Category: Hungary

The National Competitiveness Council held a meeting on 4 February 2020 about the possible future changes of the local business tax.

Mihály Varga, Minister of Finance outlined that there is a strong need for simplification and reduction of local business tax, which has not changed significantly since its introduction in the early 1990’s. According to the Council’s proposal, the amendments could result in an increased number of investments and on the long term it could lead to the decrease of territorial inequality. This is expected to be achieved though decreasing the tax rate of the local business tax, thus the overall tax burden, while implementing incentives for further research and development measures.

Mihály Varga stated that there is no decision on this specific topic yet, however, one of the biggest possible change would be from January 2021 the abolishment of the obligation of the advance payment in the last month of the tax year. This measure solely could result in the expansion of investments and would strengthen efficient businesses, as it would help the cash-flow status of these organizations. A possible further change would be that five times of the amount spent on research and development would be deductible from the tax base, as well as depreciation.

The proposed changes would affect at least 850,000 Hungarian businesses positively and at least one third of the municipalities negatively. The latter are concerned, since the primary income of municipalities is local business tax. According to the proposal, the Ministry of Finance will initiate consultations with the larger local municipalities to discuss the details.

By Gabriella Galik, Partner, KCG Partners Law Firm

The Hungarian Parliament approved certain amendments to the Hungarian Corporate Income Tax Act in July 2019.

Most of the changes, such as the rules of the exit taxation, are applicable from 1 January 2020. The exit taxation has been introduced in Hungary by implementing the Anti Tax Avoidance Directive (ATAD) regulations. In general, exit tax rules would apply when a taxpayer transfers its place of effective management to a foreign country, and as a result becomes a foreign tax resident, or when a taxpayer transfers its assets or business activities connected to its business in Hungary to a registered seat or branch located in a foreign country, and as a result the transferred assets and business activities would not be taxable in Hungary.

In this case the taxpayers will be required to increase their tax base with the amount by which the fair market value of the transferred assets and activities exceeds the book value. The exit taxation is not unknown in the Hungarian tax system, since it has been applicable to the associated enterprises. The new rules extend the obligations, and the Hungarian tax authority has now the right to exam the transactions between independent parties or parties who seem to be independent. Subject to certain conditions, the exit tax can be paid in five instalments if the effective place of management, assets or activities are transferred to an EU Member State or an EEA country that has a mutual assistance treaty for the recovery of claims relating to taxes concluded either with the EU or with taxpayer’s EU Member State. Special exemptions may apply.

By Eszter Kamocsay-Berta, Managing partner, KCG Partners Law Firm

The Hungarian tax authority prepares the personal income tax returns for everyone it has employer information about, whether they are employees, primary producers, private individuals liable for the payment of VAT or individual entrepreneurs.

The Hungarian tax authority draws attention to the fact that individual entrepreneurs – except for the part-time individual entrepreneurs taxing on fixed-rate tax of low tax-bracket enterprises (KIVA) or on simplified entrepreneurial taxation (EVA) –, primary producers and private individuals liable for VAT payments are obliged to submit their personal income tax declarations independently. However, the drafts prepared by the tax authority, which are based on the information provided by the employer or the taxpayer, facilitate the preparation of their tax returns as well. The draft returns will be available on the tax authority’s website and the governmental portal from 15 March 2020.

The individual entrepreneurs, primary producers, private individuals liable for VAT payments can submit their returns after completing and saving their return with the non-payer employer, payer employer, entrepreneurial and primary producer income information. The unified deadline for filing the tax return is 20 May for everyone.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

So far, it has been relatively easy for neighbours and other stakeholders to challenge the building permit of a major development project during the licensing process. This situation created major potential for extortion for these individuals. However, with the amendment of the building regulations, which came into effect on 1 March, this vulnerability would appear to have been eliminated.

The timing and cost of licensing always plays a significant role in the return on property investments. However, in addition to the unpredictability of the regulatory procedure, licensing has so far been exposed to another serious risk factor. Neighbours and other interested parties could challenge the decision issued by the building authority – even for concocted reasons. This could delay the completion of the construction by many months. In many cases, the opportunity to appeal has been used as a means of blackmail by those concerned: they have sought to obtain financial gain from the investor or the contractor by raising the theoretical possibility of a formal appeal against the development.

The new building regulations that came into force on 1 March, while changing the acting building authority, have put an end to the vulnerable position of developers and their clients.

The acting authority is set to change

While until the end of February, building permits were issued by the notaries of the municipality concerned, from March, these procedures have been transferred to government offices. What’s more, this change applies not only to new cases, but also to cases already in progress, provided that no substantive decision was taken in the matter by 29 February.

Given that many ongoing cases are expected to change hands, the transition is expected to be a time-consuming and lengthy process. However, it is important to know that the transfers do not affect the procedural deadlines. That is, the transfer alone does not extend the time limits for dealing with the case.

There can be no more appeals; all complaints must be taken to court

At the same time, as of the 1 March, it is no longer possible to appeal against building permits. From now on, the person who is adversely affected by the building permit must turn directly to the courts to assert his claim. In other words, the amendment does not affect the right of stakeholders to take action against an approved building permit, but they will have to do so through a more formalised judicial procedure rather than in a more informal and flexible appeal system. This is expected to reduce the number of legal remedies and increase investors’ sense of security.

It also improves the situation of investors that while appeals had a suspensive effect on the first-instance decision, the initiation of legal proceedings has no such effect. So far, even though the first-instance authority issued a permit, if an appeal was lodged against it, it was not possible to start the licensed construction work until the second-instance authority had made a decision on the appeal. And that was the real weapon for those blackmailing through such an appeal. From now on, however, in the absence of an extraordinary judge decision the commencement of the construction work need not to wait until the legal remedy procedure has been conducted.

Last but not least, the court will only review the lawfulness of the issued building permit in the context of a petition for action, which will also make life easier for the investors and contractors. In the case of an appeal, the second-instance authority would examine the entire official procedure that had come before, regardless of the reason for the appeal. That is, the decision could be annulled even if the appellant had “failed to guess the right reason”. From March, an appeal against the building permit will require more thorough preparation from the injured party, for whom it will not be enough to try to guess where the infringement may have occurred.

What can be expected in practice?

In the short term, the transfer of cases between authorities is likely to cause some disruption. It can also be expected that more cases than usual will result in a pending decision – that is, the client will automatically receive the requested building permit even if the authority has not taken a substantive decision in time. In the long run, the cost and time required for major investments could be reduced significantly. This, ultimately, may also have a positive effect on property prices.

By Levente Bihari, Senior Attorney, Jalsovszky

IT systems are evolving rapidly: cloud-based solutions, artificial intelligence and automated processes are all making businesses, organizations, and communities more and more efficient. Compared to the 2 billion internet users in 2015, at the end of 2017 there were approximately 3.8 billion internet users worldwide. It is estimated that by 2022 there will be 6 billion internet users (75% of the population that will grow to 8 billion by then) and by 2030 they will reach 7.5 billion (90% of the projected 8.5 billion population). This increase of usage of IT technologies, and the ever growing number of internet users naturally mean more cyber-attacks and hacking activity, that come with a price: much more attention than usual has to be paid to IT security.

Governments around the world have responded with laws and regulations to reduce these threats and protect digital security, and put various data protection rules in place, such as the GDPR regulation by the European Union that all organizations must comply with. Recently, the world’s first international standard has been published to help organizations handle personal information and comply with legal regulations. The new ISO standard helps companies meet the requirements, whatever their field of activity.

The new standard was developed by a committee of data protection experts, data protection authorities, information security experts and industry representatives, which helped to make the PIMS standard not only based on GDPR but also on knowledge of good data protection practices and standards in many member states. The main goal was to enhance the existing Information Security Management System (ISMS) with additional requirements in order to establish, implement, maintain, and continually improve a Privacy Information Management System (PIMS) in the form of an extension to ISO/IEC 27001 and ISO/IEC 27002 for privacy management within the context of the organization. Being a management system, it defines the processes of continuous improvement of data protection, which is especially important in a world where technological development does not stop. All this allows organizations of any size, area of activity or industry to protect and control the data they manage in a safe manner. – explains Rita Párkányi (partner) and Dénes Glavatity (associate) from KCG Partners Law Firm.

A special feature of the standard is that it was created for the purpose of providing a basis for the certification described under Article 42 of GDPR. The PIMS certification is a clear pathway towards the GDPR certification mechanism, which can prove to clients, employees and other third parties that the certified company is operating in accordance with GDPR requirements. It lays down practical guidelines, requirements and measures to ensure that a well operating GDPR-compliant data protection system is in place. This is also due to the fact that the GDPR framework of principles is translated into concrete controls and solutions in this standard. This solution also helps group-level businesses to develop a global data protection framework with the ability to comply with local rules.

It is worthwhile to get ready for a PIMS certification as soon as possible, which can be both a security and a business advantage for companies that handle personal data. The legal experts of KCG Partners, however, draw the attention to the fact that the standard is only available to companies that have already implemented the ISO/IEC 27001 ISMS standard, following the required certification process. Despite the risk of not complying with these rules, it is known that many companies simply are not yet ready and in the need of guidance. As there is a growing number of complaints and penalties for lack of data protection all over the European Union, it is clear that this standard is needed. Moreover, companies need to build trust with authorities, partners, clients and employees, to which this standard contributes significantly.

By Rita Parkanyi, Partner, and Denes Glavatity, Associate, KCG Partners Law Firm

A new act on vocational training entered into force on 1 January 2020.

The new law has reformed the contractual relationship between the employer and the trainee. Until now, the students had worked under the scope of an ‘apprenticeship contract’, while from now on it will be qualified as a ‘vocational employment contract’. An important change is that there will be a pay rise in the salary of student workers, since after January 2020 student wages will become adapted to the changed minimum wages.

Another novelty is that the student pursuing vocational training will be insured under the vocational employment contract, and the payment received on the basis of such contract will be qualified as an income for the purpose of social security contribution. It is important however that the previous practice relating to apprenticeship contracts for students still being under these contracts will not change, i.e. the social security status of a student under apprenticeship contract remains unchanged.

By Levente Csengery, Founding Partner, KCG Partners Law Firm

As of 1 January 2020, a new tax allowance is available under the Hungarian Personal Income Tax Act, which provides for that mothers raising four or more children might be exempted from the payment of personal income tax.

Previously, the tax base of the personal income tax could be reduced with two tax allowances: the family tax allowance and the allowance for couples in their first marriage. As of the beginning of this year, a third tax allowance has been introduced: the allowance granted to mothers raising four or more children. According to the new provisions, persons eligible for this allowance might deduct certain incomes from their tax base calculated for the payment of personal income tax. In particular, salary received under employment contract might be deducted from the tax base.

According to a governmental press conference held in the beginning of 2020, the target of the Hungarian Government is to extend the personal income tax exemption also to mothers raising three children as of 1 January 2021. Currently this proposal is still under political discussion.

By Gabriella Galik, Partner, KCG Partners Law Firm

Online sales in the EU are estimated to worth €550 billion a year – €96 billion of which is cross-border. The new EU VAT system for e-commerce aims to give simpler value added tax (VAT) rules and administration for businesses and measures for Member States to tackle VAT fraud related to e-commerce.

The new framework introduced the destination principle for cross-border business-to-consumer (B2C) sales; i.e. VAT is to be paid at the rate of the country of consumption as of January 2021. The regime is expected to raise €7 billion in VAT revenues for Member States and drop in VAT compliance costs of €2.3 billion a year for businesses from next year. Identification of the online businesses supplying goods and services to customers in other Member States, however, is going to be key when it comes to ensuring effective collection of VAT and addressing e-commerce VAT fraud.

The European Parliament supported measures on 17 December 2019 designed to fight e-commerce VAT evasion that would help close some of the €137 billion VAT gap each year across the EU due to (inter alia) VAT fraud. E-commerce payments in most cases involve intermediaries (payment service providers (PSPs). Accordingly, the first proposal would oblige PSPs to collect and retain cross-border e-commerce payment records for three years. The second proposal includes several measures to improve administrative cooperation, information sharing between the parties and effective prosecution supported by the European Public Prosecutor’s Office.

Now, it is up to the EU Member State ministers to adopt the two pieces of legislation.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm