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1. National Office for Research and Technology

Hungarian Tax Incentives for Research and Development

As far as Hungary is concerned, there is no increment scheme; tax schemes are strictly based on the level of R&D
expenditures. Fiscal measures related to R&D were started to be employed relatively recently, (e.g. R&D tax
allowances are used since 1997, and their rate has jumped in 2000 from 20% to 100%, while the special 300% rule is
applicable from 2004).

The Hungarian R&D fiscal measures in coincidence of the EU practice usually take one of the three following forms:

(1) tax deferrals, which are relieves in the form of a delay in payment of tax, e.g. deprecation allowances;
(2) tax allowances or extra amounts over current business expenses deducted from gross income
     to arrive at taxable income;
(3) tax credits or amounts deducted from tax liability.

Measures                     (1) deferrals                (2) allowances                    (3) tax credits
(a) current                  X                            X                                 -
(b) capital                  X                            X                                 X

Nowadays, Hungary uses several fiscal measures to stimulate R&D, the most important of which:

         100% RTD corporate tax allowance (also available for subcontracted R&D activities if partner is public/non-
          profit research site)
         300% RTD tax allowance if the company lab is located at university or public research institute
         In case of SME's, there is a special IPR tax allowance. The emerging costs of getting and maintaining of the
          patents, utility model and design in the area of Hungary can be deducted from the corporate income,
          supposing these costs can not be regarded direct costs of fundamental research, applied research and
          technological development.
         Tax credits on investments, including R&D investments (rate depends on volume, company size and
          geographic location)
         Tax free employment of PhD, MSc or MBA students (up to the official minimum wage) in the field of
          educational and research activities and other services closely related to these activities.
         Option to create tax-free investment reserves, including R&D investments
         Tax allowance for corporate donations to organisations of public benefit supporting R&D activities
         Tax credit for individual donors supporting R&D activities.
         Tax credit off personal income tax after the creation of intellectual property.
         In addition, the Research and Technological Innovation Fund with fiscal incentives like credits toward the
          innovation contribution to be paid by companies.

The amount of any floor or cap on the amount of R&D that can be claimed or a cap on the maximum amount of the
tax incentive that can be deducted:

         100% RTD tax allowance: no cap
         IPR tax allowance: no cap
         300% RTD tax allowance: up to 50 M HUF
         investment tax credits: up to 25% of value of material assets
         tax free employment of students: up to official minimum wage
         tax credit of individual donors to R&D up to 50.000 HUF
         tax credit for individuals after creation of intellectual property up to 50.000 HUF
         tax allowance for corporate donations: 20% of net turnover
Carry-over (backward or forward) is possible only in specific cases:

a) For investments: option to create tax-free investment reserves up to 500 M HUF
b) According to the Act on Accounting, current R&D expenditures can be deferred to later years
   e.g in case of sustained losses, with hopes for profitability for the following year

The firms, which receiving royalty income in profit or in profit from any other sources, are able to get the same
benefits from these fiscal measures. Firms, which are not in profit, are not able to get benefit from a fiscal measure in
these ways. Research and Technological Innovation Fund: fiscal measures positively discriminate micro-companies,
and to a lesser extent SMEs. Tax credits on investments are higher for SMEs; SMEs also enjoy a preferable
treatment via a specific tax deferral measure. The tax allowance or tax credit for R&D is not taxable. The tax credit
can not be traded.

In the future, the intended direction for Hungary (e.g. through the new Bill on Research, Development and
Technological Innovation-hereinafter called Act on Innovation) is the improving and fine-tuning of fiscal measures to
create innovation-conducive conditions for the economy and the society. The advantage of fiscal measures is that
they are more "democratic", provide for a playing field with equal opportunities, reaching a wider audience than grant
schemes, where e.g. proposal-writing wizards have an advantage. On the other hand, they are not as much
concentrated, cannot serve a specific, targeted and well-defined goal.

Hungarian legislation related to R&D fiscal measures:

        Hungary has two major legislations relating to fiscal measures supporting R&D, with definitions of R&D. The
         Act C. of 2000 on Accounting uses a compact version of the OCED/Frascati Manual definitions,
         recommended by the International Accounting Standards Committee (Frascati definitions are also used in
         statistical data gathering legislation); while the Act XC. of 2003 on the Research and Technological
         Innovation Fund uses a slightly different terminology in line with EU competition regulations (as this Act has
         to be declared as a State Aid measure, EU competition terminology, based on the WTO document
         "Agreement on subsidies and countervailing measures", was followed as closely as possible).
        According to the provisions of the Act of 2003 on the Research and Technological Innovation Fund
         contribution (innovation fee) shall be payable by business companies which have their registered office in
         Hungary and which are subject to Act C of the year 2000 on Accounting, except for companies considered
         micro-enterprises under Article 3 of Act XCV of the year 1999 on Small and Medium Enterprises and the
         Promotion of their Development. Within the limits defined in this Act, the gross annual contribution amount
         may be reduced by the direct costs of the R&D activities conducted by the business company itself, and the
         costs of R&D activities ordered from organisations identified in of Act CLVI of the year 1997 on
         Organisations Operating in the State Budget Framework and Organisations of Public Benefit. Any
         deductible costs shall be reduced by any public aid and used to cover the relevant costs, both in the case of
         R&D conducted by the company itself and when the R&D was purchased.
        R&D activities are designated by law to be so-called activities of public benefit, thus foundations supporting
         R&D are designated foundations of public benefit, eligible for specific privileges according to the Law CLVI
         of 1997 on Organisations of Public Benefit. These privileges include exemption on corporate taxes as well
         as other tax and contribution allowances and credits. See the text of legislation for details, as well as exact
         requirements to be registered as an organisation of public benefit.
        On Corporate and Capital Return Taxes Act LXXXI of 1996 (modified by Act CXIII of 2001) contains the
         earlier mentioned R&D fiscal measures.
        In addition to that, the corporate taxation rules have been changed from January 2004. To improve the
         competitiveness of the domestic enterprises, their corporate tax decreases to 16 percent from 18 percent.

Hungary finds it particularly important and has undertaken to publish detailed guidelines for companies, especially to
SMEs (the exploitation of the benefits arising from the fiscal measures is less than satisfactory among them) usually
not having the knowledge, expertise and experience to deal with sometimes complicated fiscal regimes. We have a
detailed guideline about the tax incentives and the innovation fees on the following websites: (only
in Hungarian). Other than publishing guidelines and setting up diverse information schemes, a way to fight this
problem is simplify measures and relieve administrative burdens as much as possible.

Generally, there is no expiration date set for Hungarian fiscal measures. When applicable, incremental rates are set
for the introduction phase the fiscal measures. For example, see the Research and Technological Innovation Fund for
incremental increases of the innovation contribution for the first years of the measure.

Geographic differentiation: Tax credits on investments are higher for economically backward regions.
        In 2001, only around 400 companies with double bookkeeping (out of a total of over 180.000, 155.000 of
         which being micro-companies) utilised R&D tax allowances: these represented 9% of the total price income;
         8% of employment and 5.5% of total corporate taxes. 85% of them were profitable (qualifying for 88% of the
         allowance). With respect to the overall volume of tax allowances, large companies are dominating: 21.9
         Billion HUF out of 26.8 Billion HUF (0.18% of GDP) of total tax allowances went to the 89 large companies
         The number of companies using the tax allowances showed only a slight increase over the years, while
         after the stagnating first years, the actual amount of allowances jumped from 4.6 Billion HUF in 2000 to 26.8
         Billion in 2001 (this can mainly be attributed to the 5 change of the rate from 20% to 100%), although this is
         still only 0.9% of all items reducing the aggregate corporate tax base. As a result, it can safely be said
         currently that the overall economic situation and profitability of companies have mostly visibly improved due
         to the fiscal measures supporting their R&D activities.

Hungarian Innovation Policy
by Philip Hemmings
Published 2005
OECD Economics Department Working Papers

There is also a new executive body, the National Office for Research and Technology (NKTH), which is notably
responsible for running a new fund for financing support for innovation – the Research and Technology
Innovation Fund

Key schemes in Hungary's innovation policy
Grants available to both the public and private sector:
A system of open-tender grants for specific research projects funded by the innovation fund (around 30
projects are
currently being funded).1
R&D related (co-financed) grants from the EU, including special measures for providing innovation services in
industrial parks.2
Tax (and similar) incentives
Firms can make the following deductions from corporate income tax base:3
    100% of the value of other R&D spending for outsourced R&D projects and in-house R&D
(introduced in
2001, prior to this the tax allowance was 20% and was first introduced in 1997).
    300% of the value of R&D if it is performed in a higher-education institution or in an institution
managed by
the Hungarian Academy of Sciences (up to a limit of HUF 50 million) (introduced in 2004).
    50 to 70% of the value of donations to foundations supporting R&D activities.
    10% of wage costs related to R&D or software activities (in this case the deduction is on corporate
tax, not its base).
Offset for contributions to the Innovation Fund can be made by the amount spent on R&D.
Special policies for SMEs (firms with less than 250 employees)
Assistance with intellectual property rights (IPRs) and marketing:
    The cost of applying for IPRs (up to HUF 30 million) can be deducted from the income-tax base.
    In December 2004 grants valued at HUF 80 million were awarded for tenders to provide services to SMEs
help international registration of patents and marketing.
    Support services for patenting: In 2004, a programme (VIVACE) was launched that aims for the Hungarian
Patent Office to have a new customer service network and to provide training in industrial and intellectual
property rights.
Support to overcome liquidity problems in financing research in early stages of innovation:
    Financial support, funded by the Hungarian Development Bank.
    Subsidies for firms getting EU R&D grants to help overcome the problem that the EU funds are only
awarded when research projects are completed (part of the 2005 Innovation Act).
Special policies for public-sector institutions and universities
As part of re-focusing of the grant system, universities have been able to apply for grants to set up regional
New rules on university spin-off companies (part of the 2005 Innovation Act):
    Universities (and similar institutions) can now set up a spin-off company without government approval and a
rule that the spin-off had to have at least 50% public ownership has been scrapped. Rules on academics
taking leave without pay to work elsewhere have also been lightened.
    New opportunities for grants for setting up a spin-off (one of the conditions being that the spin off is
classified as an SME, i.e. it has less than 250 employees).
Some reforms to tertiary education are underway, notably with the introduction this year of shorter and more
vocationally oriented degree courses.
1. Details of the projects supported by the open tender grant system can be found on the NKTH’s website.
2. Firms or universities which have succeeded in getting a grant of more than HUF 50 million of EU Structural
Funds to provide
innovation services to companies in industrial parks can get a subsidy equal to 50% of costs up to a value of
HUF 100 million.
3. Only the most important tax-incentives for R&D are listed. The deductions are “additional” deductions in the
sense that R&D
expenditures are counted as a business cost anyway and like other costs can go towards reducing the profit
assessed for
corporate income tax. The treatment of donations is in fact more complex but effectively means an additional
tax deduction of 50%
(70% if the donations are classified as “permanent”).

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