New Rules on Interest Deduction

How to make use of the new possibilities for interest expense deduction?

The restrictive limitations to the deductibility of financing expense have been lifted in Hungary with effect of January 1, 2019. The new rules allow for an internationally generous tax base reduction, replacing the previous thin capitalization rules that used to be based on interest/equity ratio.

According to the general rule net interest expense not exceeding 3 million Euros per year is generally deductible for corporate income tax purposes. Net interest expense is defined as the difference between the interest income and the interest expense incurred by the taxpayer. Interest paid to credit institutions is also considered part of the net interest expense. In the case of group taxation, the rules apply to the group as a single taxpayer.

Deduction limits

Corporate taxpayers with net interest expense exceeding 3 million Euros (HUF 939,810,000) have the possibility to seek higher deduction limits allowed for by the law. Such taxpayers may deduct their net interest expense not exceeding 30 per cent of their tax base before interest, tax, and depreciation.

The main further exemptions from the limitations on the deductibility of interest expense are as follows:

• Loan agreements concluded before June 17, 2016
• Loans received to finance long-term infrastructure investments
• If the ratio of assets to equity of a consolidated taxpayer is equal to or higher than asset-equity ratio at group level
• Financial institutions, licensed investment firms, alternative investment fund managers, collective management companies of transferable securities, insurance companies and reinsurance undertakings
• Independent corporate taxpayers, that is taxpayers who are considered as separate taxpayers from the tax point of view.

Further options

In addition to the above exemptions, taxpayers are allowed to carry forward non-deductible net interest to subsequent tax years without limitation. Moreover, the law also allows for the carrying forward of the unused part of the tax deductible interest for the next five tax years.

In our opinion, the rules can be considered as generally favourable for groups and individual taxpayers alike. They are the result of a competitive tax policy which is also reflected in the general corporate income tax rate of 9 percent in Hungary.

For the sake of completeness it is to be mentioned that the Hungarian rules on interest limitation are compliant with the European Union’s Anti Tax Avoidance Directive (ATAD), reflecting measures of the OECD’s BEPS Action Plan.