The determination of the corporate tax base (general rules)
Írta: Tímea Kocsis
8 Sep, 2020

Do you have a business in Hungary or are you planning to start a company here? Then this is very important information for you.

In Hungary, the corporate income tax is uniquely low in Europe, it is only 9%!

Taxpayers with business activities in Hungary pay corporate tax on their earned income, which is uniformly 9% from 1st January 2017, which is also a very favorable rate regarding the whole world, so it is worth reckoning with foreign companies when planning taxes.

The tax base shall be determined on the basis of the profit before taxes shown in the accounting report of the current year in accordance with the adjustment items required by the law of the Corporate Income Tax. These adjustment items serve the protection of the tax base, certain costs and expenses in the accounting are not recognized by the law of the Corporate Income Tax (CIT); therefore, they must be adjusted. 

Typical tax base adjustment items (the list is not complete):

1. Loss Accrual

Deferred losses from the previous tax years may be recognized as a deduction from the profit before taxes up to 50 per cent of the tax base calculated without this.

2. Provision

Taxpayers with double-entry bookkeeping are required to increase their profit before taxes by the amount of the provision for the expected liabilities and future expenses in the tax year and the amount of the increase in the provision booked as other operation charges, while the other revenue from the use of those provisions reduces the profit before taxes.

3. Depreciation

The tax base is increased by accounting law accounted for the depreciation and reduces the depreciation according to the Corporate Income Tax Law.

4. Dividend share received (due)

Income received on such an item reduces your tax base if it comes from an unchecked foreign company.

5. Development reserve

According to the taxpayer’s decision, it can form a development reserve for its future investments. If you exercise this option, you reduce your profit before taxes by the amount transferred to the retained earnings reserve in the tax year and shown as a reserve on the last day of the tax year (development reserve), but not more than 50% of the profit before taxes and up to 10 billion HUF per tax year.

6. Fines, legal consequences

Increase pre-tax profit:

– a fine imposed in a final decision, payable for a breach of the law. (Penalty charged by the parties related to the contract, default interest according to the Civil Code does not qualify as a fine – thus a non-increasing item)

– consequences by the tax administration regulations, Act on the Order of Taxation, and Act on Social Security Benefits (penalty for default, penalty for late payment, tax penalty) as an expense, excluding the self-audit allowance

7. Basic research, applied research, experimental development

It is possible to reduce the profit before taxes in the taxpayer’s own field of activity – for own use or for order, or for direct costs incurred in a tax year on the basis of a research and development agreement with the received support reduced by 100 percent of its value.

8. Prices used between related companies

Affiliates are required to settle accounts with each other at normal market rates. If they deviate from this, i.e. they are accounted for at a lower or higher price, they are required to take the amount of the difference from the market price into account as an increase in the tax base.

9. Benefits of donations 

It reduces the profit after taxes by 20 percent of the amount of the donation provided to support the public benefit activity of the public benefit organization – in any form: money, assets, services, or 40 percent of the amount of the donation in the case of a permanent donation contract. Furthermore, 50% of the cost of a grant, benefit, asset or service provided to the Hungarian Damage Rescue Fund, the National Cultural Fund, the Compensation Fund on a voluntary basis, not on the basis of a legal obligation, or to a higher education institution within the framework of a higher education support agreement, but not more than the amount of profit before taxes.

Considering the above, the positive calculated tax base will be the base of 9% corporate income tax, which can be further reduced by the amount of support for visual team sports and filmmaking to a maximum of 80% of the calculated tax.

Grants under the title of support for visual team sports and filmmaking can be made to eligible organizations in the form of a tax provision from Corporate Income Tax advances or / or in the year-end Corporate Income Tax return at the expense of the annual tax. 

There is a separate systematic form for this, which must be sent electronically to the tax authority together with the related tax certificate, which was previously issued by the superior, control body of the supported organization in the name of the taxpayer’s sponsor.

In view of the above described facts, the deduction of the corporation tax payable is as follows:

+ Revenues for the tax year

– Tax year expenses, expenses

± Profit before tax

– Decreasing adjustment items

+ Incremental adjustment items

± Tax base

(+) Tax base x 9%

= Calculated corporate tax

– Tax credit

= Tax payable

If you are planning to allocate your business to Hungary, contact the ProacTeam Hungary for tax tips, and your tax advisors will be happy to guide you through the maze of tax laws.

How to avoid tax fines? Ask our tax advisor for help.

Would you support non-profit organizations? We can also help you with this, we will bring you together with the organization you want to support with the help of our partners, and we will also help you to write donation and sponsorship agreements in accordance with the law.

Ask for our quote today!

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