In order to comply with the requirements set out in Action 5 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, Hungary has revamped its preferential tax regime related to income derived from IP, making the regime much more stringent. The new BEPS compliant regime will apply to IP acquired after 30 June 2016.
Under the current regime, royalties from IP benefit from 50% lower taxation than the already low general corporate income tax rate applicable in Hungary, resulting in effective tax rates of between 5 to 9.5% depending on the level of profitability. In cases of significant expenditure associated with IP income, even lower effective tax rates can be achieved due to deductions from the general tax base calculated on gross income from IP, rather than on profits associated with IP. Additionally, the sale of IP currently benefits from a full tax exemption provided that a one year holding period was maintained or that the proceeds are utilised for further IP purchases.
Under the new regime, the definition of royalty will be limited to payments made with respect to industry related protected IP and will no longer include payments made with respect to trademarks, know-how or other marketing related IP nor will it cover IP protected by copyright laws other than copyrighted software.
Additionally, benefits will be calculated from IP related profits rather than from gross income. Further, following the “nexus approach” imposed by Action 5 of BEPS, benefits will be limited to the proportion of the taxpayer’s own R&D expenditure as opposed to acquisition costs paid for already developed IP or R&D costs incurred by other group companies.
Existing IP schemes will be able to benefit from grandfathering rules that last until 30 June 2021.