INTRODUCTION OF THE GLOBAL MINIMUM TAX IN HUNGARY
UPDATE - FEBRUARY 13, 2024
On November 21, 2023, the Hungarian Parliament adopted the draft act on Top-Up Taxes to Ensure a Global Minimum Level of Taxation and on Related Amendments to Certain Tax Acts (hereinafter: “Draft”). Following the publication of the Draft, Act LXXXIV of 2023 on Top-Up Taxes to Ensure a Global Minimum Level of Taxation and on Related Amendments to Certain Tax Acts (hereinafter: “Global Minimum Tax Act”) was published in the Hungarian Gazette on November 30, 2023. Compared to the Draft, the Global Minimum Tax Act does not include new provisions but clarifies specific technical and administrative details.
The adopted Global Minimum Tax Act contains the necessary regulations for the transposition and application of Council Directive (EU) 2022/2523 of December 14, 2022, on Ensuring a Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-scale Domestic Groups in the Union in Hungary. The Global Minimum Tax Act entered into force on December 31, 2023, and is generally applicable for the tax year beginning after this date, with certain provisions applicable for the tax year starting after December 31, 2024.
The purpose of this update is to provide owners, managers, and employees of potentially affected multinational companies with information on the key concepts and requirements of the Global Minimum Tax Act. We recommend consultation with legal and audit/tax professionals in each case.
I. Subjects of the Global Minimum Tax
The Global Minimum Tax Act determines the rules of how a member of a multinational enterprise group or a large-scale domestic group must comply with its additional top-up tax liabilities, ensuring the global minimum level of taxation.
On this basis, a constituent entity resident in Hungary who is a member of a multinational enterprise group or of a large-scale domestic group, which has an annual revenue of EUR 750 million or more, including the revenue of the excluded entities, in its ultimate parent entity’s consolidated financial statements in at least two of the four prior tax years immediately preceding the subject tax year will be subject to the top-up tax liability.
II. Top-up Taxes and Collection Mechanisms
Based on the Global Minimum Tax Act, top-up tax liabilities may arise as follows if the group is considered under-taxed in the concerned state:
- Qualified domestic top-up tax: All low-taxed constituent entities who qualify as a resident under the Global Minimum Tax Act are subject to this tax based on their computed excess profits, which is the sum of the net qualified income reduced by the substance-based income exclusion;
- Income inclusion top-up tax (hereinafter: “Qualified IIR tax”): Based on the income inclusion rule (hereinafter: “IIR”), the parent entity of a multinational enterprise group or a large-scale domestic group computes and pays its allocable share of Qualified IRR tax in respect of the low-taxed constituent entities;
- Undertaxed profit top-up tax (hereinafter: “Qualified UTPR tax”): Its subject is the multinational enterprise group based on the undertaxed profit rule (hereinafter: “UTPR”). The amount allocated to a domestic constituent entity from the Qualified UTPR tax is computed as the product of the total determined sum of the qualified UTPR tax and a determined percentage of the Qualified UTPR tax allocated to the domestic members.
The Global Minimum Tax Act regulates a significant part of the rules on qualified domestic top-up tax under one subtitle, explaining them in more detail and adding new provisions. The qualified domestic top-up tax allows countries applying it - including Hungary - to collect the necessary top-up tax in case of low tax burdens.
A Qualified IIR tax or Qualified UTPR tax liability will arise if the appropriate amount of top-up tax is not paid in the concerned state. In such cases, the tax law of the jurisdiction of residence of the ultimate parent company or other group company will assess and collect the additional tax.
III. The Tax Rate of the Global Minimum Tax
The Global Minimum Tax Act stipulates a 15% minimum tax rate, which the group members in the concerned state must reach per the relevant provisions; otherwise, they could be considered undertaxed. The top-up tax rate can be computed as the difference between the minimum and effective tax rates. When calculating the effective tax rate, it is not the nominal tax rate determined in the given state that should be compared to the 15%, but the amount of the tax liability borne by the company. The calculation of the tax must take into account all tax deductions and tax allowances. How a particular tax allowance affects the rate of the top-up tax can be determined according to the Global Minimum Tax Act rules. For example, the new R&D tax allowance introduced by the Global Minimum Tax Act into the corporate tax system may be treated positively in calculating the top-up tax.
The effective tax rate is the ratio of the adjusted covered taxes of the domestic constituent entities in the given state and the qualified net income of these entities. The adjusted covered tax of the entities is the sum of all domestic constituent entities in the given state, calculated based on the rules to determine the adjusted covered tax.
IV. Covered Taxes and Adjusted Covered Taxes
The Global Minimum Tax Act considers other company tax liabilities through the category of adjusted covered taxes, which must be considered when computing the effective tax rate. By the express provision of the Global Minimum Tax Act, the following are considered to be covered taxes in Hungary:
- corporate tax;
- local business tax;
- income tax of suppliers of energy;
- innovation contributions.
In addition, in individual cases, the Global Minimum Tax Act also provides additional tax benefits when determining the actual tax rate.
V. Tax Declaration and Payment
According to the Global Minimum Tax Act, the top-up tax declaration and disclosure of information required must be prepared in Hungarian or English, made in Hungarian Forint (HUF), US Dollar (USD), or Euro (EUR), and the payment must also be made in Hungarian Forint (HUF), US Dollar (USD) or Euro (EUR).
VI. Tax Exemption and Temporary Exemption
The regulations under the Global Minimum Tax Act allow for tax exemptions. To qualify for an exemption, a company has to meet one of several conditions included in the system of the Global Minimum Tax Act, including tests and thresholds expressly set out as well as those set out in any qualifying international agreement on safe harbors or in the OECD (Organisation for Economic Co-operation and Development) Model Rules on Qualified Domestic Top-up Tax. The detailed regulations on the different tax exemptions may be laid down in a Decree of the Minister of Finance.
The exemption rules, based on tests and thresholds specified by the law, provide an opportunity for temporary relief or reduction from tax obligations and administrative burdens imposed by the Global Minimum Tax Act. Their application is limited in time, with the option being available only for tax years beginning on or before December 31, 2026. The option is no longer available for tax years ending after June 30, 2028. It is important to note that if a multinational group or a large-scale domestic group does not treat the top-up tax as zero according to the exemption rules in the tax year in which it becomes subject to the Global Minimum Tax Act, it will lose the possibility to opt-out and apply for the exemption in the subsequent tax years.
VII. Summary
The provisions of the Global Minimum Tax Act did not introduce significant new amendments and changes compared to the provisions of the Draft. Multinational companies affected by the Global Minimum Tax Act should prepare for the tax liabilities and administrative burdens brought by the changes as soon as possible and assess whether they are eligible for any available exemptions and reliefs.
The contents of this document do not constitute legal advice and are not a substitute for expert advice.
If you have any further questions about the rules and provisions of the global minimum tax, please feel free to contact us and ask for the assistance of KNP LAW experts.
