The deadline of 25 February 2021 is just around the corner, by which time micro, small and medium sized enterprises (hereinafter: “SMEs”) may submit their request for the 50% reduction of their local business tax (HIPA) advance.

In our earlier newsletter, we have already discussed that Government Decree 639/2020, promulgated on 22 December 2020 (hereinafter: the “Decree”), on the one hand provides for a 1% cap on the local business tax (HIPA) payable by SMEs in their tax year ending in 2021, and on the other hand, based on a declaration that may be submitted by 25 February 2021, SMEs can also receive a 50% reduction of their HIPA advance. As the above deadline is drawing closer, there is increasing uncertainty related to the practical application of the Decree, and therefore, we intend to concentrate on these in our present newsletter.

Section 1 of the Decree prescribes the HIPA rate capped at 1% for taxpayers that qualify as micro, small or medium sized enterprises, as defined in the Act on SMEs, with the exception that in their case, the threshold of net revenue or balance sheet total is not EUR 50 million or 43 million, but rather HUF 4 billion. This rule – also on the basis of the information published by the National Tax and Customs Administration (NAV) in its bulletin of 19 February 2021 – entails that from the point of view of qualification, all other conditions of the Act on SMEs must be applied:

• for the purposes of the qualification, the data of the last  consolidated financial statement – or in the absence of a consolidated financial statement, the consolidated data of the last financial statements of the enterprise and its partner and affiliated enterprises – must be taken into consideration, and
• if the values thus calculated, on an annual level, exceed or fall behind the employee headcount and financial thresholds, then the company only loses or receives SME status in case the values exceed or fall behind the relevant thresholds in two consecutive reporting periods (hereinafter: “two-year rule”), and
• as a general rule an enterprise cannot be treated as an SME if the direct or indirect share of the state or the municipality – based on the capital and on the voting right, separately or altogether – reaches or exceeds 25%.

By contrast, Section 2 of the Decree only makes the 50% HIPA reduction available to those enterprises that satisfy the criteria of having fewer than 250 employees and a maximum of HUF 4 billion revenue or balance sheet total on the basis of the following:

• in case of enterprises required to prepare a financial statement, on the basis of the last approved financial statement, prepared pursuant to Act C of 2000 on Accounting, available on the first day of the tax year starting in 2021, or in the absence of an approved financial statement, on the basis of estimated data,
• in case of enterprises not required to prepare a financial statement, on the basis of the revenue and headcount data of the tax year starting in 2020, and in case of enterprises starting their activities in 2021, on the basis of estimated data.

The difference in the phrasing suggests that:

• while the HIPA rate capped at 1% is only available to taxpayers that qualify as SMEs on the basis of their data consolidated on group level and with the two-year rule taken into consideration,
• the 50% HIPA reduction is available to all taxpayers that individually and only on the basis of the last financial report available on the first day of the tax year starting in 2021 – or in the absence of the above, on the basis of estimated data – fulfil the criteria of having an employee headcount of less than 250 persons and a revenue or balance sheet total not exceeding HUF 4 billion.

It is important to be aware of the fact that, in its information bulletin of 5 February 2021, the Municipality Government of Budapest expressly prescribes as a condition of the 50% reduction of HIPA that the taxpayer must satisfy the conditions set forth in the Act on SMEs, in such a way that the upper limit of the net revenue or balance sheet total according to Section 3 (1), point b) is HUF 4 billion. Further, it is also indicative that in its own bulletin, the National Tax and Customs Administration provides the information with general effect that the Decree does not prescribe any different rules than the provisions of the Act on SMEs concerning the aggregation of the data of the enterprise with the data of its affiliates and partner enterprises, and that these rules must also be applied when checking the eligibility for the tax reductions according to the Decree.

On the basis of the above, in order to avoid a fine, it is not worth interpreting the provisions of the Decree related to the 50% reduction of HIPA permissively, and therefore, our recommendation is that only such companies should submit their declarations for tax reduction , i.e. the 21NYHIPA form, until 25 February 2021 that are also eligible to pay HIPA capped at 1%.

We hope that you found our summary useful. If you have any further questions in connection with this topic, we are at your disposal.