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Parliament approves 2019 budget, tax changes

The Hungarian Parliament approved the 2019 budget on Friday, winding up the summer session. The house also approved several tax changes, including a controversial levy aimed at punishing NGOs seen to be funding or promoting what the government defines as illegal immigration.

The 2019 budget targets revenues of HUF 19.58 trillion and expenditures of HUF 20.578 tln, leaving a deficit of HUF 998.4 billion. In accordance with the convergence program, the budget is calculated with a deficit of 1.8% of GDP, news portal index.hu reported.

The budget is based on estimated 4.1% GDP growth next year, and strong growth in domestic consumption and investment, of 3.9% and 9.5%, respectively. The government targets state debt of 70.3% of GDP by December 31, 2019, and annual inflation of 2.7%.

Online news portal index.hu observes that growth forecasts are "very optimistic," while the government senses "storm clouds" over the world economy and the eurozone. Acordingly, it has increased the safety buffer, compared to last year, to HUF 360 bln, or 0.8% of GDP. It has also targeted higher amounts for "road transport activities" and "railway transport and services."

Meanwhile, Minister of Finance Mihály Varga told business daily Világgazdaság that "the calm period which held the exchange rate of the forint (against the euro) between 305-315 is over." Following hikes in base rates by the U.S. Fed and the European Central Bank, the forint is "searching for a new balance level," he noted. However, the budget will not be affected by this and it does not need to be recalculated, Varga added.

Government attacks NGOs with levy

Tax changes were also passed by lawmakers on Friday. One controversial change introduces a 25% levy on what is defined as providing "material support for the operation of NGOs whose activities support immigration."

The levy would be imposed on NGOs that support the immigration of non-EU nationals or foreigners without proper residency permits either "directly or indirectly." All proceeds from the levy would go towards protecting the borders, national news agency MTI reported.

Another change to tax law exempts retail bank transfers of up to HUF 20,000 from the financial transactions duty. The change aims to "strengthen electronic payments and reduce the use of cash at the same time." Currently the financial transactions duty makes it more costly for households to pay their bills with a bank transfer than to queue up at the post office and pay by postal cheque.

The law raises the benchmark for late tax payment penalties from double the central bank base rate, or 1.80% at present, to five percentage points over the base rate, or 5.90%.

"The change aims to end the present condition in which the tax authority and the state are the cheapest lenders," the law states.

Rules tweaked to boost investor confidence

Another change to tax law fine-tunes the regulation of real estate investment trusts (REITs), supporting the establishment of more such entities. One of the aims of the law is to ensure that REITs are solely engaged in the activity of real estate investment and that their balance sheets show only such assets necessary for the development and operation of real estate.

By keeping REITsʼ activities within a strict framework, the proposed legislation would "raise investor confidence in [REITs]" and "prevent the conduct of business activities with greater risk", the lawʼs authors said.

REITs are exempt from corporate tax and local business tax but must pay shareholders 90% of profits as dividend. A number or REITs have been established in Hungary recently, following favorable changes to the regulatory environment.