Research and development
Almost all companies are active in development, as the innovative approach is essential for being competitive on a long run. However, the vast majority of companies do not examine if the developments they carry out can be treated as R&D activity for tax purposes.
The main characteristics of all R&D activities are novelty, dissolution of a technological/scientific uncertainty, potential risk of failure, and expert participants in the project. Basically, all activities which meet these requirements can be qualified as R&D activities for tax purposes, regardless the industry or discipline concerned.
Currently, the following R&D related tax incentives are available in Hungary:
- double (triple) deductibility of R&D costs from the corporate income tax base;
- development tax credit related to investments serving R&D activity;
- deductibility of R&D costs from local business tax base and from innovation contribution base;
- social contribution tax credit based on employing a researcher or developer employee with a PhD or a higher academic degree or academic title.
As a simple example, the tax benefit available in connection with R&D related costs of HUF 1 million could reach HUF 203,000 calculated on the basis of total revenue of HUF 6 million and total cost/expenditure of HUF 4 million.
In order to utilize the R&D tax incentives, the following three conditions should be fulfilled: (i) the development carried out should qualify as R&D activity, (ii) the R&D activity should be performed as an own activity, and (iii) direct costs incurred in connection with the R&D activity should be supported with proper documentation. R&D activity may be regarded as own activity even if the Hungarian party only reimburses the expenses incurred in relation to the R&D activity, provided that the R&D activity relates to the Hungarian party’s business activity.
An official R&D qualification for the development projects may be requested from the competent authority, i.e. from the National Office of Intellectual Properties (NOIP). There are two types of qualification procedures: preliminary and subsequent. If the qualification of the project is requested in advance (i.e. prior to starting the project), the decision of the NOIP will be binding for the Tax Authority. Qualification of the project may be requested after starting the development project as well. The guideline of the NOIP in this case will not be binding for other authorities; however, most likely it would prove to be a sufficient supporting documentation during a possible tax audit.
- R&D focused due diligence;
- Review/Preparation of R&D cost calculations;
- Review/Design/Preparation of supporting R&D documentations with a view to mitigating tax risks;
- Review of corporate governance systems (ERPs) in order to track R&D activities;
- Analysis of R&aD related cost sharing agreements and methods applied within the group;
- Ad-hoc advisory services;
- Assistance in the preparation and submission of guideline requests for preliminary/subsequent R&D qualification;
- Preparation of guideline requests to be submitted to the Tax Authority, the Ministry for National Economy or other authorities.
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