Hungary introduces new IP regime
As of 7 June 2016, Hungary has implemented a tax bill, amending the previous intellectual property (IP) regime to be in compliance with action 5 of the OECD’s base erosion and profit shifting (BEPS) project (“Countering Harmful Tax Practices More Effectively”). With regards to the amendment, the modified nexus approach is introduced, which shall reduce the available benefits under the IP regime.
The new regime shall apply to IP acquired after the date of 30 June 2016, although the old rules will be grandfathered until 30 June 2021 concerning IP for which an entity was qualified to receive benefits with respect to the old regime, which may provide a limited window of opportunity for companies to maintain benefits under the old regime for an additional five years.
Under the old IP regime, royalties from IP benefited from 50% lower taxation than the already low general corporate income tax rate applicable in the country, resulting in effective tax rates of between 5 to 9.5% depending on the level of profitability. In cases of considerable expenditure associated with IP income, even lower effective tax rates could be achieved due to deductions from the general tax base calculated on gross income from IP, rather than on profits associated with IP. Additionally, the sale of IP benefited from a full tax exemption provided that a one year holding period was maintained or that the proceeds were utilised for further IP purchases.
The above tax benefits shall effectively remain in place, however, significant changes have been made to the range of qualifying IP, the approach to determining the amount of royalties and the extent of the relevant tax benefits.
Under the new IP regime, the definition of royalty will be limited to payments made concerning industry related protected IP and will no longer foster payments made with respect to trademarks, know-how or other marketing related IP nor will it cover IP protected by copyright laws other than copyrighted software. Furthermore, benefits will be calculated from IP related profits rather than from gross income. With regards to the nexus approach imposed by Action 5 of BEPS, benefits will be limited to the proportion of the taxpayer’s own R&D expenditure as opposed to acquisition costs paid for already developed IP or R&D costs incurred by other group companies.
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