Tax law changes 2024 – Part One

Tax package 2024

The Autumn Tax Package, containing a number of amendments to the Hungarian tax laws, was published on 30 November 2023. Several legal changes entered into force already on 1 December 2023. The most relevant changes, including such to (corporate) income tax rules, the global minimum tax and changes following the termination of the US-Hungary double tax treaty are addressed in our first newsletter of 2024.

Personal income tax

Amendments following the termination of the US-Hungary double tax treaty

To remedy the disadvantages arising from the termination of the tax treaty between the US and Hungary, the tax package includes several legal amendments. The following changes came into effect from 1 January 2024:

• income from securities issued and interest paid by a resident of an OECD member state shall not be subject to the rules on income classified as „other”;
• a transaction shall be classified as a controlled capital market transaction if it is entered into with the assistance of a US-based money market service provider. This will preserve the possibility of offsetting the loss and the subsequent gain from the transactions in a given year;
• the rules on offsetting foreign source taxes shall now allow for a credit of foreign taxes if separately taxable income (e.g., dividends) is earned by a resident individual;
• the rules for performers and sportspersons have also been clarified. As in a tax treaty, the State in which an activity is carried out is entitled to tax the income from this activity, even if the income is not earned directly by the individual.

Benefits in kind and other benefits

As of 1 January 2024, the legislator’s simplification drive has changed the declaration and payment of fringe benefits and certain defined benefits. Contributions shall be now declared and paid in the quarter, in which the month of benefit payment falls rather than on monthly basis.

As a further positive change, starting 1 January 2024, tax-privileged gifts may now be made three times a year, rather than once per year.

As of 1 December 2023, wine products (bottled, with a protected origin) donated as a business gift or as a gift of small value in the context of catering will be considered tax-free. The donor must, however, keep records about the source of purchase and the manner in which the product is used.

Tax-free benefits

From 1 January 2024, a new feature of tax-free benefits was introduced. Employees or managers of a start-up company may acquire a share representing a membership right (e.g., a share in a business) either free of charge or at a discount, provided that the share is hold for at least three years.

Start-ups are a new legal concept defined as micro and small enterprises that have been registered for five years or less and not listed on a stock exchange, having yet to distribute profits and not created by a merger or division.

In order to increase participation, winnings from lotteries (e.g., lotteries, keno, etc.) will be tax exempt from 1 January 2024.

Changes to the consolidated income tax base

The criteria for receiving a tax credit as a young mother (under the age of 30) have changed. After 1 December 2023, a mother must submit a declaration stating the legal entitlement to the tax credit, the personal details of the child or foetus, including the start and end dates of the entitlement to the tax credit.

With respect to the supplementary family allowance, the definition of a “permanently ill or severely disabled person” has been also modified. Since the entry into force, individuals aged 18 and over who receive a disability allowance instead of the higher family allowance are also included. As such, they will be eligible for the higher family allowance as well.

Tax burden of self-employed persons

Proposed provisions aimed at simplifying the public tax burden for self-employed persons, were removed from the final bill, as the exact content of the necessary changes are still up to debate. As the proposed changes were only due to take effect from 1 January 2025, we expect to hear more about these reform plans in the future. If adopted, the proposed simplifications would have effect on the social contribution tax and social security obligations of self-employed persons as well.

Social contribution tax

The scope of the benefit for newcomers to the labour market has been restricted. As from 1 January 2024, only employees of Hungarian nationality and employees who are nationals of non-EEA countries bordering Hungary (Ukraine, Serbia) will be able to claim the benefit.  

Furthermore, as of 31 December 2023, the tax credit for social security contributions and the corporate income tax credit for research and development activities can be no longer claimed at the same time.

Social security

Posting of a third-country national

When a third-country national is posted from Hungary, the income earned in the month in question as consideration for the work performed is now considered part of the contribution base and also of the assessment base for social security contributions. Previously, a reduced contribution base rule applied in this case, according to which the contribution base was the basic salary, but at least the amount of the national average gross salary.

Corporate taxation

Tax relief for research and development activities

The autumn tax package has introduced a tax credit for research and development applicable as from 31 December 2023. The new tax credit serves as an alternative to the existing R&D tax benefits and is response to the additional global minimum tax. As the new R&D tax credit acts as a refundable tax credit, it is compatible with the tax recognized under the global minimum tax system and can be claimed there.

It is worth mentioning that the range of allowable costs is lower than the amount, which taxpayers could take consider under the previous R&D tax deduction scheme. From the 2024 tax year, the tax deduction can be claimed for basic research, applied research, experimental development activities and the associated direct costs. A reduction of up to 10 % of the eligible costs can be granted, but is subject to EUR-based ceilings. The reduction can be claimed in the year, in which it is incurred and in the following three years.

With the new R&D tax credit, the order in which tax reliefs can be claimed have also changed. The new R&D relief will be applied before any other tax relief. As such, the corporate tax may be reduced to zero.

One time opportunity for the retroactive application of the reported participation scheme

The amendment, in line with the introduction of the global minimum tax, creates a one-time opportunity for taxpayers to activate the scheme and notify the tax authorities of their participations/holdings in subsidiaries. If a participation classified as “reported”, its alienation after a 1-year holding period is tax exempt. Now, this one-time opportunity creates an amnesty for the so-far not reported participations to fall under the scheme with a retroactive effect if they are notified to the tax authorities by the filing of the 2023 annual corporate income tax return. Such shareholding will be classified as “reported” from 2023 onwards with gaining the right for a tax-exempt alienation. Upon the reporting, a one-time tax should be determined and paid at 20% of the hidden capital gain associated with the shareholding. This taxation; however, as belonging to 2023, will generate an advantage for the global minimum tax as well.

Development tax allowance

From 1 December 2023, the conditions for benefits based on approval by the European Court of Justice have been specified. Such approval may be required if the value of the investment created by the tax benefit reaches EUR 110 million (previously EUR 100 million).

Tax relief for energy efficiency investments and renovations

As of 1 December 2023, the system of tax relief for investments and renovations in the field of energy efficiency has changed. The amendments introduce the concept of “alternative investments and renovations”, which must be taken into account when determining the amount of tax relief. The maximum relief has been increased from HUF 15 million to HUF 30 million, whereby energy efficiency must be improved by 20 % in the case of renovation. In addition, number of detailed regulations and definitions in connection with the reduction have been clarified.

Controlled foreign companies

Following the amendments, the definition of the notion of the “controlled foreign company” has been defined according to more general rules, making Hungary less bound by its agreements with EU or EEA member states. As of the effective date, any foreign person whose permanent establishment is exempt or not taxable in its State of residence can be qualified as a controlled foreign company. Income earned by the CFC and expenses paid to it will be taxed less favourably. In some cases, special records/documents will be required. .

Costs and expenses incurred in business interest

As of 1 January 2024, the scope of costs and expenses not incurred in the interest of the business activity has been extended. Royalties and interest payments made to countries included in the EU list of non-cooperative countries and territories or classified as having zero or low tax rates will not be deductible.

Clarification of the definition of associated enterprises

Under the Corporation Tax Act, in certain cases, a 25 % shareholding or entitlement was sufficient to establish related companies. This was, however, only applicable to companies in a direct parent-subsidiary relationship. The amendment expands the definition of associated enterprises and in certain cases allows even a 25 % shareholding between sister companies to create a relationship.

Local business tax (HIPA)

The threshold for the value of tax liabilities above which local authorities can publish debtors´ details has been increased from HUF 100,000 to HUF 500,000 for debts over 90 days.

Concepts related to the mandatory packaging redemption system have been introduced in the law. From 1 January 2024, the net turnover and acquisition value of goods sold will be determined without the redemption fee being part of either, thus ensuring consistency with accounting rules.

According to the bill implementing the global minimum tax, from 31 December 2023, an entrepreneur who makes use of a corporate tax allowance for his research & development activities cannot deduct the direct costs of basic research, applied research and experimental development accounted for in the tax year from his local business tax base.

Accounting law

Mandatory packaging refund scheme

As of January 1, 2024, the new mandatory packaging refund scheme has entered into force. In this context, new rules for the accounting of recyclable products and products subject to refund fees were introduced.

Amendments related to the global minimum tax

Based on the law implementing the GloBE Directive in Hungary, subsidiaries and branches of  large global companies’ resident in Hungary may be subject to additional tax liability. This may include groups of companies whose annual turnover has reached or exceeded EUR 750 million in at least two of the four years preceding the tax year according to the consolidated financial statements of the ultimate parent company.

The company must submit a declaration within twelve months of the start of the relevant tax year. Following the declaration, a tax return for the GloBE additional tax must be filed. If another group member is obliged to file a return, the domestic group member is only required to provide information. The law entered into force on 31 December 2023 and is applicable for the first time for tax years starting after 31 December 2023.

Deferred tax

At the same time as the global minimum tax system, the so-called deferred tax, which is well known in the IFRS reporting system, was introduced into the Hungarian accounting regulations. Based thereon, deferred taxes can be recognised in the balance sheet as fixed assets or long-term liabilities, which will reduce or increase the income tax liability in the future. The application of the deferred taxes rules should be set out in the accounting policies and can be applied already for the financial year beginning in 2023.

Please note that not all regulations in connection with the global minimum tax could be discussed in detail in this newsletter.