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Until now, Hungary has concluded over 80 double taxation conventions (so called: double tax treaties) that mainly follow the OECD model treaty’s terminology and structure. Since due to different national legislations, certain type of incomes may not be taxed in either of the countries, the treaties are also used against double non-taxation. The latest Hungarian double taxation treaties were signed with Saudi Arabia, Liechtenstein, Bahrein and Uzbekistan. Currently, the complete list communicated by the Hungarian tax authority does not contain the convention with Turkmenistan and the new, modified treaty with Luxembourg. Also, the updated treaty with the United States is not yet in force.
In the beginning of the next year the so-called Firm Portal Registration in Hungary starts operating, which is as the “brother” of the well-known Citizen Portal (Ügyfélkapu) fills an akin role, just for companies. The new system was brought to life to provide direct connection between business organizations and the government.
We would like to help regarding the registration with the information we gathered up in our current summary.
Because they are determining stocks in accordance to the definition of business organisations in the 2015’s CCXXII. law (E-administration law). According to this definition the Firm Portal (Cégkapu) registration is mandatory to every business legal entities seated in Hungary. Therefore, it is not applying to the ones who only have VAT registration. Sole entrepreneurs will still have to take care about their business administration via Citizen Portal (Ügyfélkapu).
From the beginning of next year, the business organizations have to be in touch with the government electronically. After 2018.01.01 the parties – both the entities and the authority – can send official documents only via Firm Portal (Cégkapu) and the authorities only communicate with them via Firm Portal (Cégkapu) too. The contact details of the Firm Portal (Cégkapu) must be shown in the company register.
The deadline for the Firm Portal (Cégkapu) registration was 2017.08.30 but there is a cooling-off period until the 31st of December, so there is not going to be any penalties imposed because of missing the deadline.
As long as there is no registration until the end of the year, the companies who did not registered should expect getting fines because their violation.
Practically the registration means the announcement of the Firm Portal (Cégkapu). First, an e-mail address is needed and it is worthy to check the inbox on a daily basis. It is recommended to create an e-mail address just for this purpose (for example: ). Second, identification procedure must be completed which easiest way if the CEO does it via his/her Citizen Portal (Ügyfélkapu) and after that only the details of the business organisation are needed. There is an opportunity to pick some employees who have access to check the mailbox, but cannot do anything in the name of the company.
The 451/2016. (XII. 19.) government regulation’s 89. § (2) clearly states that “In the name of a business organisation only the representative of the company can initiate the Firm Portal (Cégkapu) registration.” Therefore, as general rule neither an accounting company nor a tax advisory company initiate the registration. Providing a power of attorney to other person (including accountants and advisors) are applicable as well, but in this case the registration can be done only on paper base and not online.
If you have any other questions about the Firm Portal (Cégkapu) or you would need further information about the registration and the process of it, please contact us, our experts are glad to help!
It often happens that private individuals receive gifts during representational events, or receive other benefits that are not necessarily related to specific events, occasions (and neither have to be related with purchasing). Gifting to private individuals in Hungary have a very wide range, therefore in our current brief summary we are going to give a short overview about the most important details of these possible benefits and also about their taxation.
It is worthwhile to start with understanding the relevant legislation. According to the Act CXVII of 1995 on Personal Income Tax, we consider acquired assets from others (in any forms, including cash, equivalent cash-settled instruments or non-cash) as the income of private individuals. Non-cash class applies to especially to vouchers, valuable things, waived and assumed debts and discount interests. Regarding to the differing legislations in law, these three main categories can be laid down:
Those benefits are subject to general taxation, which can be classified neither as preferential nor as tax-free.
Taxation on these kinds of benefits is always determined by the basic underlying relationship in force between the parties. Therefore, if we give non-tax-free and non-preferential benefits to our employees, then it has to be subject to the same taxation as their salary. If this benefit is given to private individual with engagement contract, the taxation rules of self-employment should be accepted. If there is no relationship between the paying party and the beneficiary, then the rules of other incomes must be accepted to the benefit.
This category mostly contains the so-called certain defined benefits specified in section 70 of Act CXVII of 1995 on Personal Income Tax, but there might be other ones what we consider as preferential taxed benefits by other reasons.
Tax burdens on these benefits granted under this title always shall be charged to the paying party.
Tax burden on the below mentioned items:
The following benefits can be classified as benefits with preferential taxation:
Representation is related to the payers’ activity on catering and other event related services at business-, official-, vocational-, diplomatic- and faith events and also on national- and religious holidays.
It is important to mention, that if the circumstances and documents showing that the purpose of the event was rather entertainment than business, the benefit cannot be considered as representation.
Business gift is -regardless of the occasion and value limit- is relating to the payers activity on gifting (product or service given for free or at a reduced price as well as any voucher for these) at business-, official-, vocational-, diplomatic- and faith events.
We consider every product and service as a low-valued gift if its price does not exceeds the 10 percent of the actual minimum wage (in 2017, HUF 12.750) and only can be given three times a year. One main condition of this benefit, that the payer must keep records in favor of the application of this preferential taxation. The list must contain the type of the gift, the price, the day of ‘handover’ together with the info about the presented party. Attention: basically only can be given to employees and their close relatives, union member and their close relatives and certain apprentices during their internships. Exceptions are allowed only in special circumstances, when the beneficiary does not acquire any other income from the payer during the tax year.
Preferential taxation shall be applied on those benefits too which neither can be considered as business gifts nor as a tax-free business policy benefits, but undeniably serving advertising purposes. These are usually those benefits, which cannot be connected to any payment. E.g. gift raffle from among Facebook page likers. However if these benefits are subjected to the Act XXXIV of 1991 on the organization gambling, preferential taxation cannot be applied to them.
The Section 76 of the Act CXVII of 1995 on Personal Income Tax allows preferential taxation to gift raffles, which can be organized without permit. Gift raffles can be organized without permit under these conditions:
In case of gift raffle, the rules of Section 76 of the Act CXVII of 1995 on Personal Income Tax has to be applied, therefore 15 percent personal income tax have to be paid after the gross value of the benefit multiplied by 1.18, but there is no healthcare contribution paying obligation towards the payer.
Under certain conditions tax free benefits can be given to private individuals, which can be in the nature of samples of goods specified by law or as business policy benefits.
The law on personal income tax considerers as sample of goods those small units which serve only to demonstrate a particular product and which in view of their size or value cannot be used permanently. Sample of goods are often given to introduce a product to the audience.
This is one of the most common benefits given by the purpose of business policy, what can be given tax free under the following conditions:
The following promotions, benefits given by the framework of events and gifts can be given tax free for private individual business partners:
According to the general rules of the Act on Value added tax, if a company gives over a product as a business gift or as a promotion for free and they deducted the related VAT during the acquisition, then their VAT shall become chargeable. The only exceptions, if the product given away considered as a low-value product (its individual value does not exceeds HUF 5000) as a sample of goods, as their giveaway is not regarded as product sales, therefore it does not entail any VAT paying obligation.
However, from the perspective of corporate tax benefits recorded as business gifts, business policy benefits and benefits for advertising purposes are still considered as recognized costs.
If the taxpayer advertising its own product, service, activity, name or appearance then the taxable base shall be the directly incurred expenses, what are not necessarily the same as the definition of direct own-cost price defined in the Act on the Organization of gambling. Every expense falls within the scope of directly incurred expenses, which emerge during the publication directly such as the costs of ad materials or the costs of commercial production, editing and publishing.
The viewpoint of the National Tax and Customs Administration of Hungary (NTCA) about small business gifts is the following:
Although, if a company using its name/logo in order to identify itself and it does not serve any advertising purpose (for example name/logo on letter paper, business card, bill, envelope, work clothes or company car) then showing the name/logo on printed material (sort of publishing) does not result taxable situation.
If your company spends considerable amount on gifts and other benefits as described in this newsletter, we suggest that the practice should be revised from a tax point of view.
If you need further help, please feel free to contact us, our professional tax advisors at Accace would pleased to help you.
According to the Act on Personal Income Tax, the total dividend amount paid by limited liability companies to individuals should be considered as the income of individuals, thus public burden payment obligations arise in form of personal income tax and in general case healthcare contribution related to the paid amount. The Hungarian law regulates dividend payment at limited liability companies in Hungary, therefore in our current newsletter we are going to discuss the most important general issues and criteria, to beforehand answer the questions which possibly could arise regarding this topic.
Dividend payment is, when companies making payments to their members, in the actual financial year, using the profit after taxation of the current year and free accumulated profit reserves.
The taxed profit of the previous, already closed financial year should be considered as the basis, what should be added (or deducted in case of negative amount) with the value of retained earnings.
The total amount of dividend paid for individuals by companies shall be regarded as their separately taxed revenue; therefore they are liable to pay personal income tax and healthcare contributions based on it.
In case of limited liability companies, the members decide about the payment of dividends at time of acceptance of the annual report. According to the current legislations in force, except if the articles of association defined otherwise, the dividends should be paid from the company’s profit after taxation, in the proportion of primary stakes of the members.
According to the law, it’s a mandatory condition, that only those members are entitled to dividend payments, who are listed in the company register as members during the dividend-related general meeting. These members can receive dividend payments only to the extent of their already completed contributions.
Dividend cannot be paid in following cases:
In Hungary, limited liability companies are not obliged to make any notification regarding dividend payments. Related decision is included in the member’s resolution which will be part of the book of decisions of the company.
Unlike at the personal income tax, healthcare contribution is not payable in case of interim dividend payments, only based on the approved dividends, based on the effectively paid dividends from the profit after tax.
It can be observed, that after the paid dividend reaches a specified amount, related tax burdens are lower, due to the maximized amount of the healthcare contribution prescribed by the law (HUF 450.000).
According to the current legislations in force, the dividends and their extent can be determined based on the company’s annual report and members can receive their proportional share of profit after the financial year has been closed. As this is quite an extensive time, the law provides an opportunity for members to get an interim dividend payment before the end of the reference year. In case of limited liability companies, the interim dividend payments can be presented by the company’s manager/executive (if there is a supervisory board at the company, then according with their approval).
If the report after the interim dividend payments shows that the company has no opportunity for dividend payments, then the interim dividends should be repaid. In particular, this clause of the regulation protects the company’s creditors and vendors.
Please note that this current newsletter only covers the range of limited liability companies and only presents the most important parts and conditions. If you need more detailed information regarding this topic, please feel free to contact us, our tax advisors would be pleased to answer to your questions.
First of all, the definition of the permanent establishment and the establishment of business should be clarified. Unfortunately, there is not a unified glossary amongst the Hungarian laws which can serve as a base for some precise descriptions in laws. In the lack of such glossary, there is no other solution, but to respect the separate legislations’ own terminology in case of all regulation. In most cases, the legislations include the definitions in respect of the most important notions occurring in them, where not, there is a need to consider whether any other act considers to be the former background in law and if it includes the definition of the notion in question. If not, the secondary legislations will remain.
So the permanent establishment and establishment of business concepts should not be (just) examined in corporate law perspective but also from corporate income tax and value added tax point of view as well.
According to point 33, paragraph 4 of the Act LXXXI of 1996 on Corporate Income Tax (hereinafter referred to as Act on CIT) permanent establishment is a permanent business location, device or equipment, where and/or with which the taxpayer is engaged in business activities in whole or in part, regardless of the title under which the taxpayer is using it.
The term of permanent establishment includes especially the place of management, representative established with domestic seat, the office, the factory, the facility, the workshop, the mine, the oil or gas well, or facilities used for natural resource exploration, exploitation. The legal definition clearly highlights that the permanent establishment does not depend on the title of use, which is may be owned by the undertaking, but it can be rented as well.
Consequently, if the foreign company is in the possession of an office in Hungary, or has even just a rented, hidden work desk where it carries on business activity with the purpose to achieve corporate profit, this fact alone rises a permanent establishment and causes corporate income tax registration and payment obligations on behalf of the foreign company.
Of course, all rules must be applied in the light of international conventions. Thus, if there is a tax treaty to avoid double taxation between the state of foreign company and Hungary, then the contained provisions of permanent establishment should be applied. Here we note that the wording of permanent establishment recommended by the OECD Model Convention is almost completely identical to the one included in the Act on CIT.
According to point 2, paragraph 259 of the Act CXXVII of 2007 on Value Added Tax (hereinafter referred to as Act on VAT) permanent establishment is a geographically isolated area established outside of the headquarters established to economic activity for an extended period of time, where other conditions required for the stand-alone continuation of the economic activity – independently from the seat – are actually available. Thus if the company is in the possession of above mentioned physically existing place, then it will have registration obligation (also) according to the Act on VAT, i.e. a tax number should be requested in Hungary.
However the VAT is specialized in the sense that there are cases when the foreign company must obtain for a tax number in Hungary, despite the fact that there is no permanent establishment from VAT point of view. The reason is that VAT liability can not only arise in connection of permanent establishment, but simply regard the nature of single transactions (due to the place of performance).
We note that even the structure of the tax numbers can be different depending on the fact if they were requested in connection with permanent establishment determined by the Act on VAT or Act on CIT (or both). While the last two digits of tax number requested by taxpayers only having permanent establishment under Act on VAT, is in each case “51” (KAIG), the tax number of taxpayers having permanent establishment under Act on CIT, contains the site code of the relevant territorial tax authority. However, in the last case only if the permanent establishment exists physically and not only due to the so-called “virtual permanent establishment” because of dependent agents.
It is evident that both the Act on VAT and the Act on CIT and all the tax treaties define the cases when a foreign company should apply for a tax number in Hungary.
After done, we could stop… we might think. Unfortunately, no. This picture is tinged (overshadowed) by the Act XXIV of 1988 on the investments of foreigners in Hungary (hereinafter referred to as “Inv. of for. in Hun.”).
Point c, paragraph 2 of the Inv. of for. in Hun. aligns, which cases are specified by the law. Accordingly, foreigners’ economic establishment in the territory of Hungary means the facilities, premises, office, shop or other places, equipment or means of fixed equipment used to perform economic activity carried out effectively and durable, independently, commercial scale – regularly, to achieve profits beside economic risk-taking.
Under the law, determined in point 1, paragraph 3, foreigners may carry out independent, business-like economic activity in the territory of Hungary only in one of the following forms:
Accordingly, in principle economic activity can be performed only in form of any type of establishment prescribed by the law.
However, the same paragraph (2) includes some exceptions to the general rule.
In case the foreigner does not employ employee inland (which exposure is valid also for the employment of foreign employees’ secondment or posting to Hungary), then the following activities can be carried out without the obligation of creating a Hungarian form of business:
Under certain conditions it is possible to continue economic activity without permanent establishment, however the conditions are even limited. As mentioned above, if the activities carried out by a foreign company in Hungary cannot be categorized into any of the activities listed above , then in principle the foreign company must be settled in Hungary, regardless of whether it has an employee in Hungary or not.
Of course, this legislation should also be applied in accordance with the relevant international conventions, as stated in paragraph 6. Thus if it is provided otherwise by the applicable international treaty or the general effective, directly applicable legal act of the European Union, the provisions contained therein should be valid.
Therefore, the permanent establishment defined by the relevant tax treaty on avoiding double taxation must be examined in each case, because it is feasible that although according to the Inv. of for. in Hun. settlement obligation arises for the foreign firm, the activity performed does not create a permanent establishment in Hungary according to the tax treaty. But more interesting is the case when according to the tax treaty permanent establishment arises for the foreign company, since in this case it also must be examined whether according to the Inv. of for. in Hun. also arises permanent establishment obligation. It cannot be stated that if a foreign company has a permanent establishment under the tax treaty in Hungary, then its activity will consider as durable and long lasting performed also according to the Inv. of for. in Hun. In fact, even if it is considered as durable and long lasting performed, further investigation is needed as the activity could belong to one of the exceptions. However, the assessment is complicated by the general interpretation, which according to if an activity causes permanent establishment according to the tax treaty, then it cannot be treated as temporary and is to be considered as sustained and regular according to the Inv. of for. in Hun. as well. Assuming, but not allowing the correctness of this interpretation, we realize the contradiction that applying related rules of the tax treaty and Rules of Taxation, there is a theoretical possibility to fulfill the corporate income tax obligation in the possession of a tax number but without the presence according to the Hungarian company law, however, due to the strict rules of the Inv. of for. in Hun. such cases are virtually inconceivable. As a typical example let’s imagine a construction which exceeds one year. In this case the majority of the tax treaties of Hungary considers the building site as permanent establishment which is then automatically considered as a permanent establishment by economic reasons also according to the Inv. of for. in Hun, and it does not belong to the exceptions. But even if it would belong to the exceptions, it is hard to imagine that the foreign company does not delegate at least one employee to Hungary to supervising the work and ensure the quality.
Thus the case when according to the tax treaty permanent establishment arises but according to the Inv. of for. in Hun. not, beyond the exception cases, is only be imaginable if the latter act does not consider the activity as systematic, durable and long lasting continued. However, this cannot be stated safely in any cases and because of this there is no common practice regarding the treatment of such cases, therefore it cannot be always clearly decided in connection of continuing the specific activity whether the permanent establishment in Hungary of the foreigner is needed or not. Moreover, it raises the question whether our national legislation is in line with the EU principle of free movement of the services or not.
The above shows that the three legislations define separate definitions of permanent establishment. However, while the Act on CIT and the Act on VAT allows the continuation of the activities after tax registration but without having permanent establishment, the Inv. of for. in Hun. includes clear rules on what activities can be performed only in the possession of tax number, without having establishment according to the (company) law.
If you like our writing, please share it. Please feel free to contact our tax advisors in further permanent establishment related issues.
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About Accace Circle
Accace operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience and erase the borders of service delivery. Covering over 60 jurisdictions with more than 7,000 professionals, we support over 80,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and process at least 800,000 pay slips globally.
