A tax reform package will be introduced from 1 September 2006 which may affect foreign investors active on the Hungarian market. The changes are intended to help reduce Hungary's public deficit, raise revenue and also move the country closer to adopting euro in 2010.
Key changes are:
- Corporate income tax: from 1 January 2007, companies with a minor or negative tax base will be liable to a minimum corporate income tax payment of 2% of revenue (less the costs of goods sold and income from foreign permanent establishments). Some exemptions apply, especially during the pre-company period and during the first tax year. The minimum tax may be contrary to EU law: income such as dividends payable to a parent company in another EU member state should get a full tax exemption but would be included in the revenue subject to the minimum tax
- Solidarity tax: from 1 September 2006, a 4% solidarity tax is being introduced on all pre-tax profits of companies subject to corporate income tax. The tax base is not the same as for CIT but the result is not much different from increasing CIT from 16% to 20%.
- Capital gains exemption: no corporate tax will be payable on capital gains from holdings above 30% acquired on or after 1 January 2007 in any Hungarian or a non-Hungarian resident company, as long as they are notified to the Hungarian tax authorities within 30 days and held for at least two years. No deduction is available for any loss incurred on the disposal of such a holding.
- VAT: from 1 September 2006, all activities and services currently subject to the 15% preferential rate of VAT will move to the general 20% VAT rate. Goods and services subject to the 5% preferential VAT rate are unaffected.
- VAT: the VAT exemption for imported goods is now only available where the importer provides security for the amount of import VAT applicable to the imported goods. This protects against the goods being released into free circulation in Hungary and then sold directly to another EU member state.
- Local turnover tax: as this was to be abolished from 31 December 2007, currently, 100% (not 50%, as before) of the local turnover tax recorded as cost is allowed as an additional deduction from the taxpayer's corporate tax base. In the latest tax reform package accepted by the Hungarian Government in July this year, there is no indication, however, that local business tax will be abolished even though it is currently the subject of cases before the ECJ.
- Self-revision of tax returns: from 1 August 2006, no self-revision fee is payable on any tax returns submitted before 9 June 2006, as long as the tax payer decides to carry out self-revision on or before 31 December 2006.
- Tax underpayment: If, during self-revision, the taxpayer discovers a tax underpayment of more than HUF 50,000 (c. €178), they are automatically (without needing to submit a formal request) allowed between 12 and 60 months (depending on the amount) to pay the extra tax, as long as they do so by bank transfer to the designated bank account of the Hungarian tax authorities at the Hungarian State Treasury.
