Tax Alert

Within the framework of the process necessary for the implementation and application of Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large domestic enterprise groups in the Union, the Hungarian Parliament has passed the Act on the Top-up Tax Ensuring the Global Minimum Level of Taxation and Amendments to Other Interrelated Tax Laws (hereinafter ‘Act’). The essence of the new Act can be summarized as follows.

According to the Act — and in line with the Directive — members of multinational enterprise groups or large-scale domestic groups that meet the annual threshold of at least EUR 750 million of consolidated revenue in at least two of the preceding four fiscal years will become subject to global minimum tax rules as of 1 January 2024.

The Hungarian government has opted to introduce a Qualified Domestic Top-Up Tax (QDMTT) through which the effective tax rate achieved by multinational enterprise groups or large-scale domestic groups shall be supplemented on a jurisdictional level by the aforementioned Hungarian group members to the prescribed minimum effective tax rate of 15%. Thus, the top-up tax amounts to the percentage difference between the effective tax rate and the 15% rate. This tax liability is to be borne by the Hungarian resident group members in proportion to their contribution to the cumulated net income of the group, calculated according to the Act. If, subject to certain conditions, the Hungarian QMDTT meets the safe harbor requirements, then global minimum tax liabilities may be regarded as complied with within Hungary, providing safe harbor from obligations for the parent company.

Income Inclusion Rules (IIR) and the newly introduced Qualified Domestic Top-Up Tax Rules (QDMTT) shall be applicable for fiscal years commencing after 31 December 2023, while Under Tax Payment Rules (UTPR) shall be applied one year later, for fiscal years beginning after 31 December 2024.

The new legislation gives an explicit but not exhaustive list of the taxes that will be considered covered taxes as defined by GLOBE. As such,  these taxes are eligible for determining the effective tax rate for global minimum tax purposes. Beyond corporation income tax, these taxes include local business tax, income tax on energy suppliers and innovation contribution.

The Hungarian Accounting Standard and the International Financial Reporting Standards (IFRS) can be applied for the determination of the qualifying income or loss and for the corresponding reporting obligations to be adhered to. The legislation allows for the application of the local accounting standard if all the Hungarian group members apply the standard to their calculation. However, if not all the domestic group members use a local accounting standard, or the fiscal year of the Hungarian group member differs from the fiscal year of the ultimate parent entity, the accounting standard applied by the ultimate parent for consolidation shall be used. Tax returns and the related reporting / compliance obligations can be fulfilled in either Hungarian or English. The payment of top-up tax liabilities is allowed to be settled in HUF, USD or EUR.

The Act also makes changes to the corporate income tax legislation concerning R&D expenditures in order to allow them to be regarded as a qualified refundable tax credit and thereby facilitate a favorable treatment from a global minimum tax perspective. Pursuant to this intention, besides the currently available R&D scheme (resulting in a tax base reduction) a new option will be introduced for certain research and development costs incurred in relation to basic research, applied (industrial) research, and development. The new option allows for a tax credit of up to 10% of certain R&D costs per project (in a maximized amount for each cost type), up to the overall tax liability calculated for the entity. This is granted for the fiscal year of the costs incurred as well as the following three fiscal years. Any credit left unused by the end of the third fiscal year can be indicated in the tax return and will be paid to the entity as cash or a cash equivalent from the tax authority. In case of opting for the new R&D credit scheme, R&D expenses may not be used to reduce the tax base for CIT, local business tax or social contribution tax purposes. It is possible to revise the choice of R&D treatment after the end of the sixth fiscal year following the fiscal year affected by the credit. Other existing tax credits are expected not to qualify for global minimum tax purposes.

A new option in the CIT legislation will be accessible, namely an opportunity will be open until the submission deadline of the CIT return (being a time-barred deadline), under which participations that had not been reported until 30 December 2023 can now be made reported. The fair market value of the participations in question should be reported as well, and the taxpayer should be able to support this value by an independent auditor or valuation expert. However, 20% of any non-realized gain on such newly reported participations is upfront taxable at 9% corporate income tax where no deduction or loss carryforward is available. In case of, for example, any subsequent sale such participations can be treated the same as those that had been reported under the general procedure (retrospectively as well), the reported fair market value deeming as acquisition value.

The regime of deferred tax assets and liabilities are introduced to the Hungarian Accounting Act as part of the new rules. This modification facilitates accumulated losses and their tax effect impacting subsequent fiscal years to be accounted for in the financial statements, and therefore makes them eligible for being taken into account at the effective tax rate calculations for global minimum tax purposes. The application of deferred taxes will be optional; the choice shall be indicated in the accounting policy.

The new Act has modified the general rules of taxation regarding registration obligations in relation to top-up tax rules, global minimum tax compliance requirements and sanctions applicable in case of a breach of them (on which a moratorium is provided until 31 December 2026, supposing the taxpayer has acted in good faith).