Hungarian Tax Incentives for Research and Development

As far as Hungary is concerned, there is no increment scheme; tax schemes are strictly based on the level of R&D expenditures. Fiscal measures related to R&D were started to be employed relatively recently, (e.g. R&D tax allowances are used since 1997, and their rate has jumped in 2000 from 20% to 100%, while the special 300% rule is applicable from 2004).

The Hungarian R&D fiscal measures in coincidence of the EU practice usually take one of the three following forms:

1. tax deferrals, which are relieves in the form of a delay in payment of tax, e.g. deprecation allowances;
2. tax allowances or extra amounts over current business expenses deducted from gross income to arrive at taxable income;
3. tax credits or amounts deducted from tax liability.

Nowadays, Hungary uses several fiscal measures to stimulate R&D, the most important of which:

• 100% RTD corporate tax allowance (also available for subcontracted R&D activities if partner is public/non-profit research site)
• 300% RTD tax allowance if the company lab is located at university or public research institute
• In case of SME’s, there is a special IPR tax allowance. The emerging costs of getting and maintaining of the patents, utility model and design in the area of Hungary can be deducted from the corporate income, supposing these costs can not be regarded direct costs of fundamental research, applied research and technological development.
• Tax credits on investments, including R&D investments (rate depends on volume, company size and geographic location)
• Tax free employment of PhD, MSc or MBA students (up to the official minimum wage) in the field of educational and research activities and other services closely related to these activities.
• Option to create tax-free investment reserves, including R&D investments
• Tax allowance for corporate donations to organisations of public benefit supporting R&D activities
• Tax credit for individual donors supporting R&D activities.
• Tax credit off personal income tax after the creation of intellectual property.
• In addition, the Research and Technological Innovation Fund with fiscal incentives like credits toward the innovation contribution to be paid by companies.

The amount of any floor or cap on the amount of R&D that can be claimed or a cap on the maximum amount of the tax incentive that can be deducted:

• 100% RTD tax allowance: no cap
• IPR tax allowance: no cap
• 300% RTD tax allowance: up to 50 M HUF
• investment tax credits: up to 25% of value of material assets
• tax free employment of students: up to official minimum wage
• tax credit of individual donors to R&D up to 50.000 HUF
• tax credit for individuals after creation of intellectual property up to 50.000 HUF
• tax allowance for corporate donations: 20% of net turnover

Carry-over (backward or forward) is possible only in specific cases:

a) For investments: option to create tax-free investment reserves up to 500 M HUF.
b) According to the Act on Accounting, current R&D expenditures can be deferred to later years
e.g in case of sustained losses, with hopes for profitability for the following year.

The firms, which receiving royalty income in profit or in profit from any other sources, are able to get the same benefits from these fiscal measures. Firms, which are not in profit, are not able to get benefit from a fiscal measure in these ways.

Research and Technological Innovation Fund: fiscal measures positively discriminate micro-companies, and to a lesser extent SMEs. Tax credits on investments are higher for SMEs; SMEs also enjoy a preferable treatment via a specific tax deferral measure. The tax allowance or tax credit for R&D is not taxable. The tax credit can not be traded.

In the future, the intended direction for Hungary (e.g. through the new Bill on Research, Development and Technological Innovation-hereinafter called Act on Innovation) is the improving and fine-tuning of fiscal measures to create innovation-conducive conditions for the economy and the society. The advantage of fiscal measures is that they are more “democratic”, provide for a playing field with equal opportunities, reaching a wider audience than grant schemes, where e.g. proposal-writing wizards have an advantage. On the other hand, they are not as much concentrated, cannot serve a specific, targeted and well-defined goal.

Hungarian legislation related to R&D fiscal measures:

• Hungary has two major legislations relating to fiscal measures supporting R&D, with definitions of R&D. The Act C. of 2000 on Accounting uses a compact version of the OCED/Frascati Manual definitions, recommended by the International Accounting Standards Committee (Frascati definitions are also used in statistical data gathering legislation); while the Act XC. of 2003 on the Research and Technological Innovation Fund uses a slightly different terminology in line with EU competition regulations (as this Act has to be declared as a State Aid measure, EU competition terminology, based on the WTO document “Agreement on subsidies and countervailing measures”, was followed as closely as possible).
• According to the provisions of the Act of 2003 on the Research and Technological Innovation Fund contribution (innovation fee) shall be payable by business companies which have their registered office in Hungary and which are subject to Act C of the year 2000 on Accounting, except for companies considered micro-enterprises under Article 3 of Act XCV of the year 1999 on Small and Medium Enterprises and the Promotion of their Development. Within the limits defined in this Act, the gross annual contribution amount may be reduced by the direct costs of the R&D activities conducted by the business company itself, and the costs of R&D activities ordered from organisations identified in of Act CLVI of the year 1997 on Organisations Operating in the State Budget Framework and Organisations of Public Benefit. Any deductible costs shall be reduced by any public aid and used to cover the relevant costs, both in the case of R&D conducted by the company itself and when the R&D was purchased.
• R&D activities are designated by law to be so-called activities of public benefit, thus foundations supporting R&D are designated foundations of public benefit, eligible for specific privileges according to the Law CLVI of 1997 on Organisations of Public Benefit. These privileges include exemption on corporate taxes as well as other tax and contribution allowances and credits. See the text of legislation for details, as well as exact requirements to be registered as an organisation of public benefit.
• On Corporate and Capital Return Taxes Act LXXXI of 1996 (modified by Act CXIII of 2001) contains the earlier mentioned R&D fiscal measures.
• In addition to that, the corporate taxation rules have been changed from January 2004. To improve the competitiveness of the domestic enterprises, their corporate tax decreases to 16 percent from 18 percent. Hungary finds it particularly important and has undertaken to publish detailed guidelines for companies, especially to SMEs (the exploitation of the benefits arising from the fiscal measures is less than satisfactory among them) usually not having the knowledge, expertise and experience to deal with sometimes complicated fiscal regimes. We have a detailed guideline about the tax incentives and the innovation fees on the following websites: www.nkth.gov.hu (only in Hungarian). Other than publishing guidelines and setting up diverse information schemes, a way to fight this problem is simplify measures and relieve administrative burdens as much as possible. Generally, there is no expiration date set for Hungarian fiscal measures. When applicable, incremental rates are set for the introduction phase the fiscal measures. For example, see the Research and Technological Innovation Fund for incremental increases of the innovation contribution for the first years of the measure.

Geographic differentiation: Tax credits on investments are higher for economically backward regions. In 2001, only around 400 companies with double bookkeeping (out of a total of over 180.000, 155.000 of which being micro-companies) utilised R&D tax allowances: these represented 9% of the total price income; 8% of employment and 5.5% of total corporate taxes. 85% of them were profitable (qualifying for 88% of the allowance). With respect to the overall volume of tax allowances, large companies are dominating: 21.9 Billion HUF out of 26.8 Billion HUF (0.18% of GDP) of total tax allowances went to the 89 large companies The number of companies using the tax allowances showed only a slight increase over the years, while after the stagnating first years, the actual amount of allowances jumped from 4.6 Billion HUF in 2000 to 26.8 Billion in 2001 (this can mainly be attributed to the 5 change of the rate from 20% to 100%), although this is still only 0.9% of all items reducing the aggregate corporate tax base. As a result, it can safely be said currently that the overall economic situation and profitability of companies have mostly visibly improved due to the fiscal measures supporting their R&D activities.

Source: http://www.nkth.gov.hu/english/hungarian-d-tax/hungarian-tax-incentives