Hungary windfall tax relief - Introduction
In December 2022, Hungary's government introduced a windfall tax on drug producers.
It was based on net revenues generated in 2022 and 2023 in attempt to 'cure' its ailing state budget.
The rate increased progressively from 8% on net revenues exceeding 150 billion forints ($398 million).
Companies have to pay the new tax for both 2022 and 2023 next year.
Relief from windfall tax
However, the government has somewhat rowed back to provide support to some of the businesses within its scope.
Published in the Hungarian Gazette on 17 July 2023, the detailed legislation provides for taxpayers to reduce windfall tax and increased clawback payment obligations.
These measures come as welcome news for the Pharma industry, offering potential relief based on investments in tangible assets and research and development costs.
Reducing the increased clawback payment obligation - conditions
The tax relief provides a potential lifeline for eligible taxpayers in the pharmaceutical sector. It offers the opportunity to reduce their clawback payment obligation in the 2023 and 2024 tax years.
Deductible items include the cost of investments in Hungary for tangible assets, direct costs of fundamental research, applied research, and experimental development in the healthcare sector.
Furthermore, marketing authorization holders or distributors, in case of an approved agreement, can apply the tax relief starting from 20 July 2023, and continue to benefit from it for both 2023 and 2024.
Benefits for consolidated companies
For corporate groups preparing consolidated financial statements, an affected company may also apply deductible items indicated in its financial statement for the tax year preceding the ongoing tax year.
This provision ensures that consolidation does not overshadow the tax relief, allowing for smoother application and fair distribution of benefits among the group entities.
Direct R&D Costs and Clinical Research
The tax relief extends further, encompassing the costs of phase I to III clinical trials and clinical research commissioned in Hungary as deductible items.
Moreover, the location of direct R&D costs is no longer a barrier, as long as the clinical research is conducted in Hungary.
However, some restrictions may apply in specific cases.
Commencement rules
The clawback payment obligation rules took effect from 18 July 2023.
Taxpayers can apply the relief for the first time for the clawback payment obligation due by 20 July 2023.
Any remaining unused tax relief may be applied to subsequent clawback payment obligations, while the relief is available until the clawback payment obligation due by March 20, 2025.
Reducing windfall tax on Hungarian pharmaceutical manufacturers - conditions
The same favorable rules apply to Hungarian pharmaceutical manufacturers regarding deductible items and tax relief caps.
Clinical research commissioned in Hungary involving the manufacturers may also be considered to reduce windfall tax.
However, unlike the clawback payment obligation, the windfall tax relief will only take effect on 1 January 2024.
Hungarian pharmaceutical manufacturers can apply the relief for the first time when determining their tax liability for the tax year 2024.
Hungary windfall tax relief - Conclusion
With the introduction of these measures, Hungary's pharmaceutical industry should he shielded to some extent from the windfall taxes previously introduced.
These incentives should serve to encourage investments in tangible assets and research and development, while alleviating the financial burden on taxpayers.
If you have any queries relating to the Hungary windfall tax relief or tax matters in Hungary more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.