The government is trying to use a new corporate tax incentive for sports to motivate the Hungarian business world to spend more on sponsoring games.
Football, handball, basketball, water polo and ice hockey - the sports favored by a new corporate tax incentive aimed to increase financial support to the five most popular team sports in Hungary.
The new regulation will likely become effective in June, as talks with the European Commission have come to an end after it had examined compliance with EU state aid regulations. The most debated issues were the support of professional clubs’ investments in fixed assets and renovations and of the wages of these clubs employees.
The government expects that the amount of financial support will grow by HUF 20 billion as a result of the new regime. Taxpayers, on the other hand, expressed fears of taxation related risks and the potential misuse of the subsides.
“We are aware that a similar tax regime in film financing that has been in place for years unfortunately caused inconveniences for taxpayers acting in good faith even with the most cautious behavior, “ Ottó Sinkó, CEO of industrial group Videoton, told the Budapest Business Journal. Sinkó stressed that the new regulation should not include any tax related risks. “Legislators have to eliminate such risks in order to gain the confidence of taxpayers, especially multinational firms,” he added.
According to the new rules, Hungarian taxpayers providing financial support to any sport association or any non-profit foundation established to support these five sports obtain a double tax benefit. Both the corporate tax base and their tax liability can be reduced by the amount of the subsidy. Taxpayers have the option to use the second benefit in the year the subsidy is granted or any time during the consecutive three years. The tax credit is limited to 70% of the annual tax liability.
Another element of the new law is the transfer tax exemption. The acquisition of sports establishments and the pecuniary rights established on them have become transfer tax exempt. The exemption is subject to the condition that the acquirer operates the establishment for sports purposes for at least 15 years. The acquisition land to build sports establishments by sport associations and organizations has also become exempt of transfer tax.
“As the Videoton group has continuously been profitable, it is ready to spend part of its corporate income tax on sport financing under the new tax regime,” Sinkó said. “Within that, we would like to focus on the support of the next generation.” Currently, Videoton support ice hockey and football with subsidies totaling less than HUF 10 million per year each. “This amount is in line with the expectations from Székesfehérvár’s biggest private employer,” he added.
“In case a company’s tax payable is, let’s say, is HUF 100 million, it can decide to support, for instance, an ice hockey team with an amount of maximum HUF 70 million,” Zoltán Lambert, managing partner of accounting firm HLB Klient said. “As the result of the recognized expenses and the tax credit, companies providing support could reach considerable tax savings.” The new incentives could not be introduced, if Hungary had to harmonize its corporate tax base by joining the EU’s Stability Pact, he added.
Sports and movies
Such generous incentives in sports financing are unique in the EU, Lambert said. In Hungary, similar advantages have been available in financing films produced in Hungary. A relatively big volume of movie production has been based on these tax incentives. American movies with a budget of several billion dollars have been produced in recently built Hungarian studios, he added.
Under the legislation in force since 2004, businesses supporting film production may deduct 100% of this subsidy from their tax base as well as from their payable taxes. The tax break has some conditions: investors may write off no more than 70% of their payable taxes, and they may not deduct any more than 20% of the total production costs of any one film.
EU state aid control
In the sports sector, state aid mainly finances infrastructure or activities of individual sport clubs. As most sports infrastructure is local in nature and is unlikely to have an effect on trade between EU member states, it generally does not have state aid relevance, according to the EU. There have been only few decisions so far where the Commission has applied EU state aid provisions to the sports sector.
Subsidies granted to amateur sport clubs are generally not covered by the state aid rules, the EU says. However, as professional sports clubs are engaged in economic activities, they are covered by the state aid rules to ensure that subsidies do not disrupt fair competition.