Pitfalls In The Hungarian Tax System: Sectoral And Special Taxes

• Published date: 27 November 2023
• Subject Matter: Tax, Tax Treaties, Income Tax, Corporate Tax, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: Horizon Solutions Kft.
• Author: Mr Laszlo Soos

During tax planning, Hungary stands out as an attractive jurisdiction due to its favorable tax environment. This is attributed to the country's main tax types, which boast some of the lowest tax rates.

The main types of taxes create a very favorable environment for businesses operating in Hungary:

However, in addition to the main types of taxes, the Hungarian tax system recognizes several other types of taxes, sectoral and special taxes that are related to a particular activity.

The amount of these special taxes and the related administrative requirements are not negligible factors in tax planning. Moreover, one of the biggest tax risks in the case of a company operating in Hungary or newly established is the special taxes. It is therefore recommended to analyze the additional tax burden that certain economic activities may incur, in addition to income taxes and sales tax. This prevents the company from subsequently revealing, for example, that a given economic event or activity has made the company subject to a specific tax type and has incurred a payment obligation.

In this article we deal with taxes on the retail, energy supply and energy generation sectors, the environmental tax, the public health product tax, the innovation contribution on medium-sized and large enterprises, the special tax on telecommunications and airlines and the financial sector tax. To illustrate these special taxes, here is the following table:

Below is an overview of the above specific taxes that may affect a wider range of businesses.

Local business tax (LBT)

All municipalities are entitled to levy local business tax, i.e. LBT. LBT is deductible for Hungarian corporate income tax (CIT) purposes and is not treated as 'income tax' in the application of the tax treaties.

The LBT base is the total net sales revenue reduced by the cost of goods sold (COGS), subcontractors' work, material costs, mediated services, and research and development (R&D) costs. These items are deductible under a decreasing scale at taxpayers with larger turnover (with the effect that lower margin businesses may have higher effective LBT rates). The LBT rate may differ from municipality to municipality but is capped at 2% by law (but there are also municipalities with zero rates).

Innovation contribution

The innovation contribution must be paid by domestic companies and enterprises based in Hungary. The innovation contribution is 0.3% of net turnover (the tax base is the same as Local Business Tax base).

Companies qualifying as micro or small enterprises are exempt from the innovation contribution. The classification shall be carried out in respect of the first day of the financial year.

The indicators are summarized in the table below.

In principle, two of the three indicators must be met: headcount in any case, and at least one of the other two indicators (turnover and balance sheet total).

The innovation contribution, as...