31 May 2022 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 2022 on Form 2021HIPA (a separate return must be filed for the head office and each business establishment)

Decreased LBT rate

A hot topic for the 2021 tax year is the reduced local business tax rate of 1%. If a company qualifies as an SME, it should tick the box next to Line 10 of Block I on the Main Page of the form. The form will then automatically use the reduced rate. The tax savings from the reduced rate will be considered as Covid19 transitional aid.

The tax rates, tax reductions, and exemptions established by each municipality are summarised on the website of the Hungarian State Treasury maintained for this purpose (https://hakka.allamkincstar.gov.hu/).

The tax base decreasing adjustments

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. In our last year's newsletter, we highlighted some specific details that should be taken into account in this year's tax calculation, too (https://vgd.hu/en/news/professional-publications-newsletters/31-may-2021-deadline-for-filing-hungarian-local-business-tax-returns-what-to-look-out-for ).

Companies subject to Small Business Tax (“KIVA”) – choice of option

Companies 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 time 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.

Transfer pricing adjustments in LBT

As of 1 January 2021, the Local Tax Act also stipulates that the base for local business tax should be adjusted to the arm's length price (previously this could only be inferred from the general provision of the Act on the Rules of Taxation). Accordingly, a company obliged to apply the arm's length prices should determine the net sales revenue or the costs or expenses decreasing the net sales revenue derived from a transaction with its affiliated company on the basis of the arm's length price principle.

It is important to note that a company is only entitled to reduce net sales or increase costs or expenses that decrease net sales if it has a statement from the related party that the related party has made the opposite adjustment to its business tax base. In the case of a foreign related party, the statement should include that the foreign related party has taken the adjustment into account in determining its foreign tax base corresponding to local business tax or, failing that, foreign tax base corresponding to corporate tax.

The transfer pricing adjustment can be shown on individual lines in the tax base calculation or even on a single line.

Tax base apportionment methods

From 2021, minor clarifications have been made to the tax base apportionment methods. For example, in the case of the Asset Pro rata Method, the asset value of vehicles leased out on a long-term rental or lease basis should be taken into account in proportion to the personnel expenses attributable to the head office or business establishment.

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 regarding this newsletter, the tax experts of VGD Hungary will be pleased to assist you.

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

28. April 2022