R&D tax incentives in Hungary and the Central and Eastern European region

The promotion of research and development activities is a priority for many Central and Eastern European (CEE) countries. It means businesses that carry out basic, applied research and experimental development (R&D) are eligible for a range of tax reliefs.

In Hungary, the direct costs of R&D projects can be treated as tax-deductible expenses for corporate tax purposes. In addition, as a super-deduction scheme, the tax base can be further reduced by the direct cost of an R&D project carried out within the scope of the company’s own activities. Businesses can choose whether they wish to claim the relief in the financial year in which it is incurred, or over a number of years after capitalisation. Overall, given Hungary’s low corporate tax rate, the super-deduction may result in a 9% tax saving.

Development tax credit

A further corporate tax incentive is development tax credit, available to companies for new start-up investments. To qualify for the development tax credit, the present value of the R&D investment must reach approximately €250,000. To benefit from the tax credit scheme, a notification has to be filed with the Ministry of Finance prior to the start of the investment. A further condition is that the investment must be carried out by a company that qualifies as an SME or a large enterprise carrying out an investment outside of Budapest, as this incentive is unavailable in the capital city.

The amount of development tax credit depends on where the investment is made. In the more developed regions of the country, the aid is 30%. In less advanced regions, the aid is 50% to encourage economic operators to invest. As well as tax savings of between 30-50% of the eligible costs, other forms of aid, such as cash grants, may also influence the final amount in line with European Union (EU) State aid rules.

The tax credit is available for the first time in the financial year the investment is put into service or in the following financial year. Tax credit is then available in the following 12 financial years, up to the 16th financial year following the notification. A maximum of 80% of the calculated tax can be deducted as a development tax credit in a given financial year.

Local business tax and innovation contribution

The local business tax base, which applies a turnover-based tax payable in the territory of local municipalities, can also be reduced by the direct costs of R&D projects. The relief also contributes to reducing the innovation contribution payable, as its base is the same as that of the local business tax. The overall saving is 2.3% of the eligible costs. In addition, municipalities may, by decree, allow a reduction of the tax payable by 10% of the direct costs of the R&D activity.

Social contribution tax

The social contribution tax payable by employers may be reduced by 50% of the calculated tax on the wage costs of researchers employed by research centres carrying out R&D activities. This may result in a tax saving of 6.5%. Extra tax reliefs are available for specific employees, such as those at PhD level. It should be noted, however, that the salary for which a social tax credit has been claimed cannot also be super-deducted as a direct cost of the R&D activity for corporate tax purposes

R&D allowances in the CEE region

Other countries in the CEE region also have some form of R&D incentive, including the three major countries of the Czech Republic, Romania and Croatia.

Czech Republic

In the Czech Republic, companies that incur costs for R&D may reduce the corporate tax base of these costs twice. In effect, this 200% deduction for eligible costs incurred is deducted once as tax-deductible costs and the second time as a deduction for the support of R&D.

There are no minimum or maximum limits for the amount of R&D costs that may be included in the deduction for R&D support. However, costs for services acquired from other parties do not qualify. In cases of a low tax base or a tax loss, the unused deduction for the support of R&D may be carried forward for three subsequent years.

Croatia

Generally, R&D costs are deductible for tax purposes in Croatia if booked as expenses in the profit and loss (P&L) account in line with the applicable accounting standards. Additionally, Croatian tax legislation prescribes tax relief for R&D projects and feasibility studies.

R&D tax incentives may decrease the corporate income tax base to the extent of 125%-200% of eligible project costs, depending on the type of R&D project, and for 150% of eligible costs for feasibility study R&D projects lasting three years. To apply for R&D tax incentives, a company should submit prescribed forms to the Ministry of Economy and Sustainable Development before the start of the R&D project.

Romania

The Romanian tax legislation provides tax incentives for R&D activities applicable at both  company and employee levels.

• The tax incentives applicable at company level consist of an uplift for corporate income tax deduction purposes of eligible R&D expenses. This provides an additional deduction of 50% of the eligible R&D expenses and accelerated depreciation for equipment and apparatus used in R&D activities.

There is also full corporate income tax exemption for companies that exclusively carry out R&D activities in the first ten years of activity. However, this is currently inapplicable as it is awaiting approval from the European Commission (EC) from a State aid perspective.

The tax incentive applicable at the employee level consists of the personal income tax exemption on 10% of the salary income earned.

A mandatory step for large taxpayers applying for tax incentives is obtaining certification on the nature of the R&D activities by a certified R&D expert included in an official register.