This is how Hungary's windfall tax will change

The Hungarian government has published its decree on the windfall tax late on Wednesday. Although this levy introduced in 2022 was supposed to be temporary and phased out at the end of this year, the cabinet will continue to collect it from various sectors even in 2024, despite its explicit pledge to the European Commission to scrap it by end-2023.

Some sectors will have a smaller extra tax obligation, while it will be kept in place in an unchanged form in others. The decree stipulates that the new rules on the windfall tax will expire on 1 January 2025.

It means that this special tax will remain in place only by the end of next year, if the government does not grows even more attached to this "temporary" form of revenue that is...

Banks and financial enterprises - If you buy a lot of government securities, you can have your tax halved!

In 2024, the extra profit tax for banks and financial institutions will remain based on the pre-tax profit of 2022. This rule is applicable as of 1 June this year, following an April amendment. This is in line with Portfolio's scoop that the government is cementing the 2022 tax base. The 2022 pre-tax profit as the tax base will be adjusted downwards and upwards by several items:

• it is reduced by the amount recognised as dividend income in 2022;
• is reduced by profits from the sale of goods or the provision of services not generated in the ordinary course of business in 2022;
• it is increased by the bank tax, transaction tax and windfall tax charged to the pre-tax profit for the tax year 2022.

The tax rate is 13% on the part of the tax not exceeding HUF 20 billion, and 30% on the amount above that (this is also the case in the second half of this year, but with a limit of half that amount, HUF 10 billion).

The credit institution or financial undertaking must assess the special tax for the tax year 2024 on a separate form by 10 June 2024 and pay the tax liability in two equal instalments by 10 June 2024 and 10 December 2024.

A crucial change is that those that buy a lot of government securities, may even have their windfall tax halved.

As of July, investment funds will also be required to boost their government bond holdings in certain portfolios.

The reduction of the tax liability may be

• up to 10% of the increase in the stock of government securities and
• up to 50% of the extra profit tax liability calculated without it.

If everyone succeeds, it will be in line with the Fiscal Council's budget bill assessment, which showed a halving of extra profit tax revenues from banks and financial institutions in the draft budget for next year (to HUF 132 billion from HUF 264 billion).

Windfall tax on energy companies here to stay

The tax rate remains 10% of the tax base, just like this year.

Windfall tax on pharmaceutical producers halved

This special levy will be mentioned by those affected for a long time to come, as the government decree stipulating the new rules was published during the night of 13 December 2022, and it will remain in effect next year too, but with different rates. The new regulation states that

as of 1 January 2024, the rate of the tax will be

• 0.5% on the part of the tax base not exceeding HUF 50 billion;
• 1.5% on the part of the tax base between HUF 50 billion and HUF 150 bn;
• and 4% on the part of the tax base exceeding HUF 150 bn.

This means the tax rate will be halved. The government pencilled in HUF 32 billion from this tax for 2024, which compares with HUF 122 bn expected in 2023, but note that it is two years worth of windfall tax.

Special tax on the pharma sector to be raised

There were two measures in 2022 that affected pharmaceutical industry players: firstly, distributors were affected by the hike to the repayment obligation for subsidised sales, and secondly, pharmaceutical manufacturers were hit by a special sales tax last December.

Wednesday night's decree halved the rate of the special tax on manufacturers, so pharmaceutical companies benefited. However, it increased the repayment obligation for subsidised sales in certain cases. The cabinet has hidden the bitter pill for pharmaceutical companies and distributors in Section 12 of Wednesday's government decree, which reads as follows:

In Article 7(1), the words "in 2022 and 2023" are replaced by "in 2022, 2023 and 2024", the words "in the case of 28 per cent" are replaced by "in the case of 40 per cent";

This means that the rate at which pharmaceutical companies are taxed on their subsidised sales (with payments made to the pharmaceutical fund) is changing, and not in a small way.

Last summer, the government already introduced a change here: previously, there was a uniform 20% tax rate for pharmaceutical manufacturers and distributors, and then a new element was introduced with the windfall tax rule entering into force last year.

In particular, the repayment rate remained 20% for medicines with a producer price of less than HUF 10,000, while the obligation to pay increased to 28% for medicines with a producer price of more than HUF 10,000.

This was seen at the time as putting (innovative) international companies with more expensive products at a relative disadvantage. And the amendment to the regulation, published late Wednesday night, will further increase this relative disadvantage. The repayment / tax rate for medicines with a producer price of more than 10,000 HUF will rise to 40% from 28%.

Windfall tax on manufacturing companies

Since last summer, businesses producing bioethanol, starch and starch products and sunflower oil have been subject to the special tax. The only change here is that the government will maintain this tax in 2024.

Insurers: everything remains the same

The supplementary tax on insurers introduced last year will continue to run at unchanged rates, ranging from 2 to 12% for non-life insurance and from 1 to 5% for life insurance, in 2024, as it does this year. The Hungarian Insurance Association has protested against these plans in recent days. The tax base is "continuously accruing": in 2024, the current annual premium income will still be taken into account and insurers will have to pay a tax advance first.

Supplementary tax on telecom companies: no change

The telecommunications sector cannot breathe a sigh of relief from the squeeze of the windfall tax either, as Wednesday night's decree stipulates that taxpayers must assess, pay and declare - on a form prescribed by the tax authority - an additional advance tax equal to the amount of the supplementary tax assessed for the tax year 2023 by the last day of the fifth month of the tax year starting in 2024.

Likewise, the extra profit tax paid by the producer of petroleum products (namely Mol) on the basis of the price spread between Urals crude oil and the Brent crude benchmark is maintained. But the special tax on producers eligible for green premium type support under the regulation of the operational support system METÁR will remain in force next year.

Squeeze on retailers tightened

The windfall tax on retailers is to remain in place also in 2024, with the following rates:

• a) 0% on the part of the tax base up to HUF 500 million;
• b) 0.15% on the part of the tax base between HUF 500 mn and HUF 30 billion;
• c) 1.0% on the part of the tax base between HUF 30 bn and HUF 100 bn;
• d) 4.5% on the part of the tax base exceeding HUF 100 bn.

A significant change here, and an innovation compared to the current regime, is that the tax rate above HUF 100 billion will increase from the current 4.1% to 4.5%.

Softening of the mining royalty

Until now, the windfall tax decree relating to the mining royalty has established several rates for the quantities extracted, and for example, last year's decree also stated that hydrocarbon fields put into production before 1 January 2008 are taxed at a 48% mining royalty rate, while extraction from fields put into production after 1 January 2008 is taxed at a 36% rate. The 2024 rules change this by cutting the 48% rate to 24% and the 36% rate to 18%.

The draft budget shows that in practice this means that next year's revenues from the mining royalty will fall by HUF 142 billion (42.5%) to HUF 192 billion.

The regulation also contains an exemption. Mining companies storing hydrocarbons underground are not subject to the requirement that the quantity to be extracted in 2024 must not be less than the quantity extracted in 2021.

The specific value of minerals and geothermal energy is now extended to 2024.

Cover photo: Mihály Varga, Minister of Finance (l) and László Kövér, Speaker of Parliament, at a press conference on the 2024 budget bill and its negotiation procedure in Parliament on 30 May 2023. Source: MTI/Zoltán Máthé