Hungarian taxpayers will face considerable changes in taxation next year, due to the implementation of the European Commissionʼs Anti-Tax Avoidance Directive (ATAD), according to a press release sent by tax advisory Deloitte to the Budapest Business Journal.
According to an amendment accepted by Parliament on November 13, the regulations regarding the deductibility of paid interest from the corporate tax base will be significantly altered, notes Deloitteʼs press release.
The current sub-prime rule based on equity capital and debt will be removed from corporate tax law, to be replaced from January 1 by a result-bound interest deductibility limit, as prescribed by ATAD.
According to the new rules, taxpayers may deduct their interest expense exceeding their net interest income from their interest revenue, up to 30% of their pre-interest, pre-tax and pre-depreciation result, says Deloitte.
An important difference compared to the current undercapitalization rules is that the interest paid to credit institutions will be part of the net interest expense under the new provisions. Under the amended law, Hungarian legislation will benefit from all the discounts offered by ATAD, which is subject to the interest rate deduction limit, so the 30% interest rate deduction limit will not apply in several cases.
One such case is when the net interest expense does not exceed HUF 939.81 million (at the group level in case of company groups). It will also not apply for taxpayers considered separately under taxation aspects. Others exempt from the limit are financial institutions, (licensed) investment firms, alternative investment fund managers, holdings managing collective investment undertakings and transferable securities, as well as insurance firms and reinsurers. It also does not apply to loan contracts concluded before June 17, 2016, and loans granted for financing long-term infrastructural investments.
However, all of the above entities are exempt from the limit only if, in the consolidated yearly report, the proportion of the assets of the taxpayer on equity is equal to or higher than that of the same value calculated on the company group level.
Besides these changes, taxpayers will have the opportunity to continue net interest-free interest payments that cannot be deducted in the current year and use them in later tax years. Moreover, the continuation of the unused interest rate capacity in a given year in the next five fiscal years is also allowed.
"While the new measures will be implemented without a transitional period, which may levy a heavy administrative burden on taxpayers, it can be said that Hungarian legislators aimed at making interest deductions as widely applicable as the principles allowed," says Ferenc Póczak, partner of Deloitte Hungaryʼs tax and legal division. "With this step, they created the possibility for Hungary to stay one of Europeʼs most competitive investment locations in the future," he added.