The Hungarian parliament reportedly approved corporate income tax reform legislation on 13 November 2018 that provides for the introduction of a group taxation regime, new interest limitation rules, and changes to the CFC rules.

Group Taxation

The group taxation regime allows related taxpayers with at least 75% direct or indirect control (voting rights) to opt for group taxation, subject to certain conditions, including that they have the same balance sheet date and the same functional currency. Under the regime, taxpayers must each determine their tax base, which must be declared to the tax authority, with a group return submitted by the group representative that includes the sum of the positive tax bases, offset by losses carried forward and the negative tax bases. In addition to being allowed to offset losses and negative tax bases, taxpayers that opt for group taxation are subject to simplified transfer pricing requirements in relation to transactions between them, with supporting documentation requirements at the group level to be introduced by ministerial decree.

For 2019, taxpayers wishing to opt for group taxation must apply between 1 and 15 January 2019. For subsequent years, application must be made before the end of the previous year.

Interest Limitation

New interest limitation rules are introduced in line with the EU Anti-Tax Avoidance Directive (ATAD). The rules replace existing thin capitalization rules and provide that the deduction of net interest expense is limited to 30% of EBITDA, with a safe harbor of HUF 939,810,000 (~EUR 3 million), which applies at the group level. Net interest expense exceeding the limit may be carried forward for up to five years.

The new interest limitation applies from 1 January 2019 in respect of loan agreements concluded or modified on or after 17 June 2016.

CFC Rule Changes

Hungary's CFC rules were already generally compliant with ATAD, although certain changes are made. This includes a change from the exemption based on a CFC carrying on substantive economic activity to an exemption based on a CFC deriving income only from genuine arrangements or series of arrangements not put in place to obtain a tax advantage, which must be verified by the taxpayer. In addition, an exemption is added where:

• The CFC's accounting profit does not exceed HUF 234,952,500 (~EUR 750,000), and its non-trading income does not exceed HUF 23,495,250 (~EUR 75,000); or
• The CFC's accounting profit amounts to no more than 10% of its operating costs for the tax period.

Lastly, it is provided that a permanent establishment (PE) situated outside the EU/EEA will not be considered as a CFC where Hungary has a tax treaty with the jurisdiction of the PE and the treaty provides that the income of the PE is exempt from taxation in Hungary. However, the exemption from the rules for taxpayers whose shares are listed on a recognized stock exchange is removed.

Additional details will be published once available.