At 9%, Hungarian corporate tax is one of the lowest in the European Union. However, depending on its registered seat, your Hungarian company will very likely to pay local business tax as well. As opposed to corporate tax, local business tax does not exist in other countries, so it is recommended to learn what it is and how much of it you can expect to pay.
What is local business tax?
Local business tax (often abbreviated as IPA or HIPA in Hungarian for “helyi iparűzési adó”) is collected by municipalities. Your enterprise needs to pay IPA/HIPA where its registered seat and establishments (factories, warehouses, workshops, offices and other properties) are located. If the location of the establishments is different from the registered seat, local business tax is often divided between the municipalities in question. Subsidiaries and branch offices are also required to pay local business tax at the registered seat of their branch office. Commercial representatives do not need to pay local business tax.
How is IPA/HIPA calculated?
The base of local business tax is equal to the revenues of your Hungarian company (minus the cost of the goods, services, and materials you purchased, as well as the money you spent on contractors, research, and development). The tax rate is determined by the municipality. Starting from 2021, IPA/HIPA is capped at 1% for SMEs with a balance sheet total and yearly net sales under HUF 4 billion (approximately EUR 11.35 million). For larger companies, the upper limit of local business tax is 2%. Although municipalities can waive their right to levy IPA/HIPA, most of them charge local business tax because it is an important source of income for them. Currently, there are about 350 municipalities with a 0% IPA/HIPA rate, mostly in the counties of Borsod-Abaúj-Zemplén, Baranya, Zala and Szabolcs-Szatmár-Bereg. In Budapest, the tax rate differs from district to district.
Are you about to form a company?
Since the amount of local business tax you need to pay depends on where the registered seat and establishments of your enterprise are located, it is worth doing some research before you form a company. If your activity does not require you to be at a specific place, you can find a municipality with a favorable IPA/HIPA rate for your registered seat. You can also opt for a virtual office service, which allows you to have a registered seat in the municipality of your choice without having to maintain a physical presence there. However, if you have establishments elsewhere, you will not be able to reduce your local business tax to zero. Furthermore, changing registered seat requires a company modification which is a costly procedure, and you should only trust a proven seat address provider with your official correspondence.
Always consult your accountant
By having your registered seat at a municipality with a low IPA/HIPA rate, you can save money on local business tax. Nonetheless, as with any other tax, you should have an expert accountant who can guarantee that your finances comply with the regulations. Helpers Finance will gladly help you with this: we have provided accounting and tax advisory to international SMEs in Hungary for years. You can see our prices here. You can reach us by calling +36 1 215 0712, by e-mailing firstname.lastname@example.org or by filling in our contact form.