31 May 2022 deadline for filing Hungarian Small Business (“KIVA”) tax returns: what to look out for?

Taxpayers whose financial year is the same as the calendar year should submit their Small Business (“KIVA”) tax returns by 31 May 2022. This tax was already very popular in 2021 with its 11% rate and wide entry thresholds. The rate reduction to 10%, which came into effect from tax year 2022, further increased its popularity.

Before filing their annual returns, the taxpayers should check that their Small Business tax calculation is complete. Below we highlight some interesting points that may arise when preparing the 2021 Small Business tax calculation:

• Temporary exemptions from January to May 2021: KIVA-taxpayers carrying out the activities defined in Government Decree 485/2020 (XI.10.) as their main activity are entitled to disregard income, fringe benefits and other defined benefits that are recorded as personal expenses and constitute the basis for contributions for the January-May 2021 period when calculating the KIVA tax base. Importantly, the existence of entitlement must be assessed on an employee-by-employee basis (the employment contract must have been in force on 11 November 2020, the obligation to pay wages must have been fulfilled, the employer must not have dismissed the employee in the period from November 2020 to May 2021, and the employer must have submitted its claim for exemption).
• Balance of capital and dividend transactions (dividends): the taxpayer should increase its KIVA tax base by the amount of the dividend in the tax year in which the company has approved it, but no such obligation exists for the dividend paid out of the taxable profit and retained earnings of the years preceding the Small Business tax period. The taxpayer can decide which tax year the approved dividend belongs to. If he chooses to pay the dividend from the retained earnings of the period of his corporate income tax liability, then he does not have to increase the KIVA tax base.
• Balance of capital and dividend transactions (other): similar to the corporate income tax base adjustments, the KIVA tax base can only be reduced by the arm's length price correction if the taxpayer possesses an appropriate statement signed by its related company. In contrast to corporate income tax, the self-correction surcharge should be treated as a tax base-increasing adjustment for the KIVA purposes.
• Tax loss carry forward: under KIVA, as a general rule, the tax loss carry forward should reduce only the balance of capital and dividend transactions (and not the amount of personnel costs). Unlike for corporate income tax, this reduction is compulsory (also meaning that its amount can be amended by a corrective tax return). However, the total tax base (comprising the amount of personnel costs and the balance of capital and dividend transactions) may be reduced by the amount of new investments, regardless of whether the asset(s) concerned were put into operation in the tax year.

• Tax base adjustments based on the minimum wage: in 2021, the monthly amount of the minimum wage changed later than usual: from 1 February instead of 1 January. Still, the increased minimum wage can be applied from 1 January 2021 if it is more favourable for the company (e.g. when calculating the tax reliefs on the wages of persons entering the labour market, workers in unskilled jobs, female employees entering the labour market with three or more children, employees with disabilities, etc.).

Before submitting the Small Business tax return, it is also advisable to have the tax calculation and return reviewed by an external tax adviser with the necessary professional experience who can identify errors that are not always obvious and draw attention to the unused tax base optimisation opportunities. 

17 May, 2022

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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.