Hungary: The final deadline for the 2021 Master File

Companies that are required to have a Local File for the 2021 tax year must also have an updated Master File for the tax year by 31 December 2022 at the latest (for calendar year taxpayers).

The Master File covers the entire group of companies and certain intra-group transactions, while the Local File examines the arm’s length nature of the taxpayer’s transactions with its affiliates. The Hungarian transfer pricing legislation in force clearly provides that Hungarian companies involved in transfer pricing must have a Master File describing the group of companies for at least one transaction subject to documentation - in addition to the Local File describing the subsidiary concerned and its related party transactions.

Although the regulation does not stipulate that the parent company is the only one that can prepare the Master File, our experience has shown that in practice it is not possible in most cases to prepare the Master File without at least partial involvement of the parent company. This is because the Master File needs to present quite detailed information on intra-group transactions and financial processes for which a subsidiary often does not have sufficient information. The Master File requires the presentation of the whole group of companies, i.e. all related companies must be included, regardless of whether the Hungarian company has had any transactions with the company in question.

In the case of multinational groups of companies, the parent company may not be required to prepare a Master File under the transfer pricing rules of its home country, or it may be required to do so but with a later deadline than the Hungarian one. For example, German legislation does not define a deadline for the preparation of transfer pricing documentation. However, if requested by the tax authorities in an eventual tax audit, thenthe taxpayer has 60 days to provide the transfer pricing documentation, including Master File. Certain companies in Germany are exempt from preparing the Master File.

The Hungarian legislator does not provide any relief in such cases: the Hungarian company is still required to have a Master File for the entire group of companies with the content required by Hungarian law, and this must be done by the deadline for the preparation of the Master File.

Like the Local File, the Master File does not have to be submitted to the tax authority, the legislator only requires that it be ready by the specified deadline. As the preparation of the Master File involves a considerable administrative burden compared to the preparation of the Local File, for the reasons mentioned above, the time limit is also longer: under Hungarian rules, the Hungarian taxpayer concerned must prepare the Master File by the end of the 12th month following the end of the tax year. For calendar year taxpayers, this means 31 December 2022 for the 2021 tax year.

We would like to highlight that if the taxpayer's ultimate parent company is resident in Hungary, the deadline for the preparation of the Master File is the same as the deadline for the preparation of the Local File, i.e. 31 May for a company with a calendar tax year.

Due to its international nature, the Master File can be drawn up in any language. In addition to Hungarian, English, German and French languages are preferred. If any of these foreign languages are used, the Hungarian tax authority may not, in theory, ask the taxpayer to provide documentation translated into Hungarian based on the Hungarian rules of tax administration proceedings.

Under the current legislation, if the tax authority audit reveals that the taxpayer, who is otherwise obliged to do so, does not have a Master File or it does not have the required content, the taxpayer may face a default penalty of up to HUF 2 million, depending on the size of the omission. It is important to note that this penalty does not replace the obligation to prepare the Master File, as the tax authority will still require it and in many cases will check whether the Master File has been completed or corrected (amended). In the case of a second control, the default penalty can reach up to HUF 4 million, although the taxpayer is still not exempt from the obligation to prepare the Master File properly. In a subsequent control, a default penalty of four times the amount of the first penalty may be imposed.

In addition, we would like to draw attention to the fact that under the new regulation, the amounts of default penalties will be tightened in tax audits starting from the year 2024 (i.e. first in tax audits for the tax year 2023) according to which the default penalties will increase to HUF 5 million per transaction, and in the case of repeated violation a default penalty of HUF 10 million might be applied.

As can be seen from the above, the preparation of a Master File requires close cooperation and numerous consultations between the parent company and its subsidiary or subsidiaries, which can significantly extend the time needed to prepare it, especially in the case of multinational groups. It is therefore not recommended to leave the preparation to the last minute, as we have also seen that the tax authority imposes heavy fines on latecomers.

VGD Hungary's transfer pricing experts will be pleased to provide clients with tax advisory services related to the preparation of Master Files in Hungarian, English and German or to the verification of the compliance of their Master File with the Hungarian legislation.

10 Nov., 2022

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