Hungary has developed its internal legislation on transfer pricing (hereinafter: TP) regulations since 1996. Though the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) are not obligatory in Hungary, the domestic transfer pricing legislation is based on the OECD Framework.
Currently, the TP legislation is provisioned in the Act LXXXI on Corporate Income Tax (hereinafter: Act LXXXI) sections 4,18 and 31; as well in 2017 the Ministry of National Economy approved Decree 32/2017 which regulates the methods of transfer pricing documentation. In addition, the Double Tax Agreements serve its purpose toward TP regulations.
Arm’s Length Principle
Section 18 of the Act LXXXI provisions the arm’s length principle in transfer pricing regulations, ensuring that transactions between affiliated entities reflect market-based pricing. Particularly, section 18 sets out clear rules for adjusting pre-tax profit when transfer prices deviate from market norms. If a taxpayer applies a higher-than-market price, they may reduce their taxable profit under specific conditions, such as ensuring that the counterparty (not being a controlled foreign company) acknowledges the adjustment. If the price is lower than the market rate, the taxpayer must increase pre-tax profit unless the counterparty is an individual sole proprietor.
Recently, through the aforementioned Decree No. 32/2017 the compliance requirements were further strengthened, by introducing the mandatory use of the interquartile range when using external databases to determine comparable prices.
Related Party Definition
In Hungarian corporate tax law, related parties (affiliated companies) are defined under Section 4, point 23 of Act LXXXI of 1996 on Corporate Tax and Dividend Tax. A related party relationship exists when there is majority control or significant influence between entities. This includes cases where one entity directly or indirectly controls another, where both entities are controlled by a common third party, or where there is dominant influence over business and financial policies. The definition also extends to nonresident businesses and their domestic branches as well as foreign branches of Hungarian taxpayers. Additionally, a 25% ownership or voting rights threshold establishes related party status for specific tax provisions, while a 50% threshold applies to others, considering joint influence within corporate groups.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Hungary are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
Hungary does not have a preferred method, relying on the OECD-provided methods based on the “most appropriate method” principle. However, the legislation also confirms that, in case the taxpayer can properly demonstrate that none of these methods are appropriate, they may use any other reliable method.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Hungary:
In practice, Hungary follows the OECD Transfer Pricing Guidelines (OECD TPG) and applies the comparability analysis outlined in Chapter III. When conducting comparability analyses, preference is given to local companies: starting with Hungary, then expanding to the Visegrád countries, and, if required, additional regions.
Documentation Requirements
Documentation requirements for transfer prices in Hungary are based on the three-wheeler method of OECD. That means multinationals have to report the following to the Hungarian tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
The master file is prepared by the parent company and provides an overview of the entire corporate group, including its global operations, structure, and transfer pricing policies. In contrast, the local file is prepared by the local entity and focuses on specific transactions carried out within the local jurisdiction.
For Hungarian taxpayers, the local documentation must be prepared separately for each transaction and be completed by the time the yearly corporate income tax return is filed. However, while the documentation must be available, it does not need to be submitted automatically to the tax authority. Instead, it must be kept on record and provided upon request during a tax audit.
If a taxpayer identifies errors in the documentation—such as inconsistencies in the tax base, tax amount, arm’s length price, or price range—it may correct the records within the statute of limitations, provided the correction is made before the tax authority begins its inspection.
Country-by-Country Reporting
Hungary implemented Country-by-Country (CbC) reporting to meet the international tax requirements of the BEPS framework.
- Country-by-country (CbC) reports must be submitted by multinational enterprise (MNE) groups that had a consolidated turnover of at least €750 million in the preceding fiscal year. The parent company is required to submit the report within a year following the end of the fiscal year if it has tax residency in an EU member state. Nonetheless, an EU-based group business is required to handle filing if the parent firm is not bound by comparable CbC reporting regulations in its nation or if there is no exchange agreement.
- CbC report should include key operational and financial information, such as revenues, profit before taxes, income tax paid, workforce size, capital, total profits, and physical assets, for each country in which the group conducts business. All group entities, their primary business operations, and their tax residency information must also be listed.
- Tax authorities in Hungary share these reports with other EU members within 15 months of the reporting period.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Hungary uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines and EU directives.
The Hungarian Advanced Pricing Agreements regime allows taxpayers to request unilateral, bilateral, or multilateral APAs to determine transfer pricing in advance. Once granted, an APA remains valid for three to five tax years and can be extended for an additional three years upon request. The APA is generally binding on the tax authority, provided the taxpayer complies with its terms. If new, previously unknown facts emerge that affect the agreement or the arm’s length price determination, the terms of the APA can be modified upon request. Hungary has also aligned its legislation with Directive 2015/2376/EU, ensuring the automatic exchange of advance cross-border tax rulings and APAs within the EU.
Starting January 1st, 2023, the fee for an APA with the Hungarian Tax Authority has been increased to 5,000,000 HUF for a unilateral procedure. In the case of bilateral or multilateral procedures, the fee is 8,000,000 HUF.
Mutual Agreement Procedure (MAP): Taxpayers can settle international tax issues resulting from the interpretation or application of tax treaties using Hungary’s Mutual Agreement Procedure (MAP). Even if a taxpayer has already sought domestic legal remedies, they are still eligible to obtain MAP aid. Regardless of domestic time constraints, the tax authority can modify the taxpayer’s initial tax liability after reaching an agreement through MAP. Mandatory binding arbitration clauses are not yet present in Hungary’s tax treaties, though.
Approach to Transfer Pricing Audits
Audit control is conducted by both Federal and Cantonal tax authorities. Hungarian tax authorities closely examine transfer pricing in regular tax audits, focusing on low-risk, low-profit entities and offshore structures. They also scrutinize transactions involving intellectual property, intercompany financing, and business restructurings to ensure compliance with the arm’s length principle.
Penalties
If a taxpayer fails to comply with transfer pricing rules, resulting in a tax base adjustment, they may face tax penalties and late payment interest under general tax regulations.
Non-compliance with transfer pricing documentation requirements can lead to a penalty of up to HUF 5 million (~EUR 12,500) per missing or incorrect document (with the Master File and Local File treated separately). For repeated violations, the penalty can increase to HUF 10 million (~EUR 25,000). While late payment interest applies to additional tax assessed, it does not apply to penalties for missing or inadequate documentation.
Taxation at a Glance
Hungary consists of 19 counties, all of which follow national tax laws and use the Hungarian Forint (HUF) as the official currency. The country’s tax system is administered by the National Tax and Customs Administration, which oversees tax collection, enforcement, and compliance across all regions.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 9% |
VAT | 27% |
Withholding tax on dividends to non-residents | 0/15% |
Withholding tax on interest to non-residents | 0/15% |
Withholding tax on royalties to non-residents | 0% |
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