Declaration required to take advantage of local business tax reduction

As part of the economic protection action plan introduced by the Hungarian government the local business tax is reduced to 1% for small- and medium-sized enterprises and sole proprietors from January 1, 2021. 

The reduction does not affect all companies, only micro, small and medium-sized enterprises (hereinafter collectively referred to as “SME”). However, it is important to note, that under the rules of the Government Decree, not all companies that are otherwise considered to be SMEs under the Hungarian Act XXXIV of 2004 on small and medium-sized enterprises and support for their development (henceforth: “SME Act”) can count on the possibility of a reduction.

The general rules of the relevant classification are contained in the SME Act, according to which a company that meets the following two conditions together should be considered as an SME:

  • its total number of employees is less than 250, AND 
  • its annual net sales is up to EUR 50 million (approx. HUF 18 billion) OR its balance sheet total is up to EUR 43 million (approx. HUF 15.48 billion). 

The latter condition – i.e. the upper limit of the net sales OR balance sheet total – is tightened by the Government Decree on the local tax reduction: only those enterprises are involved in the reduction of the local business tax rate, for which at least one of the mentioned indicators has a maximum value of HUF 4 billion (approximately EUR 11.1 million).

We would like to draw the attention to the fact that pursuant to § 5 of the SME Act the member companies of a company group should be classified on the basis of the consolidated parameters of that given company group.

To determine the classification according to the Government Decree, the data of the last, accepted financial report available on the first day of the tax year starting in 2021 must be taken into account, in the absence thereof, estimated values.
The Government Decree in question states that the rate of local business tax payable by the company is 1% if the tax rate set by that municipality is more than 1%.

According to Government Decree 640/2020, the business tax reduced to 1% qualifies as state aid pursuant to the Treaty on the Functioning of the European Union, to which, as a general rule, only those companies entitled that did not qualify as a so-called “enterprise in difficulty” on 31 December 2019.

The Government Decree also stipulates that the companies affected by the reduction have to pay only 50% of their local business tax advance otherwise due on 15 March 2021 (for non-calendar year companies on the 15th day of the third month of their tax year starting in 2021). With the amount of the non-payable advance, the tax authority reduces the amount of the company’s local business tax advance obligation ex officio without making a decision.

However, the condition for this is that the company has to until 25 February 2021

  • declare that it qualifies as an SME according to the rules of the Government Decree (and not the SME Act), 
  • also declare that according to Government Decree 640/2020 is entitled to use the amount corresponding to the state aid as a temporary aid,  
  • at the same time declare that on 31 December 2019 it was not classified as an enterprise in difficulty, and 
  • declare the address of its place of business, unless it has already done so in accordance with the rules of Hungarian Act on Taxation. 

This declaration may be submitted only through the Hungarian Tax Authority, electronically, on an electronic form.