A new penalty tax against concealed employment, broader tax liability for foreign taxpayers in Hungary and more favourable rules concerning local business tax and VAT are some of the main features of the amended tax legislation for 2021.
In recent years, it has become increasingly common for larger companies to outsource certain types of work to micro-enterprises. These micro-enterprises, often consisting of just one person, are required to pay a low flat-rate tax (the so-called KATA taxation of micro-entrepreneurs), allowing significant tax and social security savings for the principal (quasi employer).
Starting from 2021, more stringent rules apply, reducing the possibility of such tax savings. A new penalty tax at a rate of 40 per cent has been introduced on invoices issued by micro-entrepreneurs containing:
The 40 per cent tax is to be paid by the principal if it is registered in Hungary. If the principal is a foreign person or entity, then the penalty tax is to be paid by the micro-entrepreneur. The new regulations also oblige the micro-entrepreneur to inform the principal in writing that it is registered under the KATA taxation system when entering into a contractual relationship. Already existing contracts with KATA micro-entrepreneurs are to be identified by January 15, 2021.
As based on the above, businesses should review their agreements with KATA micro-entrepreneurs to make sure that they identify them as such in the first place and also in order to adjust the contractual conditions so that they can avoid the 40% penalty tax.
The purpose of the new rules is to enable all taxation possibilities included in double taxation conventions between Hungary and other states to be applicable. Some taxable scenarios as based on double tax agreements did not lead to taxation in Hungary, due to the lack of corresponding internal legislation.
The new amendment to corporate income tax legislation extended the concept of a permanent establishment. According to the changes, if a double taxation agreement between Hungary and another state contains less favorable rules concerning the concept of permanent establishment than Hungarian law, then the prior rules shall prevail.
According to the new rules, services provided by foreign companies in Hungary are subject to tax from 2021, even if the service is not furnished from a permanent establishment in Hungary. Thus, if an employee or other natural person employed by a foreign company renders services in Hungary for more than 183 days, the foreign company is liable to pay corporate income tax in Hungary in respect of these services, even if the company does not have a permanent establishment. In practice, the provision concerning services mainly affects Czech and Slovak companies operating in Hungary. Tax conventions with most other countries do not allow taxation just based on services, with some Far Eastern countries, e.g. China, as the main exception.
Due to these major changes affecting double taxation agreements, it is advisable for foreign taxable persons operating in Hungary to revise the possibility of additional tax scenarios as based on a permanent establishment or services tax.
The tax pre-payment obligation for local municipality tax at the end of the year has been abolished. Businesses can file their local business tax return on a single standardized form to the state tax authority.
Another favorable provision is the abolition of tax on temporary business activities. However, business activity for more than 180 days remains to create a permanent establishment.
Companies with multiple branches share their tax base and vehicles leased on a long-term basis must be taken into account in the proportion of personal expenses per head office or site, thus eliminating a loophole in taxation.
The new amendment now specifically states that transfer prices apply to local taxes, although in practice the usual market price has always been applicable in relation to local taxes.
The tax base of VAT can be retrospectively reduced for uncollectible receivables even if the customer (debtor) is not subject to VAT.
The e-commerce VAT package of the European Union has been included in the Hungarian VAT regulation, which, among other things, abolishes the tax exemption for imports not exceeding 22 euros. Starting from 1 July 2021, all goods ordered from abroad (non-EU countries) are subject to VAT. Accordingly, under the general principle VAT on distance sales is payable in the Member State of consumption.
The general reverse charge mechanism on temporary agency work is only available for construction and installation work concerning real-estate.
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