Hungary was well-known for its generous taxation of revenues from IP rights but has this year implemented the OECD's BEPS recommendations. The tax advantages for revenues from IP rights have therefore ben reduced with effect from 1 July 2016.
A new definition
The amendment has two important effects on companies owning IP rights . First, the definition of IP rights has been changed to exclude a number of IP rights from the scope of the tax advantage. Under the new rules, only the following rights will fall under the Corporate Income Tax Act's IP regime:
- utility model and plant variety rights;
- supplementary protection certificate;
- topographies of semiconductor products;
- copyrighted software; and
- orphan medicinal products.
An IP right not falling within the above categories will not benefit from the tax deductions allowed under the Hungarian Corporate Income Tax Act. Furthermore, even IP rights falling within the scope will be subject to a limited deductibility. That is because the definition refers to income generated from IP rights instead of revenues when determining the amount deductible from the company's corporate income tax base. Depreciation and costs related to the IP right must be deducted from the revenues, if a company wants to apply the tax deduction rights (under the Corporate Income Tax Act, companies may deduct 50 percent of their revenues generated from IP rights from their corporate income tax base, resulting in an effective tax rate of 5/9.5 percent).
Limitation on the deductibility
The new law also limits deductibility of revenues that are generated from IP rights developed by affiliated companies. For this purpose, the Government applied the so-called "nexus approach" that was developed by the OECD in BEPS Action 5. According to the "nexus approach" - and the Hungarian law implementing it -, revenues from IP rights may be deducted in a given proportion only, namely the ratio of the costs incurred by the IP rights-owning company (excluding costs of affiliated companies) or third parties, divided by all costs incurred in relation to the IP rights.
This provision practically eliminates the possibility of using the deduction in the case of an IP right that was purchased from an affiliated company (because in that case the costs incurred by the IP rights-owning company will be zero).
For IP rights obtained up to 30 June 2016, the general rule is that the old (and more favorable) tax deductions can be applied in the financial years ending before 30 June 2021. The new provisions must be applied to all IP rights that are obtained after that date.
However, restrictions apply to IP rights obtained by a Hungarian company from an affiliated company between January and June 2016. If the affiliated company was not allowed tax deductions on the revenue from the IP rights., then the Hungarian company can opt for the tax deductions only in the financial year ending on 31 December 2016.