Hungarian Profit Tax

Hungary has attracted large inflows of foreign investment since the early nineties, partly by offering generous ten-year tax breaks to foreign firms setting up plants in the country, and partly having one of the lowest corporate tax rate in OECD countries, i.e.18 %.

The EU found these incentives incompatible with its rules, Brussels had demanded Hungary move into line with EU policy in granting tax breaks in proportion to the size of the investment, rather than for a set period of time. On 1st January, 2003 a so-called developmental tax benefit was introduced to replace the large-scale investment tax benefits previously employed.

Development tax benefit will be granted by the Hungarian government, at the request of the tax payer, for developments started after 2002. 12. 31. Decisions will be published.

To qualify, taxpayers should put an investment of HUF 10 billion into operation in any area of Hungary or at least HUF 3 billion in a designated region (or HUF 100 million in case of environmental protection and Internet services). In addition, the taxpayer should establish a new plant, make additions to an existing plant or improve the production process, and:

As a main rule, the tax allowance would be applicable from the second year of putting the investment into operation, if the taxpayer has hired at least 500 new employees (300 employees in a designated area) or employment costs exceed minimal wage 1500 times. If the taxpayer is not able to meet this requirement, it can fulfil an alternative condition: supplies from small and medium-sized companies should exceed 50 percent of the total supply.

The new development tax benefit for five subsequent tax years. Taxpayers may claim tax relief up to the extent of their corporate tax, in the form of tax withholding.

According to the law tax benefit shall be granted if: – the tax payer has no unpaid public debt – he has not requested payment of public debt in installments – he was not obliged to pay penalty for illegal employment – at least 25 % of the investment was from private source – development is started only after the request for the tax benefit is presented to the Hungarian state.

Tax benefits are not granted in certain fields like coal mining.