Group corporate taxation and transfer pricing adjustments in Hungary | News Flash

The relevance of this article lies in the fact that applications for establishing a group corporate taxpayer status must be submitted to the Hungarian Tax Authority (NAV) between 1 and 20 November each year (for taxpayers with a calendar year). The NAV approves the formation of the group and assigns it a group identification number.

The group taxation regime has been available in Hungary since 2019, and an increasing number of company groups are taking advantage of it to reduce transfer pricing obligations and simplify administrative burdens.

Below, we summarise the conditions, benefits, and transfer pricing implications of forming a group for corporate income tax purposes, as well as the effects on local business tax and innovation contribution.

Conditions for group corporate taxation

A group of corporate taxpayers can be established by at least two companies, with no upper limit on the number of members. The members may operate in the following legal forms:

• Business associations (except non-profit business associations)
• Cooperatives (with certain exceptions)
• European companies (SE)
• Unions
• Sole proprietorships
• Foreign entities qualifying as Hungarian tax residents
• Foreign enterprises operating through a Hungarian permanent establishment

A direct or indirect majority control of at least 75% of the voting rights must exist between the members.

Additional requirements include a common balance sheet date and a uniform accounting policy (under either the Hungarian Accounting Act or IFRS).

Advantages and simplifications

The most significant advantage of this taxation model is that transfer pricing rules do not apply to transactions between the group members for corporate income tax purposes:

• No need to prepare transfer pricing documentation
• No obligation to perform transfer pricing adjustments
• A significant reduction in administrative workload

The group representative is responsible for submitting the corporate income tax return on behalf of the entire group, under the group’s identification number.

For other taxes (e.g. local business tax, innovation contribution, VAT), the members continue to act as individual taxpayers.

Group corporate taxation and transfer pricing

The arm’s length principle still applies

It is important to emphasize that the corporate income tax exemption does not eliminate the obligation to apply the arm’s length principle.

The group members must comply with the principle of proper use of rights, meaning that when assessing transactions for tax purposes, the appropriate arm’s length value must still be considered and substantiated.

However, preparing transfer pricing documentation as defined by the transfer pricing decree is not mandatory for intra-group transactions covered by the group taxation regime.

If members of the group conduct transactions with each other at prices deviating from the arm’s length principle, they must adjust their local business tax and innovation contribution bases, since for these two taxes, the arm’s length principle continues to apply unchanged.

Transfer pricing adjustments and documentation obligations

As a general rule, group members are not required to prepare transfer pricing documentation or apply the arm’s length principle for transactions within the group under corporate income tax.

Exceptions apply to transactions originating before joining the group that are still ongoing after membership begins.

For transactions with related parties outside the group, the transfer pricing documentation and data reporting obligations remain in effect, and these are fulfilled by the group representative.

It is important to note that transfer pricing documentation and data reporting represent two separate tax obligations. Data reporting applies only to related party transactions outside the group.

Local business tax and innovation contribution

While group members are exempt from transfer pricing rules for corporate income tax, they must continue to apply the arm’s length principle when determining their local business tax and innovation contribution bases.

When determining these tax bases, group membership cannot be taken into account — each member must proceed as if they were not part of the group.

During tax inspections, the tax authority may request evidence of the pricing applied in transactions between the members. Therefore, preparing a benchmark study to demonstrate that the transactions were at arm’s length is highly recommended, even though it is not mandatory.

Exits, mergers, and other special cases

If a member leaves the group, its transactions must again be treated according to transfer pricing rules.

In the case of a merger, the legal successor — if it meets the necessary requirements — will automatically become a member of the group, and the income of the merged entity must be included in the corporate income tax return for the relevant year.

Summary

Choosing group corporate taxation can result in significant administrative simplification and tax savings, especially through exemption from transfer pricing obligations on internal transactions.

However, for local business tax and innovation contribution, compliance with the arm’s length principle remains essential.

Before establishing such a group, it is advisable to carefully assess the eligibility criteria and potential benefits, and to seek professional advice to ensure full compliance with the Hungarian tax legislation.

Ildikó Hajnal-Balázs

Tax Manager | Accace Hungary

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