31 May 2021 deadline for filing Hungarian local business tax returns:
what to look out for?

Taxpayers whose financial year is the same as the calendar year should submit their local business tax returns by 31 May 2021. It is important to note that from 1 January 2021, local business tax returns for the tax year starting in 2020 should be submitted to the HTA electronically (instead of submitting in paper to the local municipalities).

When determining the local business tax base, the most important thing is to always reduce the tax base by only those items that are fully compliant with the relevant, while at the same time, with proper documentation and record-keeping, one should try to take advantage of all available tax base reduction opportunities. Below we highlight some of the specifics which one should pay attention to when applying certain tax base reduction items.

• Cost of materials should be properly separated from the cost of services used. Most often, in the case of printing, marketing, vehicle repair services, POS ("point of sale advertising") and other information materials, the question arises whether these should be classified as material costs or as consideration for services rendered, i.e. whether there is a possibility for a tax base deduction;
• Cost of goods sold (COGS): it is important to note that the banded deductibility restriction does not extend to COGS attributable to the export sales (i.e. such COGS should be fully deductible from the taxable amount), but each COGS item that was considered as out of scope of the banded deductibility restriction should be supported by an appropriate itemisation showing its effective link to taxable export sales. The tax authority should not be likely to accept the use of pro rata method.
• Cost of recharged services: the triple condition must be met for each item (the contract must include the possibility of service intermediation, the invoice must include the fact of recharging, the service itself should be sold in an unchanged form, but not necessarily at the same price).
• Cost of subcontractors’ services: the contracts with both the subcontractor and the customer must be entrepreneurial type contracts under the Hungarian Civil Code, each subcontractor’s output should be attributable to (a) particular customer order(s), and the subcontractor’s output should form part of the taxpayer's own output.  

Groups of companies often overlook the fact that affiliated companies that split up after 1 October 2016 are subject to additional restrictions on tax base reductions.

Businesses subject to Small Business Tax (Hung. “KIVA”) should consider whether to calculate their tax base according to the general rules or to opt for the simplified method, whereby their local business tax base is 20% of their KIVA base. They must indicate their choice in their local business tax return, so it is still timely to decide. While it is true that this election cannot be retrospectively reviewed at a later date, different elections may be made for each subsequent tax year.  

Before submitting the local business tax return, it is also advisable to have the tax calculation and return reviewed by an external tax adviser who has the necessary professional experience and can identify errors that are not always obvious, and draw attention to the tax risks associated with tax base reductions and how to avoid them.  

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Should you have any questions as regards the review of local business tax calculation or return submission, the tax experts of VGD Hungary will be pleased to assist you.

This newsletter provides general information and does not constitute tax advice.