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R&D activities in Hungary. Two in one – A value added way to tax optimization.

9 Jul 2014

One of the main priority fields of the Hungarian Government in relation to the 2014-2020 European fund programming period is the development of the expertise knowledge‑based economy. This means – amongst others –, that research and development & innovation (R&D&I) activities, as well as strategic R&D co-operation agreement with both companies and research institutes will be significantly expanded.

R&D activities in Hungary. Two in one – A value added way to tax optimization.
 Download

These R&D activities are performed in almost all areas of business, even if this is not always acknowledged by companies themselves. In Hungary the legal environment in case of R&D is highly favorable for tax purposes; costs incurred in relation to R&D activities may be deducted in several tax types. In the current business environment it is increasingly important that companies maximize regulatory benefits and optimize their tax burden by also considering R&D incentives.

International studies show that corporate R&D activities relevant for tax purposes may be several times higher than currently believed; therefore the amount of tax savings could be significantly higher than expected or calculated by the taxpayers.

According to international statistics, the following percentages – in proportion to revenues-, could be typically regarded as eligible costs incurred in relation to R&D activities in the following industries:

    • IT services app. 20%
    • High-tech manufacturing app. 15%
    • Pharmaceutical industry app. 10%
    • Telecommunication app. 10%
    • Automotive industry app. 6-7%
    • Chemical industry app. 5%

Moreover, several activities in the field of banking and insurance may also qualify as R&D activities. Furthermore, there are some industries where R&D activities are performed – in contrast to what companies typically assume like media, food industry, agriculture, or even metallurgy and construction.

Saving opportunities

Saving opportunities

The Corporate Income Tax Act provides several R&D incentives, e.g. accelerated depreciation, tax and tax base decrease related to direct R&D costs, R&D wage costs and royalty received, Development Tax Allowance for R&D related investments with eligible expenditure of HUF 100 Million at least. The local business tax base may also be reduced by direct R&D costs.

In addition to the above, tax allowance is also available on social tax for employers who employ R&D employees with Ph.D degree or above. The maximum amount of tax allowance is up to HUF 135.000 per month per R&D employee. Furthermore, the tax law codified in January 2014 allows the R&D costs to share between the Hungarian associated entities in terms of the deduction from the corporate income tax base, as well as certain R&D costs invoiced from foreign related party in frame of joint R&D activity.

Certification of Research and Development activities

As a new institution, to be able to decide whether certain services qualify as R&D activities, if yes, then what type of R&D – either a basic research, an applied one, or experimental development, and what rate is applied in certain types of R&D within the whole activity performed by the company, furthermore whether the performed activity qualifies as “own R&D activity”, in case of future projects there is a possibility of asking a ruling request from the Hungarian Intellectual Property Office, and the decision of the institution has binding force in front of all related authorities, the key decision-making authorities as National Tax and Customs Administration. The decision‑making procedure takes typically 30 days and submission of the request is subjected to a reasonable fee between EUR 200-400 payable.

Our services

Based on our industry specific advisor’s knowledge, we offer a wide range of R&D services – on the highest quality, but reasonable price – to our clients:

R&D scoping

R&D scoping

          • Preliminary review of the companies’ potential R&D activities
          • Identification of costs associated with the potential R&D activities
          • Preliminary estimates of tax savings available through the optimization of R&D incentives
          • Preparation of the application for R&D classification
          • Elaboration of the application strategy
          • Preparation and submission of the ruling request
          • Preliminary and posterior relationship management with related authorities – Hungarian Intellectual Property Office, Ministry for National Economy

Preparation of the R&D documentation

Preparation of the R&D documentation

          • Detailed analysis of the companies’ R&D activities
          • Detailed review and quantification of the costs related to the R&D activities
          • Preparation of a detailed R&D documentation/manual with a view to decreasing tax risks
          • Accurate assessment and quantification of the tax incentives available for the individual tax types

Services related to R&D grants

          • Preparing a Grant report about the eligibility check
          • Compilation of the grant application
          • Aftercare services during the realization and the maintenance period

Further related services

Further related services

          • Strategy development and structuring to optimize R&D incentives
          • Analysis and evaluation of the potential R&D activities of companies
          • Liaising and negotiation with the competent authorities
          • Filing requests to the competent authorities
          • Filing requests for binding ruling to the Ministry of Finance in order to minimize tax risk

The below model calculation demonstrates well that a significant tax savings can be reached through several years, even on a small scale (about 15% overall tax sparing based on the below model calculation):

Corporate tax  (CIT) – million HUF 2014
Profit before tax 250
– LBT decrease (without R&D) 12
 CIT base (without R&D) 238
CIT liability (without R&D) 23.8
With R&D tax base allowance
Profit before tax 250
– LBT decrease (with R&D)* 11
– R&D decrease* 48
CIT base (with R&D) 191
CIT liability (with R&D) 19.1
CIT tax saving 4.7
Local business tax (LBT) – million HUF 2014
Net sales revenue 600
LBT base (without R&D)** 600
LBT liability (without R&D) 12
With R&D tax base allowance
Net sales revenue 600
– R&D decrease* 48
LBT base (with R&D) 552
LBT liability(with R&D) 11
LBT tax saving 1

* Conservative estimation – R&D cost is 8% of net sales revenue
** No other LBT decrease item for simplicity purposes
Download –  R&D activities in Hungary. Two in one – A value added way to tax optimization.

 

Contact us
If you would like to learn more about cost saving opportunities inherent in the field of R&D, please do not hesitate to contact us:

 

László Icsu
Tax Manager
+36 1 412 3547
Laszlo.Icsu@accace.com

 

Accace Hungary
Váci út 22 – 24, 2nd floor, 1132 Budapest
+36 141 235 30
Hungary@accace.com

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Originally established in Central and Eastern Europe in 2006, Accace ranks among the leading outsourcing and consultancy providers in the region. Engaging over 600 experts, we have vast experience with handling small to large scale, multi-country outsourcing projects and providing a comprehensive range of our services to over 2,000 customers.

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