On 12 October 2012 a bill introducing the 2013 “tax package” was introduced into the Hungarian Parliament. Further amendments to the package were proposed on 18 November and on 29 November 2012 the changes for 2013 were published in the Official Gazette. The legislation has introduced amendments to corporate taxation, individual income tax and other tax measures.

The most important features introduced by the new legislation regarding corporate taxation and individual income tax are summarized below.

Corporate Taxation

The definition of Controlled Foreign Company (CFC) has been revised in the new legislation.  Currently the taxpayer has the burden of proof in all aspects of the CFC legislation. Under the amended rules taxpayers will be exempted from the burden of proof in relation to the 10% indirect holding required to be an “actual owner” for the purpose of the CFC legislation. Also according to the previous CFC definition a foreign company was not regarded as a CFC if its country’s corporate income tax rate was above 10%. Under the new CFC definition, if the country of a foreign company has more than one tax rate depending on the amount of the tax base, and the lowest tax rate reaches the 10% threshold, it will be regarded as a CFC.

According to the previous regulations, only gains derived from acquired intangible assets were subject to exemption from tax. Under the new rules gains from the disposal of self-developed intangible assets will also be covered by the exemption. The 60-day reporting obligation and the 1-year holding obligation still apply, in line with the current exemption. According to the new rules, taxpayers will not be eligible for the exemption if the rules relating to intangible assets entitled to royalty income were used in respect of the alienation or write-off of the intangible asset in the tax year preceding the reporting obligation.

Currently, the minimum corporate income tax base is 2% of the annual aggregate revenue with certain adjustments. Under the new legislation 50% of the increase in the liabilities to members must be added to the minimum income tax base. This is measured by looking at the difference between the liabilities on the last day of the previous tax year and the average daily balance of the liabilities in the current tax year.

According to the new rules, capital gains on the sale or contribution in kind (disposal) of a holding in a  company will be exempted from corporate income tax if the shareholding in that company reaches at least 30% for at least 1 year and the shareholding was reported to the tax administration within 60 days from acquisition.

The expense in respect of revoked goodwill related to the disposal of a shareholding will be deducted from the capital gains, with effect from 1 January 2013.

In determining the debt/equity ratio, debt was previously computed on a net basis. Under the new rules the accounts payable from trade or services and credits on the accounts receivable from trade or services will be disregarded in calculating the amount of debt.

Under the current legislation a deduction of three times the direct costs of certain R&D activities is available for tax purposes, if these activities were carried out in partnership with an institution of higher education, the Hungarian Academy of Sciences or with a research institute. According to the new regulations, the deduction is also available for collaboration with a research institute forming part of the central budget or a research institute operating in the form of a corporation the majority of whose shares are directly or indirectly owned by the government.

Under the rules relating to company transformation and the carry forward of assets to a successor company, the tax rules require that a new member who had majority control of the predecessor company immediately before the transformation must acquire majority control of the successor company and that revenue must be earned from at least one of the activities of the predecessor company in the two years after the transformation. Under the new rules the pre-condition related to the earning revenue from the predecessor’s activity would not have to be met in cases where the successor terminates its business within 2 years after the transformation. This “revenue condition” would also not apply if the activity of the predecessor company was asset management.

 Personal Income Tax

The grossing-up rules for personal tax will no longer apply from 1 January 2013 and the effective personal income tax will be a flat rate of 16 % of the total income of the individual.

The conditions for the tax exempt treatment of pension service payments from voluntary mutual pension funds, employer’s pension service providers and from pre-pension investment funds have been changed.  Ten years’ membership will be required to consider these payments as tax exempt income, instead of the previous three year membership period. In the case of memberships initiated before 1 January 2013, the rules effective for 2012 remain applicable as a transitional rule.

No quarterly tax advances will be due on dividend income where this is received from certain persons who are not regarded as payers of the income. In the annual Hungarian personal income tax return, this dividend income should be reported and the tax liability paid.