An interesting tax base decreasing item in Hungary
Today, we are going to deal with early-stage businesses, i.e., startups. Our examination aspect is one of the decreasing items used when determining the tax base, i.e., that which decrease the earnings before taxes. We will look at the most important detailed rules regarding, for example,
- when a business is considered an early-stage business,
- who can be an investor and under what conditions, so they can acquire a stake in the business, and
- what discounts can be used with this investment.
According to the Act on Corporate and Dividend Tax (hereinafter: CDTA):
an early-stage business is a legal entity registered in accordance with the relevant government decree, provided that it complies with the provisions of the government decree in connection with its registration.
The official register is maintained by the Hungarian Intellectual Property Office not only for early-stage businesses, but also for the businesses, investors that support them.
The average number of employees in the early-stage enterprise must reach or exceed two people in the tax years in which the discount is used.
the early-stage enterprise cannot be classified as an affiliated company of the taxpayer (investor) entitled to use the discount in the tax years in which the discount is used.
An affiliated company is, for example:
between a person and a taxpayer in which the natural person directly or indirectly has a majority influence.
A legal entity can apply for registration as an early-stage enterprise by fulfilling the following:
- which was established within three calendar years prior to the date of submission of the application for registration,
- which annual net sales according to the annual report of the business year preceding the submission of the application does not exceed HUF 100 million,
- for which, according to the annual report of the business year preceding the submission of the application, the average number of employees is at least two and at most twenty,
- in the case of a company in which a venture capital fund manager has not made an investment,
- which does not have a share (business share) in another business company,
- which activity meets the conditions of the concept of innovation contained in the relevant legislation, and
- which does not have an enforceable tax debt registered with a state or local government tax authority.
Finally, it must declare that it does not carry out activities in the following sectors as its main activity:
- transport sector,
- commercial sector,
- real estate transactions.
What conditions the investor must meet?
As a business supporting early-stage businesses, the following legal entities may apply for registration:
- which does not have an enforceable tax debt registered with a state or local government tax authority,
- which indicates in the application in which economic sector it intends to invest (taking into account the excluded activities and main activities),
- which neither the enterprise supporting early-stage enterprise, nor its legal predecessor or the entrepreneur’s (legal predecessor) affiliated enterprise was a member (shareholder) within the three tax years prior to the investment.
This is the most important detail to see exactly what kind of discount it is:
three times the cost value of the share acquired in an early-stage enterprise in the tax year of the acquisition of the share and in the following three tax years, in equal instalments, but no more than HUF 20 million per tax year.
Therefore, it is possible to decrease the tax base if
- the investor acquires a share in an early-stage company,
- as well as acquires an additional share through the capital increase implemented in the early-stage company,
- and finally, it is possible to use this discount in the tax year of the investment and in the following 3 years.