Covered taxes 

The draft legislation defines taxes that are considered covered taxes, i.e., taxes that can be taken into account for the purposes of GloBE effective tax rate (ETR) calculations. The non-exhaustive list includes: corporate income tax, local business tax, innovation contribution, and energy suppliers' income tax.  

Observation: Local business tax and innovation contribution would not be recognized as income taxes for local GAAP purposes, which may impact CbCR safe harbor calculations. 

Knock-on effects 

Deferred tax accounting 

At present, Hungarian GAAP does not include a deferred taxation concept.  Based on the draft legislation, a simplified and elective deferred tax notion would be introduced for Hungarian companies.  

New R&D incentive  

In addition to the currently available R&D tax allowance rules (under which a ‘super deduction’ is available on selected R&D expenditures for corporate income tax purposes), a new R&D tax credit is expected to be introduced, which aims to be a qualified refundable tax credit (QRTC) under the Pillar Two rules. Companies may elect between two types of R&D tax incentives; this election could have further effects on other covered taxes as well. When applying the newly introduced tax allowance, additional rules would preclude the taxpayer from applying a tax base allowance under the R&D title, either in local business tax or in social contribution tax. 

The new R&D tax credit would come with certain limitations in contrast to the existing R&D tax base allowance. As for the recognized costs, the legislation narrows its range, as the direct costs related to certain contracted R&D services are not going to be considered eligible costs.  

Observation: The rules of other tax credits currently available in Hungary, such as the investment tax credit, are not proposed to be amended. This may indicate that these credits would not be treated as QRTCs, and therefore, potentially could significantly reduce the ETR of the Constituent Entities. 

Registration of not yet registered shares allowable until February 28, 2024 

Hungary operates an elective capital gains tax exemption regime, where investments held by Hungarian taxpayers can only benefit from the capital gains tax exemption if they have been registered with the tax authority upon their acquisition. According to the legislative draft, taxpayers subject to the global minimum tax would be given a one-time opportunity until February 28, 2024 to register their shares held that otherwise are not classified as registered shares.