In Focus: Hungary – Taxpayers’ Categories

Just like in every jurisdiction, settling tax liabilities compliantly is important to avoid penalties and other consequences. But in Hungary there are additional benefits to a taxpayer if tax liabilities are settled as compliantly as possible.

As of 1 January 2016, Hungary introduced the so-called taxpayers’ qualification system. This means the Hungarian Tax Office (HUTA) qualifies its clients into three categories. The system covers all direct and indirect taxes.

The qualification applies to companies with an establishment in Hungary, taxpayers with a VAT registration as well as taxpayers that are members of a VAT group. Individual taxpayers are not subject to this classification. Accordingly, foreign insurance companies declaring insurance premium tax (IPT) liabilities are subject to this qualification.

What are the different categories?

There are three categories – risky, general and reliable taxpayer. The best is ‘reliable taxpayer’ which provides the taxpayer with additional benefits and understandably the worst is ‘risky taxpayer’ and this classification comes with additional, stricter rules. If a taxpayer doesn’t meet the criteria of a reliable or risky taxpayer but behaves compliantly most of the time, then they will be placed in the general category.

How does the taxpayers’ qualification process work?

HUTA reviews a taxpayer’s status every quarter. The qualification process takes a month and taxpayers are notified electronically of any changes to their category via the tax office online portal.

What are the criteria to qualify as a reliable taxpayer?

To qualify as a reliable taxpayer, a company must comply with all the below criteria:

• The company must have been operating continuously or have been registered taxpayers for at least three years
• The eventual tax shortfall that has been determined during an audit by HUTA doesn’t reach a certain limit (percentage in the current year and in the previous five years)
• The company hasn’t been under enforcement procedure within the current and the previous four years
• The company isn’t under bankruptcy, liquidation, winding-up proceedings within the current and the previous five years
• The eventual tax debt of the company doesn’t exceed HUF 500,000 (approx. EUR 1,500)
• The company tax number hasn’t been withdrawn in the current year and the previous five years
• The amount of the default penalties has not reached a certain limit in the previous two fiscal years
• The company hasn’t been qualified as a risky taxpayer
• The company is in tax payment position

As you can see the criteria is robust and extensive, but it is achievable within three years following the tax registration if a company demonstrates consistent compliant behaviour.

What are the criteria to qualify as a risky taxpayer?

Whereas a taxpayer needs to fulfil several conditions simultaneously to qualify as a reliable taxpayer, a risky categorisation can be awarded if any of the below conditions are met:

• The taxpayer is listed on the substantial outstanding errors taxpayers’ lists
• The taxpayer is listed on the substantial tax debt taxpayers’ list
• The taxpayer is employing people without registration
• The taxpayer’s shop has been forced to shut repeatedly within one year
• The taxpayer’s tax number was deleted
• The tax shortfall determined by HUTA during an audit exceeds a certain limit in the current and in the previous five years
• In the previous two tax years the amount of the default penalties exceeded a certain limit
• A penalty has been levied due to improper seat registration

Once a taxpayer is placed in the risky category, this qualification will remain for at least a year or in some cases, for the duration of noncompliant behaviour.

What are the benefits of being categorised as a reliable taxpayer?

There are many benefits which include:

• The amount of the default penalty might be reduced by 50%
• The amount of the tax penalty might be reduced by 50%
• Automatic provision of payment moratorium, meaning the potential shortfall should not be paid immediately, but within a year without interest
• The time frame of the reclaims is reduced
• The tax audit can last for no longer than 180 days

What additional costs do risky taxpayers need to consider?

For a risky taxpayer the opposite conditions are applicable, meaning:

• Increased tax and default penalties
• The time frame of the reclaims will be longer
• The tax audit can last longer

Ensuring tax compliance is always important but the benefits of a reliable taxpayer qualification in Hungary are clear, and so is avoiding a risky taxpayer qualification.