Thresholds and specific SMEs regulations

1. VATrulesin Hungary Thresholds and specificSMEsregulations Effective Micro and Small Business Compliance Management – Tax Policy and Administrative Solutions International Tax Dialogue (ITD) Conference 5th of May 2011, Tbilisi

2. General overwiev Hungarianeconomy - Key facts Location: East-Central Europe Officialname: Republic of Hungary Area: 93 030 km2 Capital: Budapest Time zone: GMT + 1 hour Population: app. 10 million Ethnicgroups: Hungarian 96.9%, Roma 1.9%, German (0.6%), Slovakian (0.2%), Croatian (0.2%), other (0.2%) GDP: 200 billion$ Per capita GDP (at purchasing power parity): $19,700 Currency: Forint (HUF) Composition of GDP: agriculture: 3.2%; industry: 31.9%; services: 65% GDP growthratein 2010: 1,2% Doing Business Rankin 2010: 46th of 186 countries

3. General overwiev Taxationfacts - Statesectortaxrevenues Statesectortaxrevenues: cca. 33,8 billions of €, 91 % of totalstatesectortaxrevenuescollectedby National Tax and CustomsAdministration

4. General overwiev Taxationfacts – Taxadministration • National Tax and CustomsAdministration: • Customs and TaxAdministrationmergedinto a singleadministrationas of 1st January2011 • Governmentexpectations • more effective and economiccollection of staterevenues • more focusonthefightagainstfinancialcrimes • better flow of informationintaxationmatters • singlepubliccontactcentresforalladministrativematters • simplification of procedures • National competenceinalltax- and customs-relatedmatters • Independent centralbudgetaryorganisation

5. General overwiev of thehungarianeconomy Taxationfacts – Number of taxpayers

6. SME definition forgeneraltaxpurposes The indicators and threshold areharmonizedwiththeEC recommendation 2003/361: Thresholdsfor SME classification Differenceinthenationallaw: Anyenterprise in which the state or any local self-government holds,either directly or indirectly and either solely or jointly, 25 per cent or more ofthe capital or voting rights shall not be classified as an SME. !Differenttresholdsapply for specific tax purposes, e.g. turnover thresholds for certainVAT simplification purposes, or profit and turnover thresholds that influencetaxaudit frequency.

7. Valueaddedtaxin Hungary Main characteristics (1.) • Introducedin 1988, ValueAddedTax is nowregulatedbyAct. CXXVII. Of 2007 („VAT ACT”) • The new Hungarian VAT legislation came into effect on 1 January 2008, and it is fullyharmonized with the EU Directive 112/2006/EC.(2006/112/EC a recast of the Sixth VAT Directive of 1977) • VAT rates: • The standard rate of VAT is 25 percent • The following supplies of goods and services are exempt from VATbythetype of theactivity: • publicpostalservices, hospital, medicalcare, certaineducationactivities, insurance and reinsurancetransactions, paymenttransactions, gamblingservicesetc. • Since 1 July 2009, a new reduced rate of 18 percent has been applicable to dairy and bakery products and hotel services (from 9 July) and from 1 August 2009, also to central heating. • Reduced rate of 5 percent for the sale of most medicines, medical instruments, books, newspapers, and magazines.

8. Valueaddedtaxin Hungary Main characteristics (2.) • Non-deductablegoods and services: • the purchase of goods or services that are used or utilized for purposes other than the business activitiessubject to taxation • fueldirectly for the operation of a motor vehicle • the purchase or renting of passenger cars, motorcycles above 125 cc, yachts, sporting, and leisure boats • the purchases of foodstuffs and beverages (except, if the purchase is for the purpose of resale) • services of public catering services, entertainmentservices • purchasesand services received in connection with the operation and maintenance of passenger cars • taxi services, parkingand highway usage services (excluding vehicles over 3.5 tonnes) • purchaseof residential properties (except for taxable persons use or utilize the purchases for reselling or renting residential properties with respect to the residential properties rented out) • thirtypercent of the tax charged on telephone services

9. ValueaddedtaxinHungary VAT groups and reversecharge VAT groups: allowed, grouptaxation is available to taxable persons who meet all of the following criteria: All members of the group are: • taxable persons established in Hungary; • relatedcompanies; and • involved in one group only at any given time. The group is considered as asingle taxpayer obliged to fulfill its VAT liabilities using a single VAT number and filing common VAT returns. All transactions (supply of goods or services) performed within the group is outside the scope of VAT. Incurred input VAT is recoverable. Reversecharge: VAT is to be paid by the taxable person acquiring the goods or services in connectionwith construction and similar works,wasterealization, usedaccumulators, suplly of carbonemmissionrights, goodsorassetssoldduringliquidationprocessorinsolvency.

10. ValueaddedtaxinHungary Registrationtreshold • The taxpayer must fulfil its registration obligation prior to the commencement of its business activity on the territory of the Republic of Hungary • As the tax number generated upon registration also serves as a VAT identification number, no separate registration is necessary in respect of VAT • „One-stop-shop” system: • Privateentrepreneurs: Document Office of the local municipality • Companies: Court of Registration • Privateindividualswithouttax ID code: Taxauthority • Taxablepersondecideson VAT duringregistrationprocess: • VAT exemptbythetype of activity; • VAT subjectornot; • EU VAT number. • Application of specialtaxationmethods (specialschemeforfarmers – barter overcharge, touristic operators, optionstotax (saleorrent of properties) etc.

11. ValueaddedtaxinHungary Registrationtreshold Obilgatory VAT registration: annualturnover over 5 mill. HUF (18 200 €), underthetreshold VAT is voluntary. (Non VAT taxpayersbetween 10 000 € and 18 200 €annualturnoverin 2009: 40 575) VAT registrationtreshold is stablein Hungary theeffectivemarginslowlydecreases

12. ValueaddedtaxinHungary Frequency of VAT returns • As a general rule, taxpayers are obliged to submit VAT returns on a quarterly basis. • if the amount of tax payable exceeds HUF 1 million (approximately EUR 3,600) in the tax year preceding the previous closed tax yearVAT returns should be filed on a monthly basis. • if the amount of tax either payable or refundable did not exceed HUF 250,000 (approximately EUR 900) in the tax year preceding the previous tax year, VAT should be reported annually • iftaxpayer has EU VAT number, thetaxreturns must be submittedatleastquarterly • VAT grops must submitmonthly VAT returns • If the tax payer reaches the above limits during the course of the tax year, they have to switch to more frequent filing

13. ValueaddedtaxinHungary Recapitulativestatements • As a general rule, tax payers are obliged to submit recapitulativestatements (RS) of intra-community acquisitions and supplies of goods must besubmittedquarterly, by the 20th day of the month following the quarter. • Taxpayersobligedtosubmitmonthly VAT return must submit RS alsomonthly; • Ifquarterly VAT taxpayersquarterlyturnoveron EC salesexceeds 100 000 € must switchtomonthly RS; • Number of recapitulativestatements (2010): • Monthly: 29 482 • Quarterly: 20 881

14. ValueaddedtaxinHungary Use of electronictaxreturns Widespread and general use of electronic tax returns: From 2007 onward, each and every business entity must file all its tax returns electronically. Base of compliancestrategy: permanent expansionof electronic services The ratio of main tax returns filled in by software available on the Internet

15. ValueaddedtaxinHungary Refund of VAT - invoices • Negative VAT can be reclaimedinthe VAT return. • Ifamount of reclaimable VAT • exceeds 1 million HUF (3600 €) atmonthlytaxpayer; • exceeds 250 000 HUF (900 €) atquarterlytaxpayer; • exceeds 50 000 HUF (175 €) atannualtaxpayer. • The reclaimable VAT must be decreasedwiththeamount of VAT onnon-paidpurcheses.Notreclaimed VAT can be deductedfromthenextperiods VAT. • Invoices: • Taxable persons must issue an invoice or simplified invoice if the purchaser is an othertaxable person, or in case of IC trade and in case of distance selling. • For taxpayers who carry out only tax exempted activities it is allowed instead of issuingan invoice to use any other documents qualified as an accounting certificate.

16. SimplifiedEntrepreneurTax SpecifictaxregimeforSMEs • Introducedin 2003 • can be used if the entrepreneurfulfills special requirements (form of the enterprise, activity of the enterprise etc.); • it substitutes the Personal IncomeTax/Corporate Tax, VAT and some rules of the Accounting Act • Taxableincome: All income acquired by the taxpayer (no deductions) • Taxrate: 30% (startedwith 15%) • Main conditions: • permanentand unchangedoperation; • no public debt and default penalty; • the annual revenue cannot exceed HUF 25 million (90 000 €) • conditions connected to business activity: • inland current bank account, • no activity that fallsunder the Excise Tax Act, • no Community Tax Number, • can not be indirect re-presentativeregulated under the custom rules; • was not subject to a dissolution procedure or liquidation procedure by court order;

17. SimplifiedEntrepreneurTax SpecifictaxregimeforSMEs

18. Loweringtheadministrativeburden Governmentalactionplan • Creatingthe “Strong Europe” chosen for the motto of the European Union’s Hungarian Presidency; • Strong European economy requires fast and consistent implementation of structural reforms designed to serve rapid recovery from the crisis. • Programme to reduce administrative burden ofenterprisesin Hungary • Simplifyingtaxadministration; • Narrowing the scope of audit requirements; • Elimination of overlapping traits in administrativeand statistical data collection by the Government • Making fining practice the authorities’ morepredictable; • Simplifyingemploymentadministration. • Programmefocusesonsmall and mediumeterprises

19. Thankyouforyourattention!