterprise being related to the entrepreneurial (revenue generating) activities of the taxpayer and its related enterprise. Also, the taxpayer must hold the appropriate declaration issued by its related enterprise as follows. The declaration must include the direct costs of the R&D activity carried out by the related enterprise within the scope of its own activities in the tax year in question, and the amount that the taxpayer can decrease from its pre-tax profit in this regard. Rules on reported participation will also change. The 30% rate that provides the entitlement to report participation will decrease to 10% and the 60-day deadline by which the acquisition of participation must be reported will be increased to 75 days. Small- and medium-sized will also be able to decrease their corporate s by up to HUF 30 million in relation to purchasing the utilization rights of software products. For companies that transfer their registered seat to, taxpayers that qualify as tax residents as a result of transferring their place of management will have the opportunity to determine depreciation based on the market value of assets effective on the date on which resident status is obtained; instead of the acquisition value of the assets (which is the general rule). Self-revisions will no longer result in tax base adjustments (either decreases or increases). In this context, the Proposal includes a definition for non-material mistakes, which differs from the Act on Accounting. Based on the definition detailed in the Proposal, for micro- that prepare simplified annual financial statements, the upper limit of the non-material mistake will be 2% of the balance sheet total. Nonmaterial mistakes have to be reported in tax returns submitted for the tax year in which the mistake in question was discovered. Therefore, the corporate income tax liabilities of previous years do not have to be amended by self-revisions. If restaurant services used for promotional are paid for with debit or credit cards, costs and expenses accounted for in this respect may also qualify as eligible costs for corporate income tax even if the payer holds only the receipt issued on the transaction, provided that the services are used for business entertainment specified in the Act on Personal Income Tax. Foreign persons that sell Hungarian real properties will have permanent establishments for corporate income tax. The actual economic presence of controlled foreign companies will not be able to be verified by investment activities. The corporate Foundations (including public will not be able to apply the beneficial provisions on establishing their corporate in the tax year in which they primarily qualify as economic-entrepreneurial organizations based on the act governing the operation of foundations. 2 EY Tax News

3 income tax If a non-profit business association primarily qualifies as an economic-entrepreneurial organization, the provisions of the Act on CIT relating to the termination of non-profit legal status will have to be applied. Corporate income tax allowance Based on loan agreements relating to tangible asset investments concluded after 31 December 2013, small- and medium-sized will be able to utilize 60% (rather than 40%) of the interest paid in the tax year in question as a corporate income tax allowance. The tax allowance cap remains unchanged at HUF 6 million. Employee securities plans will no longer have to be registered with the Hungarian Tax Authority. It will become easier to start such programs, since the condition that at least 10% of a company s employees must participate will be cancelled. Plans will have to be published in writing and these must be available to every employee. Employers will still be able to provide employees with securities free of tax up to the annual amount of HUF 1 million and subject to a three-year vesting period. The amendment will come into force on the 30 th day following the date on which the act is promulgated. Therefore, it is expected that employee securities plans can also be initiated under the new rules at the end of Pursuant to the transitional rule, it will be possible to involve employees who were not reported to the tax authority when registering the plan to recognized employee securities plans initiated before Conversion rules for As regards es, rules on conversions to HUF will be significantly simplified. As of 2014, employers will have to apply the exchange rate of the 15 th day of the month preceding the month in which the compensation is provided; while private individuals will have to apply the exchange rate effective on the 15 th day of the last month of the quarter in question (when paying quarterly tax advances) or on the 15 th day of the last month of the tax year (when paying annual tax liabilities). In respect of capital income, another significant simplification is that instead of various exchange rates effective on the dates of acquisitions or expenses, the exchange rate of 15 December will have to be applied when converting income received or expenses incurred in foreign currencies into HUF. Taxation of insurance schemes The definition of non-term insurance (i.e. that does not have an investment aspect) will change. This insurance type will only cover insurance policies from which no pecuniary value can be withdrawn without a claim being made. Insurance types on which the fees paid (and the related yield) restrict the insurance company s payments will not qualify as non-term insurance in the future. For permanent life insurance, no tax liability will be triggered if the insurance agreement is significantly changed or if the insured party is replaced. Therefore, tax on other income will only be payable when money is actually withdrawn. EY Tax News 3

4 income tax Other changes in respect of Foreign persons that do not qualify as disbursers under Hungarian legislation will also be able to provide tax free promotional benefits. Credit institutions will no longer have to pay public dues under the title interest rate discount provided that they do not charge interest on the credit/loan in order to restore the liquidity of an insolvent individual. (This provision is not applicable to credits/loans provided to dependent parties, such as employees.) Returnable, transferable vouchers will not be able to be provided as non-wage benefits or certain specified benefits, whether they are tax free or subject to tax liabilities. For, Hungarian companies that participate in the provision of income between a foreign parent company and the employees will be obliged to act as disbursers if they hold the data required for the fulfillment of tax liabilities. (Until now, this was optional.) The group of receivables that financial institutions can waive tax free to independent parties will be extended to any receivables provided the waiver takes place in compliance with the principle of equal treatment - for parties in the same situation. (Therefore, it will not be restricted to receivables deriving from loan agreements concluded with the security of a lien on a residential property.) Social security contribution of Employees that are third country nationals and qualify as foreign individuals, and that are on assignments of more than two years will be able to be exempted from Hungarian social security contribution liabilities if their assignment period was extended to more than two years for unexpected reasons; provided this extension is realized after the first year of the assignment period, and that the employee reports the extension to the tax authority. As a result of the previous transitional rules being amended, until 2015, third country assignees can be exempted from social security contribution liabilities while employed in. This is because the two-year period can be calculated from 1 January 2013, meaning that the social security contribution liability will arise on 1 January 2015 the earliest. Family tax allowance Individuals that have social security coverage but that are not able to utilize the entire amount of the family tax allowance (as their salary does not reach the necessary level) will be able to deduct an amount corresponding to 16% of their unutilized personal income tax allowance from their 7% health care contribution liability and 10% pension contribution liability (in this order). Utilizing the family tax allowance will not decrease individuals entitlement to social security services. Under the procedural rules proposed in respect of utilizing the family tax allowance, employers and disbursers that are obliged to determine tax advances will first deduct the amount indicated on the tax advance declaration from the base. Then, if deduction does not provide full coverage in order to utilize the family (tax base) allowance, the individual s contribution liabilities can be decreased by 16% of the remaining allowance. 4 EY Tax News

5 income tax Social contribution tax base The definition of base salary will change for the purpose of determining the tax base in respect of foreign assignments. Base salary shall mean the monthly average sum of salaries actually accounted for and paid in the year preceding the employee s assignment, based on his or her employment agreement, directly depending on the employee s performance and hours worked, and based on the employee s base salary or the salary scheme applied (base salary as defined for statistical accounting ). If no such information is available, base salary shall mean the base salary agreed for the month in question. When establishing the social contribution tax base, the income that forms the basis of the tax base will also have to be taken into account even if it is paid after the termination of the legal relationship that forms the basis of the social contribution tax liability. This kind of income shall be considered paid on the date on which the legal relationship was terminated. Tax allowance that can be utilized from the social contribution tax Companies operating in free entrepreneurial zones will also be eligible to the social contribution tax allowance if the beneficiary employees in question have a registered place of abode, which, for the last six months, has been: in the free entrepreneurial zone in which the employer is located in a free entrepreneurial zone within a maximum of 20 km from the zone in which the employer s registered seat is located, or if the employee lives in the same micro region in which the free entrepreneurial zone in which his or her employer is located. Periodic settlement for VAT Based on the Proposal, in relation to transactions recorded in periodic settlements, the last day of the period in question will qualify as the date of supply. (Currently, the date of supply is the due date on which consideration is paid.) However, for public utility service agreements specified in the Act on Civil Code, the date of supply will not change but will remain the date on which the consideration is due. Within the period specified by the legislation, taxable persons are obliged to adjust the input VAT related to tangible assets used within their company if the ratio of use of the assets in question changes. The Proposal also prescribes that intellectual property rights must be treated in the same way as tangible assets are treated. New provisions will be first applicable to intellectual property rights acquired after the date on which the provisions come into force. Unlike the current edition of the law, provisions relating to the subsequent correction of payable and deductible taxes will be regulated in the same section. In the future, receipts can also be issued electronically. EY Tax News 5

6 income tax Excise duty 6 EY Tax News related amendments are partly aimed at simplifying administration and decreasing the burdens on business entities. Therefore among other things tax warehouses will no longer be obliged to keep customer registers. Sanctions will become stricter in order to reduce abuses: if the collateral is not increased, it will be possible to suspend the licenses of tax warehouse operators and registered traders for 30 days, and the penalty amount that will be able to be imposed in the event of tobacco related infringements will significantly increase. The base of local taxes The Proposal does not contain any amendments on determining the local business tax base. There are some smaller clarifications relating to land tax and building tax. Among other things, land not exceeding one hectare will no longer be subject to land tax. Stamp duty exemption/liability Waiving dividends will not be subject to gift tax. In the future, Hungarian companies shall be considered companies holding real estate located in if they are business entities on whose balance sheet the value of real properties exceeds 75% of the book value of assets recorded on the balance sheet date. (Currently, this qualification depends on the condition that the principal activity of the acquired company must be real estate development, letting, management or trading.) Pursuant to the Proposal, preferred exchanges of shares, preferential transformations, preferred transfers of assets (in certain cases) and the transfers of real properties and participations between related parties will not be exempt from stamp duty liabilities if the acquirer s registered seat or tax residence is located in a state in which the corporate income tax rate (or the equivalent tax rate) is less than 10%, or where the income realized from selling participations is not subject to a minimum corporate income tax (or equivalent tax) liability of 10%. Real properties and vehicles acquired within the framework of closed-end financial leasing agreements will be subject to transfer tax liabilities considering that the transfer of ownership rights results from the leasing agreement. The tax base of controlled real The amendment of the act on controlled real is aimed at facilitating the establishment of such companies. Among other things, controlled real will have the opportunity to own more than 10% of the shares of business entities engaged in organizing building projects as their principal activity. In this respect, profits realized on the alienation of shares exceeding the 10% shareholding in business entities engaged in organizing building projects as their main activity are not exempt from corporate income tax liabilities. Sectoral levy on financial Financial exclusively engaged in group financing will not qualify as financial and thus will not be subject to the sectoral levy.

7 income tax Credit institution contribution Based on the proposed amendment of the act on credit institutions and financial, if a credit institution transfers its general risk provisions or a part of it to its retained earnings, it will become subject to a onetime tax liability of 19% of the amount accounted for as the decrease of general risk provisions (on the balance sheet date of 31 December 2013). In 2013, credit institutions are subject to a onetime contribution liability of 19% on amounts accounted for as the decrease of general risk provisions in relation to converting the stock of risk provisions specified in the legislation to capital items. The contribution must be reported and settled by 10 March Sectoral levy on energy suppliers As of 2014, companies subject to the sectoral levy on energy suppliers will have to pay tax advances. The procedure and frequency of tax advance payments will correspond to the rule specified in the Act on Corporate Income Tax. Green tax There will be various amendments to the green tax regulations. For example, a new provision will specify when new green taxable products are created during the manufacture and processing of certain products. The rules on reusable packaging will include a new opportunity. Entities that rent out reusable packaging within a rental system will not be subject to any green tax liabilities on renting out reusable packaging. In order to qualify for this opportunity the entities in question must operate a closed computer system through which product history can be tracked. If an entity intends to apply the rental system, the environmental protection authority will provide the license upon request. Introducing the legal institution of green tax warehouses will lift a significant burden. Green taxable products will be able to be stored or manufactured without any green tax being paid. Green tax liabilities will only be triggered upon the final use or when products are released for domestic circulation. Binding tax ruling requests Under the Proposal, requesting a binding tax ruling will be subject to a duty of HUF 5 million (or HUF 8 million if the ruling is urgent). For permanent binding tax rulings, the duty will be HUF 8 million. In urgent cases permanent rulings will have a duty of HUF 11 million, which is a decrease on the current duty. The authorities will introduce preliminary consultation with respect to binding tax rulings. This will provide taxpayers with legally controlled opportunities to have a consultation before initiating the expensive binding tax ruling request procedure. Every consultation will be subject to a duty of HUF 100,000. In the future, binding tax ruling requests will be one-level procedures. It will be possible to request that resolutions made in the course of these procedures be revised by the court. EY Tax News 7

8 income tax Future binding tax rulings will only be able to establish tax liabilities (or the lack of them) relating to the taxpayer that submitted the request. The administration deadline of binding tax ruling requests will be extended by 15 days (from 60 to 75 days). Tax audit methods In the course of tax audits and data collection procedures, the tax authority will be entitled to become familiar with the software and IT systems (and their contents) applied by taxpayers for bookkeeping and documentation processing. Top-up obligation If taxpayers failed to pay at least 90% of the expected tax liabilities when fulfilling their top-op obligation due to foreign exchange differences for reasons out of their control, they will not become liable to a 20% default penalty in this respect. Taxable persons not established in Under the Proposal, taxable persons that are not established or that are not obliged to establish themselves in based on the Act on VAT will be exempted from the obligation to register as taxpayers in. This exemption only applies provided either that the activities that these taxpayers carry out in only cover selling products that are subject to tax warehouse procedures in such a way that the products in question remain subject to the tax warehouse procedure, or that the customs authority declares that the products left the Community. Books kept in foreign currencies; The amendment of accounting rules will provide the unconditional opportunity to keep books and prepare financial statements in USD. In the future, the official foreign exchange rate published by the European Central Bank will also be applicable for accounting when converting certain items incurred in foreign currencies into HUF. 8 EY Tax News

9 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. The information in this newsletter is correct to the best of our knowledge and belief at the time of going to press. Please note that the information in our newsletter is not intended to be relied on as tax advice and cannot replace consultation with tax advisors. If you would like to include anyone from your organization to our newsletter mailing list, or would like your name to be removed from the list of recipients, please reply to our address (ey.tax@hu.ey.com ), or fax: (+36 1 ) Ernst & Young Advisory Ltd. All rights reserved. ey.com/hu For further information please contact: Botond Rencz botond.rencz@hu.ey.com Sevim Demirbilek sevim.demirbilek@hu.ey.com Róbert Heinczinger robert.heinczinger@hu.ey.com Zoltán Lipták zoltan.liptak@hu.ey.com Tibor Pálszabó tibor.palszabo@hu.ey.com Balázs Szölgyémy balazs.szolgyemy@hu.ey.com Péter Vaszari peter.vaszari@hu.ey.com Tamás Vékási tamas.vekasi@hu.ey.com Zoltánné Lucz edit.lucz@hu.ey.com In association with Dr. Vámosi-Nagy Szabolcs Law Firm szabolcs.vamosi-nagy@hu.ey.com