What’s new in the autumn tax package for 2019?

According to the law amendment, income realized by taxpayers due to reversal of extraordinary depreciation – where the extraordinary depreciation was accounted for prior to the date of becoming subject to energy suppliers’ income tax – will not be subject to energy suppliers’ income tax liability. This amendment may be applied from the tax year beginning in 2018.

In the case of group taxation, it will be possible to reduce the energy suppliers’ income tax liability with the amount of development tax incentive and tax incentive for energy efficiency aimed investment and renewal projects, which were not utilized for corporate income tax purposes, but only up to 50% of the energy suppliers’ income tax, if certain requirements are met.

As of 1 January 2019, the tax rate of special tax for financial institutions will decrease in the case of credit institutions from the currently effective 0.21% to 0.20% - on the tax base exceeding HUF 50 billion.

The scope of financial transactions that do not trigger financial transaction tax liability will be further expanded. For example, from 1 January 2019, no financial transaction tax liability will arise upon payments executed between a private individual’s private bank account and their private account at the Hungarian State Treasury kept for the purchase of government securities.

As of early last year, the threshold of the maximum revenue and number of employees for paying taxes according to the rules on Small Business Tax (“SBT”) was increased. As a further step, a number of corporate income tax related rules and definitions will now be implemented in the SBT regulation.

Accordingly, the controlled foreign company (CFC) definition defined in the corporate income tax regulation will be added to the SBT act. Similarly, the SBT regulation will be amended so that if the main purpose of a transaction is to achieve a tax advantage, then the corresponding tax advantage cannot be applied.

As of 1 January 2019, if a taxpayer subject to the SBT will have a CFC person under its control; or if the amount of the taxpayer’s net borrowing costs will exceed HUF 939,810,000, the taxpayer will cease being subject to SBT – and thus, should generally be subject to the corporate income tax rules. This will apply in addition to the currently effective cessation rules.

The changes to the Hungarian fringe benefit system – generally called ‘cafeteria’ – adopted in the summer will remain in effect. Consequently, from 2019, employers may only provide SZÉP Card vouchers to their employees with beneficial taxation; and other widely used fringe benefits – e.g. repayment of housing loan or public transportation ticket benefit – will be taxed the same way and rate as wage income. However, a few types of fringe benefits will remain tax exempt, so the employer will be able to pay the kindergarten fees of the children of their employees, moreover they will be able to provide tax exempt tickets to sport and cultural events, such as concerts. However, vouchers for these types of events will become taxable.

Due to these changes, two types of reaction can be expected from employers. Companies may „abolish” their whole fringe benefit system from 2019 and pay the yearly ‘cafeteria’ amount as wage; or they may pay the previously granted amount as SZÉP Card vouchers only. As per the Hungarian Government expectation’s, the latter option can have a positive impact on Hungarian tourism.

There will be a minimal change in the area of „targeted services” – services ordered by the employer for the benefit of their employees from a voluntary fund – regulation. According to the new regulation, employees have to pay taxes after these benefits when they receive the actual services from the fund if the employer order these services from a voluntary supplementary fund. The treatment of services from voluntary pension and health funds will remain the same.

From an administrative point of view, a new and useful change will be introduced from the beginning of the next tax year. In case of group life insurances, employers will have the chance to ‘distribute’ premiums of these insurances – as an income element – among their employees equally. The legislation accepted in the summer included a more complicated system where the employers had to take into account for example the employees’ salary and age during the distribution of income. With the new regulations, this nearly impossible administrative task is averted.

Worker accommodation:

The term of worker accommodation will become somewhat wider. In the future the accommodation provided in a place – other than a flat – where the individual may only use one room, will be regarded as such. However, hotel rooms will not be regarded as worker accommodation. For example the accommodation provided to an employee in a dormitory will be regarded as a tax exempt benefit.

Loans for housing purposes provided by the employer:

From 1 of January 2019 the treatment of loans provided by the employer to buy or build flat will be treated in a simpler, more straight-forward way. Thus it will be decided in an easier way whether the employer has to pay tax on beneficial loans. However, in case of new loans the maximum amount of the loan is HUF 10 million, otherwise the employer will have to start paying taxes on the beneficial rate of interest – as a special type of fringe benefit.

According to the autumn tax package, the social tax rate will remain 19.5% as of January 2019. (This tax is payable by employers after the income of employees.) The first possible date for the introduction of the new, lowered tax rate of 17.5% is 1 July 2019.

Nevertheless, the package introduces two significant tax benefits.

Firstly, research centers will have to pay only half of the social tax after the employees who work in the field of research and development. Therefore, the wage cost of these research centers may decrease by 10% from 2019.

Secondly, the package contains incentives in connection with dismissed senior state employees. Namely, a business that will hire an employee who used to work for the government before and who is over 60 years of age, will not have to pay social tax up to four times of the minimum wage. Thus the employment of formal government employees could be cheaper by HUF 110 000 – 120 000 per month.

Employment of retired persons

The regulation adopted in the summer has not changed concerning the employment of retired persons. It means that pensioners and their employers will not have to pay social security charges if they entered into an employment relationship. A minimal change is that in case of the suspension of old age pensions – which happens in case of employment by the government – the retired persons still does not have to pay contributions. As a result of this provision, employers may provide a 45% higher net salary to retired persons from 2019 from an unchanged budget.

Based on the planned new regulations of the micro businesses’ tax, students will have to pay only a monthly tax of HUF 25,000 – instead of the normal rate of HUF 50,000 – even if they suspended their education provided that they did not reach the age of 25. However, most taxpayers – especially businesses providing services to the public – will regard the increase of the threshold for VAT exempt status an even more beneficial change in the regulation.

The amendment proposes a significant administrative simplification in the VAT deduction regarding passenger car rental services. Similar to the special rules for the maintenance costs of passenger cars, 50% of the input VAT charged on the incoming rental invoices automatically becomes deductible, without tracking the ratio of the private and business use of the rented passenger car in road records (given that all other requirements of VAT deduction are met). However, it remains possible to reclaim the VAT based on road records; therefore, it is important for the companies concerned to assess which option is more beneficial for them, taking also the administrative burden into account.

Regarding the repeal of the reduced VAT rate of the supply of new apartments, the amendment provides transitional rules which clarify the terms of use of the reduced rate after 31 December 2019. The reduced 5% VAT rate will remain applicable for the supply of certain newly built real estates until 31 December 2023 given that the Building and Construction Authority issued the related final construction permit until 1 November 2018, or in case a construction permit is not required by law the simplified registration procedure of the construction was initiated until 1 November 2018 at the latest.

In addition to the new rules of the former tax modification regulation issued during the summer, the amendment complements the rules of the vouchers’ VAT treatment applicable from 2019. It states clearly that the free of charge transfer of single-purpose vouchers may be regarded as a taxable transaction.

In connection with the lease of workforce, the amendment restricts the applicability of the reverse charge mechanism. According to the law wording, in case of workforce rental services, reverse charge mechanism will only be applicable in relation to certain construction and other similar works from 2021. In any other cases, VAT should be charged as per the general rules.

The threshold of opting for VAT exempt status will become significantly higher, it will be raised from HUF 8 million to HUF 12 million. Consequently, this threshold will correspond with the upper threshold of the KATA.

The proposal aims to resolve the long-standing issue concerning the release by the customs authorities of comprehensive security provided in the form of an undertaking. According to the proposal, the customs authority would retain the funds provided for such security for a period of one year, compared to the current 3 years.

The draft legislation proposes to allow customs representatives to engage ‘subcontractors’, who, in addition to the special provisions introduced by the bill, would have to comply with the provisions on subcontractors and agents within the meaning of Act V of 2013 on the Civil Code. Authorised Economic Operators would receive further benefits: under the proposal, the customs authority could supply certain Authorised Economic Operators with information on risks concerning their customs operations to reduce administrative burdens and expenses for both the economic operators and itself.

According to the law amendment, the Accounting Act – following the international practice – will handle the business unit transfer as one transaction from the beginning of FY19. Hence, income (profit) generated upon a business unit transfer will need to be recorded as other income from 1 January 2019, while on the other hand, if a loss is realised, it will need to be shown as other expense. Further, companies will need document the book values of derecognised assets and liabilities by balance sheet items in the notes to their annual financial statements. In this context, the Accounting Act will be amended with a business unit definition similar to the ones of the corporate income tax and VAT legislation.

Effective from 1 January 2019, the following major changes are introduced regarding the regulation related to Employee Share Ownership Programs (“ESOP”):

1. It is made clear that the subject of the ESOP may only be ordinary shares representing ownership rights or other securities vested with similar investor risks (and rights connected to the aforementioned two categories);

2. Several changes aim to underline the long-term employee incentive motive of the scheme (e.g. it is set forth that the ESOP has to be in force for at least 24 months and furthermore, a minimum security holding period – by the ESOP company – of 12 months is also implemented and may only be overridden on an exceptional basis). Such obligatory minimum holding period will be extended to 2 years by 1 January 2021;

3. From now on, the ESOP's founder may transfer its ESOP shareholding to the employees for no consideration;

4. Subject to the nature of the vesting conditions, their fulfilment has to be supported among others by disclosed financial statements, industry measures or the stock price of the ESOP’s founder’s securities; and it is also made certain that it is the founder that can modify (or cancel) the remuneration policy;

ESOPs initiated before the above amendments enter into force, but after 1 January 2018, are granted a 6-months grandfathering period, meaning that they have to comply with the new rules by 30 June 2019. On the other hand, ESOPs operating based on a remuneration policy entered into force on or before 1 January 2018 do not need to comply with the new rules.

The most important changes regarding tax procedures are the following:

1. According to the tax package, the maximum amount of default penalty – to be levied due to failing to fulfil; or insufficient fulfilment of the top-up liability for corporate income tax, local business tax and innovation contribution purposes – will decrease from the current 20% to 10%.

2. As of 1 January 2019, performing a tax audit will be compulsory in the case of companies – where companies established without a predecessor within 4 years are excluded – whose annual net sales revenue exceeds HUF 60 billion in two consecutive tax years, while having zero or negative profit before tax in the respective years.

3. According to the amending act, the Act on Rules of Taxation will apply the same definition of related party which is applied for corporate income tax purposes.

4. Taxpayers may face penalties in accordance with the general penalty rules set in the Act on Rules of Taxation if they fail to publish or incorrectly publish significant information in their notes to their annual financial statements, or if they violate any policy prepared based on the provisions of the Hungarian Accounting Act.

5. In the case of reliable taxpayers, the maximum amount of penalty that can be imposed by the Tax Authority will need to decreased by 50% even in the case of prescribed fixed penalty amounts.

6. n certain special cases, administrative deadlines will change, e.g. the time period of performing the supplementary information request, or test production (where relevant) will not be included in the normal 30-days tax administrative deadline.

7. Further, the possibility of preliminary consultation with the respective Ministry’s representatives in connection with the submission of a binding ruling request will be terminated.