New growth tax credit gives opportunity to defer tax payments.
Contrary to usual practice, the Hungarian Parliament adopted early this summer new tax laws that will come into force in 2016. Although we do expect supplementary amendments to the tax laws this year, we would like to highlight a new option available to companies called the "growth tax credit". This is a tax relief for fast-growing companies and is already available in 2015.
The growth tax credit is basically an opportunity to postpone a certain part of the corporate income tax payment. This option is available for companies whose increase in pre-tax profit in the subject tax year compared to the preceding tax year is at least five times the pre-tax profit of that preceding year. These fast-growing companies are allowed to pay the tax related to the growth in eight instalments over two years, instead of paying it as a lump-sum payment at the end of the tax year.
The tax credit is available for all companies that:
- operated for at least three years preceding the tax year in question; and
- did not participate in any merger, demerger or transformation in the three preceding tax years.
If the above conditions are met, the taxpayer shall declare to the tax authority by the 20th day of the last month of the given tax year that it would like to apply the growth tax credit. In this case, the company need not pay the corporate income tax advance related to the growth by the 20th day of the last month of the given tax year (this explains the deadline for the declaration); and the tax payment obligation may be paid over the next two tax years on a quarterly basis in eight equal instalments.
When calculating the growth tax credit, certain amounts (e.g., dividends and profit-sharing, interest and similar income, certain benefits from affiliated companies, etc.) have to be disregarded. The tax rate applicable to the credited tax payment obligation is determined according to the general rules; i.e., 10 per cent after the tax base up to HUF500 million, and 19 per cent above that.
Additional to the above tax credit, the company may reduce the outstanding amount of the credited tax by 19 per cent of the cost of certain so-called "favourable investments", if the investment is made before paying the full amount of the credited tax (i.e., within two years following the subject year). The outstanding amount of the credited tax can be reduced by no more than the 70 per cent of the outstanding amount. The "favourable investment" is the cost of the assets (assets under construction for which deprecation is applicable) but cannot be more than the increase in employment (compared to the previous year) multiplied by HUF10 million. If the increase in employment does not occur accordingly, the taxpayer has to pay back 19 per cent of the non-performed increase in employment multiplied by HUF10 million within 30 days following the tax year.
There are certain cases where tax deferral does not apply. The beneficial rules cannot be applied during a voluntary liquidation or winding up procedure, or in the tax year preceding such procedures. The tax payment reduction is not applicable if the taxpayer is utilising investment tax advantages or entitled to corporate income tax credit.