Flat Corporate Income Tax Re-energizes Hungary’s Business Scene
The corporate tax rate, lowered to 9% in January 2017, is not only making the country look more attractive to business investors; it has also been warmly welcomed by enterprises already active in the Hungarian market. However, some industries are still burdened by sectoral taxes that can make that sentiment bittersweet.
“Introducing the 9% corporate tax rate was a very positive step,” Ákos Burján, partner at PwC Hungary, tells the Budapest Business Journal.
“We need to distinguish between two entities: the bigger ones, the Hungarian subsidiaries of multinational companies, for example, and the middle-sized Hungarian companies. Even before the reduction to 9%, the tax rate had been very preferential, such as 10% above a certain bracket. Therefore, this is not necessarily a massive step for all bigger companies. However, for mid-sized companies the new rate is a great step forward,” Burján adds.
When Hungary unified its corporate tax at 9%, it made it the lowest in the European Union. “It definitely encourages investments coming from abroad. Also, it would make sense to increase the Hungarian tax base to optimize the tax position at the group level,” says Lajos Bagdi, head of tax advisory services at Niveus Consulting Group.
“Hungarian companies have welcomed the 9% tax rate. As a result, the corporate income tax is not a significant tax burden anymore; rather, it is the employer social securities and the local business tax that are painful,” he explains.
PwC Hungary’s Burján is also a board member of the American Chamber of Commerce in Hungary, which had long called for a bold step over corporate income tax. He agrees that the business sentiment is “great” and businesses welcomed the lowered rate.
“The corporate income tax is the lowest in the EU, and even globally is among the lowest. This is a very competitive tax rate. Partly because of this, the Hungarian system has its specialties. To counter it, for instance, the consumption-based taxes are very high [eg. the general value added tax VAT rate is at 27%]. There still are sectoral taxes, such as those imposed on the energy, pharmaceutical and telco industries, for example. [….] Altogether, profit taxes are still somewhat high for certain industries,” Burján adds.
This environment is still a driver for foreign direct investment, however. “Due to Hungary’s attractive investment incentives and the tax benefits – the flat 9% CIT rate, which can be reduced even up to 1% by the incentives in connection with R&D activity, for example – an increasing number of foreign companies choose Hungary for their future investments,” says Dániel Bajusz, senior manager and attorney at EY Law Hungary.
“Also, according to the calculations of Hungary’s EU Convergence Program 2019-2023, the investment activity of domestic households and companies also increased by 22% in 2018. The increasing investment activity is a result of the exceptionally low CIT rate and the various tax measures introduced in 2019 and 2020,” Bajusz adds.
However, this improved environment comes with some downturns, too. “The low [corporate] rate seems good to the business at first glance; however, it is very telling, actually, that the economic policy does not have other weapons, since the fundamentals for which the high-added value business would come to Hungary are missing: top-class education, truly open market, flexible and helpful regulatory environment and authorities, just to name a few,” complains says Balázs Kántor, tax advisor and lawyer at Lakatos, Köves and Partners Law Firm.
“One should also consider all potential tax-like payment liabilities from sectorial taxes to different authority fees,” he adds.
Kántor also notes that, while businesses are obviously happy about the 9% CIT rate, it is only one of the costs element they need to deal with unless they are holding companies, for whom it is truly attractive.
“The many sectoral taxes as well as the local business tax should be unified in the corporate income tax, at a possibly higher rate, and the many costly exemptions and allowances should be rationalized,” Kántor adds.
PwC Hungary’s Burján also agrees that sectoral taxes spark uncertainties among those industry players that are burdened, many of whom still find these taxes unfair.
“We do not only have the corporate income tax; we also have the so-called local business tax and innovation contribution, which is a 2.3% turnover-based tax altogether. With these taxes the effective tax rate, if you compare it to your profit, can be very significant: due to the special tax base calculation method it can easily reach 10-20% in certain sectors while in others the impact of the local business tax is marginal,” Burján says.
“The 9% can look good and most companies do enjoy it, even if there are industries that have additional sectoral taxes where the burden is higher. Overall, the 9% is an excellent tool for luring over investment and FDI, however,” he adds.
Bagdi of Niveus Consulting Group thinks that certain tax reliefs, such as the increased volume of R&D tax relief, or the tax incentive for energy saving investments, could be reconsidered for further easing.
Roger Gordon in his 2019 Cambridge publication “The Role of the Corporate Tax”, argues that corporate tax rates lower than personal taxes favor corporate activity, as well as retaining earnings instead of payouts to employees and investors.
“Exactly, it makes sense to invest by the entity itself and not to distribute the earnings to the owners,” Niveus’ Bagdi says. “However, the personal income tax rate is also on a moderate level in Hungary at a flat 15%, as a result, dividend distribution to individual owners can be made with a reasonable tax burden,” he adds.
“In my experience, whether the earnings are paid out or retained depends on the management, i.e. on the shareholders and their personal preference and plans in the end,” Kántor says. “Furthermore, since Hungarian business life is mainly dominated by foreign-owned entities, such decisions are not made in Hungary,” he adds.
The Hungarian tax system has undergone several important reforms recently. Online cash machines, linked directly to the national tax authority, were introduced; an electronic public road trade control system was launched; online and automatic invoice data transmission to the tax authority went live; a taxpayer qualification system (reliable, average and risky) was introduced; and the CIT was simplified with a flat rate of 9%.
These changes are not only good for business but also point toward a healthier economy and better tax morale, in which, as described on page 13, Hungary did not always excel historically.
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