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Subsidizing team sports – New Hungarian tax practice

The finalization of the new legislative background on subsidies to spectator team sports – football, handball, basketball, water polo and hockey – in Hungary has its first anniversary these days. Last year’s tax benefit scheme is quite unique in Europe, and it is expected to boost Hungarian sport life. With a sum of HUF 42 billion coming from the private sector, the first year was a promising start.

Overall, the first year can be declared a success story. Several private companies decided to use this new tax law, and not just benefited from it, but injected HUF 40 billion-45 billion into the sector, Miklós Fekete, partner at PwC and expert of the topic, told the Budapest Business Journal. The new subsidy system should result in a significant breakthrough in the financing of Hungarian sports, according to Fekete’s hopes. “The tax incentive could strengthen the activities of sport enterprises and create a more secure legal environment for the sport business and public subsidies as well,” he said.

The government recognized the need to attract financial supporters other than the state itself. They realized that 75% of Hungary’s active sports community – professional and hobby athletes – was from these five spectator sports. The Orbán cabinet created the National Sport Institution (NSI) in 2010, a former flagship body tasked with monitoring and sustaining the physical education of the rising generations. Now it is NSI’s responsibility to keep track of the new system and to monitor the realization of using the new tax benefit scheme.

The most important provision for companies is that as of July 1, 2011, any entity subject to corporate tax has the opportunity to decrease its corporate tax base by the value of subsidies provided to team sports. The Act on Corporate Income Tax explicitly recognizes the deductibility of costs relating to subsidizing team sports and defines these as costs incurred during business operations for corporate income tax purposes. So the greatest incentive of the corporate income tax benefit in question lies in the fact that from the supporter’s perspective, it will result in a tax saving. In addition to subsidies being recognized as eligible costs for corporate income tax purposes, taxpayers will also be entitled to a tax allowance in connection with the certified amount of the subsidies provided, capped at 70% of a company’s calculated tax liability. Although there will be a negative cash-flow effect, as the subsidies can result in a reduction of up to 70% of a company’s tax liability, this will represent a financial gain for the company. This gain can nominally exceed the amount of the actual subsidy, since the subsidy may be reckoned as an expense (hence reducing the tax base), while the incurred corporate tax liability can be also reduced. This in practice results in a realized gain on the supporter’s side equivalent to the corporate income tax rate. For instance, in case of larger companies, where presumably the 19% corporate income tax rate applies, the entity could vindicate 119 units against 100 units of the subsidy.

"The proof of the necessity and viability of the development program is the financial support of HUF 42 billion, which gives us hope that the initiative can evolve even more in the future," Gábor Bardóczy, director general of NSI, commented on the first-year report to the BBJ. He emphasized that the sum was distributed in 986 locations in the country; 58.2% of the amount went to football, 19.7% to handball, 9.7% to basketball, 6.6% to water polo, and 5.8% to hockey community programs. The financial aid was earmarked for the development of sport facilities and for supporting youth teams management.

Experts expect the new model to become an alternative way to boost sport life in Hungary and also to provide other possibilities for public-private partnership programs, especially since the core of the program was established mainly for infrastructural projects. Eventually, the long-lasting impact of the program can help Hungary prepare an official bid for a "mega" sport event, be it a major football tournament or even the Olympic games.