The geographical location – right in the heart of Europe – and various aspects of the tax system and other investment friendly economic policies, make Hungary an excellent place for growing companies to expand and strengthen their presence in the highly competitive Central and Eastern European markets. Many fiscal and legal obligations can be unfamiliar to most companies seeking to establish themselves in Hungary. This makes it crucial to work with local experts from the beginning of the process.
In this article we will take a brief look at the corporate income tax in Hungary, and one of the more complex challenges companies must face, the local business tax.
Corporate Income Tax
At first glance, the general corporate income tax rate is one of the most appealing tax rates, at 9%. The same rate applies to certain industries, like real estate companies for example. On the other hand, energy suppliers are taxed at a significantly higher rate of 31%.
For both domestic and foreign companies, the tax base is calculated by considering the pre-tax profits, losses carried forward, royalties received, R&D costs, non-business-related expenses, declared assets, depreciation, provisions, and other permissible concepts. It is important to highlight that certain cases companies closing the tax year with no profit may still be subject to a 2% tax rate on revenue generated. In this case the company also has the option to present a detailed statement of the cost structure with the tax declaration as justification.
The submission deadline for CIT is May 31st for companies closing the tax year on December 31st. If the fiscal year differs from the calendar year, the deadline is the last day of the fifth month following the closing date.
Local Business Tax
The local business tax can be difficult to navigate for foreign companies establishing themselves in Hungary. Technically, the business tax is not considered an income tax and can be deducted from the CIT returns, but there are several factors that can make it a challenging procedure.
Local governments have various tax rates, but the tax may never exceed 2%, which is centrally regulated by the government. Companies are subject to regulations in each municipality in which they are active. This implies they must maintain regular contact and liaison with hundreds of local government offices, depending on the industry and activity of the company. As payment methods, channels of communication, and ways of working are different from office to office this fiscal obligation may require special and expert attention, particularly if a company has presence in multiple cities.
With a recent update of the tax regulation, effective on January 2019, local governments have received rights to introduce tax allowances or even exemptions on local business taxes to incentivize companies to open in their municipalities.