On 31 October, bills T/5893 “on the amendment of certain tax laws” and T/5877 “on additional taxes to ensure a global minimum tax level and amending certain tax laws in this context” were submitted to the Parliament of Hungary. These two bills propose to make comprehensive changes to our tax system and introduce a number of new legal institutions. In order to provide a more detailed and comprehensive picture of the proposed changes, the two bills are presented in a series of technical publications, the first part of which deals with corporate income tax.

How will corporate income tax (CIT) change?

Next year’s changes to the CIT Act will mainly affect tax allowances.

Development tax allowance

 The rules applicable to development tax allowance changed in several respects last year and then again this year, so there are fewer novelties in the autumn tax package. The proposed amendment would, from the day after its promulgation, reduce the number of cases where the tax allowance is subject to a decision by the Government based on the authorisation of the European Commission.

Until now, a development tax allowance was subject to authorisation if:

• the amount of state aid per municipality (including the tax allowance) exceeded the amount that could be granted for an investment with eligible costs in the HUF equivalent to EUR 100 million in present value, and
• the total amount of state aid applied for by an SME for an investment in Budapest exceeds the HUF equivalent of EUR 7,5 million in present value per taxpayer.

It is envisaged that this will be amended so that in order to qualify for the development tax allowance, an authorisation will be required:

• for investments with eligible costs in the equivalent of at least EUR 110 million in present value and only if the total amount of state aid (including the tax allowance) requested for the investment exceeds the following amounts:
• in the Southern Great Plain, Southern Transdanubia (excluding Baranya county), Northern Great Plain, Northern Hungary (excluding Borsod-Abaúj-Zemplén county and Heves county) and the Pest planning-statistical region (50%): the HUF equivalent of EUR 41.25 million;
• in the Central Transdanubia and Western Transdanubia planning-statistical region (30%): the HUF equivalent of EUR 24.75 million;
• in Baranya county, Borsod-Abaúj-Zemplén county and Heves county (60%): the HUF equivalent of EUR 49.5 million;
• the total amount of state aid requested by an SME for an investment in Budapest exceeds the HUF equivalent of EUR 8.25 million in present value per taxpayer.

The maximum amount of the transitional development tax allowance that can be claimed for investments aimed at the manufacturing of battery, solar panel, wind turbine, heat pump equipment and related components (i.e. investments of strategic importance for the transition to a net-zero emission economy), which was introduced this year, must be calculated on the basis of the current value of the investment from the day following the promulgation of the law, instead of the present value of the eligible costs of the investment. The amendment significantly increases the amount of tax allowance that can be claimed under this legal title, taking into account the current very high discount rate of 13.79%.

Tax allowance for investment and renovation for energy efficiency purposes

 A number of amendments to the tax allowance for energy efficiency investments and renovations (hereafter referred to as the energy efficiency tax allowance) will enter into force on the day following the promulgation of the law.

The concept of alternative investment or renovation, as a so far missing concept, will be introduced: an investment or renovation to be carried out by the taxpayer, which complies with the applicable EU standards and which the taxpayer would have also reasonably carried out in the absence of the tax allowance or other state aid, with a production capacity and lifetime similar to that of the investment or renovation on which the tax allowance is based, and which:

1. is in line with normal commercial practices in the sector or the activity concerned, but is a less energy efficient investment or renovation than the investment or renovation that the taxpayer would make;
2. the same investment or renovation to be carried out by the taxpayer at a later date;
3. an investment or renovation involving the maintenance of an existing physical asset; or
4. an investment or renovation involving the leasing of physical assets which are less energy efficient than those which the taxpayer is leasing.

In the context of the new definition, the scope and level of eligible costs will also be modified as follows:

The maximum amount of the tax allowance is planned to increase from the HUF equivalent of 15 million to the HUF equivalent of EUR 30 million.

New cases will be excluded from the tax allowance:

• if the investment or renovation is intended to support co-generation, district heating or district cooling projects, and
• if the investment or renovation is aimed at the installation of energy production equipment operating with fossil fuels (including natural gas).

The energy efficiency tax allowance also defines investments and renovations in buildings for energy efficiency purposes as a separate category. This tax allowance can also be claimed at the earliest in the year of commissioning or in the following tax year, and it can be used in the following 5 tax years, subject to the other rules of the energy efficiency tax allowance.

The basis of the tax allowance is the cost value of the investment or development that improves the energy efficiency of the building. Eligibility for the tax allowance follows a different logic than before. The tax allowance is available if one of the following conditions is satisfied:

• in the case of an investment in or renovation of an existing buildings, the improvement in primary energy efficiency is at least 20% compared to the situation before the investment or renovation;
• in the case of a renovation involving the installation or replacement of a building services system or an element of external space envelope, the renovation results in a primary energy efficiency improvement of at least 10% compared to the situation before the investment or renovation;
• in the case of new buildings, a minimum of 10% improvement in primary energy efficiency compared to the near-zero energy buildings threshold.

In order to qualify for the tax allowance, the taxpayer must have an energy performance certificate attesting the initial primary energy demand and its estimated improvement.

The amount of the tax allowance (together with the total amount of state aid claimed for the investment or renovation) is 15% of the eligible costs (35% in case of small enterprises and 25% in case of medium-sized enterprises), up to the HUF equivalent of EUR 30 million.

Tax allowance for research and development activities

In connection with the introduction of the global minimum tax rules, but not only for global minimum taxpayers, a new tax allowance for research and development activities carried out within the scope of the company’s own activities (hereinafter: “R&D”) will be introduced from 2024.

Instead of the R&D tax base reduction, a tax allowance will also be available in the future, based on the taxpayer’s choice for 5 years (to be made in the tax return in which the R&D tax allowance is claimed for the first time). During this period, only a tax allowance may be used with a view to R&D, and returning to the application of a tax base reduction is only possible from the 6^th tax year.

The tax allowance is limited to 10% of the eligible costs, up to a maximum of

• the HUF equivalent of EUR 55 million for basic research;
• the HUF equivalent of EUR 35 million for applied (industrial) research; and
• the HUF equivalent of EUR 25 million for experimental development,

by which the calculated corporate income tax can be reduced in the tax year of the occurrence and in the following 3 tax years, before any other tax allowance, possibly all the way to HUF 0.

The maximum amount of the tax allowance must be claimed each year, and any unused tax allowance will be paid to the taxpayer by the end of the fourth tax year (provided that its enforceable tax liability, as shown in the records of the state tax authority and calculated on a net basis, does not exceed HUF 100,000).

Eligible costs are the following direct (own) costs (as such term is used in accounting) of basic research, applied (industrial) research and experimental development:

• the accounting depreciation of the tangible physical assets used by the research and development organisation for the duration of the research and development project,
• the personnel expenses accounted for the research and development personnel to the extent of their employment in the research and development project, excluding expenses indirectly related to the research and development activity (also including, but not limited to, representation, severance pay, as well as salary for the termination period and related benefits),
• the costs and expenses of patents used in the research and development activity, and
• operating and operational costs and expenses incurred directly in the course of the research and development project.

In their tax returns, businesses using the tax allowance must provide data on the following, broken down by year:

• the eligible costs for the tax year,
• the amount of the new tax allowance accrued in the tax year, and
• the amount of the tax allowance used in the tax year that was accrued previously.

Given that this new allowance is considered as a recognised refundable tax allowance, it is not disadvantageous for the calculation of the global minimum tax.

The new R&D tax allowance cannot be used in combined with the R&D corporate income tax base deduction, the R&D local business tax base deduction, or the R&D tax allowance for social contribution tax.

Expenses incurred other than in the interest of the business activities

In addition to the tax allowances, there will be a number of minor changes to the rules on costs not incurred in the interest of the business. These include a new item on royalty and interest payments. From 2024, royalties and interest payments to non-cooperative countries and territories and to zero or low-tax jurisdictions will be added to the tax base in the interest of double non-taxation. An exception to this rule is made if the main purpose of the royalty or interest payment is a real economic or commercial benefit other than a tax advantage, the existence of which the taxpayer must qualify and document.

This summary is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.