Act LXXXIV of 2023 on top-up taxes to ensure a global minimum level of taxation and on related amendments to certain tax acts came into effect on 31 December 2023.

The purpose of introducing the global minimum tax is to limit tax competition between countries, reduce tax avoidance, and ensure tax transparency. The new regulation requires multinational enterprise groups and large domestic enterprise groups to pay top-up tax so that the group's actual tax burden reaches the 15 percent global minimum tax rate.

Companies subject to global minimum tax and reporting obligations

The regulation applies to the domestic group members of multinational enterprise groups or large domestic enterprise groups with a Hungarian tax residency. The rule is applicable if the annual revenue according to the consolidated financial statements prepared by the group's ultimate parent entity reaches or exceeds the threshold of 750 million euros thershold in at least two of the four tax years immediately preceding the tax year.

If the domestic group member becomes subject to the top-up tax for the tax year 2024, its first major obligation is to fulfil the reporting requirement to the Hungarian tax authority within 12 months from the start of tax year 2024, i.e., by 31 December 2024, for calendar year taxpayers. It is important to note that the reporting obligation also applies to companies that are generally subject to the global minimum tax but enjoy exemption from paying the global minimum tax under certain conditions.

Form

The reporting obligation can be fulfilled electronically using the GLOBEA (on the top-up tax liability ensuring a global minimum level of taxation, and on the basic corporate details of the group) and GLOBEM (designated local entity on the behalf of group members reporting the corporate details of local constituent entities) forms.

The form must include the ultimate parent entity's data (name, country of residence, tax number, community tax number), and the local group member's data. Additionally, it must be declared whether the ultimate parent entity or the given group member will submit a data report or top-up tax return for the given year.

I. Global minimum tax payment

The aim of the global minimum tax regulation is that if the members of the group in a given country do not reach the 15% minimum effective tax burden, the difference, known as the "top-up tax," must be collected by one of the countries. The regulation determines a rule order:

1. First, the under-taxed subsidiary's country is entitled to collect the top-up tax, in the form of the qualified domestic minimum top-up tax (QDMTT).
2. If this does not occur, the parent company's country collects the tax based on the Income Inclusion Rule (IIR).
3. Finally, if the top-up tax cannot be collected under the above rules, it will be collected according to the Under-Taxed Payments Rule (UTPR).

In Hungary, the qualified domestic minimum top-up tax is particularly important because the 9% corporate tax rate increases the likelihood that the Hungarian subsidiaries of multinational companies will not reach the 15% minimum. However, the calculation of the actual tax rate can include covered taxes. Covered taxes include, but are not limited to, corporate tax, local business tax, energy supplier income tax, and the innovation contribution.

The domestic group member or the designated local entity acting on its behalf is obliged to:

- Determine, declare, and pay the recognized domestic top-up tax advance for the tax year. This must be done on a form prescribed by the Hungarian tax authority and must be fulfilled by the 20th day of the eleventh month following the last day of the tax year. The amount of the advance corresponds to the expected amount of recognized domestic top-up tax payable for the tax year.

- Submit a top-up tax return and provide data on a form prescribed by the Hungarian tax authority for the tax year. The return related to the top-up tax must be submitted and the top-up tax must be paid to the Hungarian tax authority no later than 15 months after the last day of the tax year covered by the data provision. During the first, transitional year, the deadline is 18 months.

II. Exemptions

The law provides several exemptions concerning the domestic top-up tax but the detailed regulations will be included in a separate government decree.

Substance-based income exclusion (SBIE): This exemption can be chosen annually. The rule ties the exemption calculation to the actual wage costs and tangible assets, assuming real economic presence and the existence of personal and material conditions.

Initial five-year exemption: This provision allows reducing the top up tax payable in Hungary to zero in two cases:

1. If a multinational group is present in no more than six countries during the first five years of its initial international activity phase, and the combined book value of significant tangible assets among members outside Hungary does not exceed 50 million euros.

 

2. Large domestic corporate groups, which only have Hungarian members, can also enjoy the initial five-year exemption starting from the year when they first fall under the law's scope.

De minimis exclusion: This exemption can be chosen annually if the average recognized revenue of all group members resident in Hungaryis less than 10 million euros, and the average recognized profit is negative or less than 1 million euros. The indicators must be examined over three years (the given tax year and the preceding two tax years).

CbCR Temporary Exemptions "Safe Harbour": According to OECD guidelines, these temporary exemptions can be applied for three years, exempting companies from the top up tax using simplified calculations based on the data of the group's Country-by-Country Report (CbCR) included in the transfer pricing documentation. These include the "de minimis test," the simplified effective tax rate test, and the routine profit test.

• De minimis test: This exemption can be chosen annually if the average recognized revenue of all resident group members is less than 10 million euros, and the average recognized profit is negative or less than 1 million euros.
• Simplified effective tax rate test (ETR): This exemption can be chosen if the ratio of the corporate group's reported income tax expense and the pre-tax profit in the Country-by-Country report is equal or greater than 15 percent threshold (for the 2024 tax year).
• Routine profit test: A group member can be exempt from the top up tax if the substance-based income exclusion amount of the Hungarian group members meets or exceeds the pre-tax profit allocated to Hungary in the CbCR report.

In the next section, we will outline the reporting obligations related to the CbCR report, which forms part of the transfer pricing documentation.

Country-by-Country Report

According to the OECD Guidelines, the three-level approach to transfer pricing documentation includes the Master File, Local File, and Country-by-Country Report. The Master File contains information about the entire corporate group, the Local File details the significant transactions of each group member and local taxpayers, and the Country-by-Country Report summarizes information on the global allocation of the group’s income and paid taxes, complemented by indicators of the group's economic activities. This allows tax authorities to conduct higher-level risk analyses and compile statistical reports.

Under the domestic legislation implementing the automatic information exchange rules for the Country-by-Country Report, taxpayers may have two types of obligations regarding the report:

• they must prepare a report, as an ultimate parent entity, designated entity, or entity required to provide data
• they must notify which member of their corporate group will prepare the report.

The entity obligated for submitting the country-by-country report:

A multinational enterprise group must submit the country-by-country report if its consolidated group revenue in the financial year preceding the reporting year reaches 750 million euros, or the HUF equivalent of 750 million euros calculated based on the average exchange rate published by the Hungarian National Bank in January 2015. If the ultimate parent entity of the group is located outside Hungary, the 750 million euro threshold must be examined in the local currency.

A Hungarian company is generally required to complete the country-by-country report if it qualifies as ultimate parent company with Hungarian tax residency.

However, the ultimate parent entity can designate a group member as the designated entity responsible for submitting the country-by-country report on behalf of the entire group under certain conditions.

A Hungarian group member may also be responsible for preparing the country-by-country report if the multinational enterprise group does not have any member obligated to submit the report.

The designated Hungarian group member:

The Hungarian group member of the multinational enterprise group obligated to complete the country-by-country report, who is not itself obligated to submit the country-by-country report, must provide minimal data on both the Hungarian tax resident group member and the multinational enterprise group using the 'T201T change reporting form.

The report must be made annually, even if there are no changes in the data.

If there is a change in the reported data, it must be reported to the tax authority within 30 days.

The deadlines and the forms to be used for reporting are summarized in the following table:

Obliged party	Obligation	Form	Reporting deadline
Hungarian ultimate parent company or designated ultimate Hungarian parent company, Hungarian company obliged to provide data	Filing country-by-country report	23CBC	Within 12 months following the last day of the fiscal year (for calendar year companies, by December 31, 2024, for the 2023 fiscal year)
Hungarian group member	Notification obligation	24T201T	Last day of the fiscal year (for calendar year companies, by 31 December 2024, for the 2024 fiscal year)

 

The tax authority shares the data received during the notification process with the authorities of the states where other group members are located within 15 months following the last day of the financial year.

Sanctions:

The tax authority may impose a fine of five million forints for failure to comply with the notification obligation related to the global minimum tax, or for late compliance. In case of failure to comply with the reporting obligation related to the global minimum tax, or in case of late, incomplete, incorrect, or false reporting, a fine of ten million forints may be imposed.

Regarding the CbC report, the tax authority may impose a fine of up to 20 million forints on those obligated to report data, for failure to comply with the reporting, notification, or change reporting obligation, or for late, incorrect, false, or incomplete reporting.