Changes to the rules on royalties in corporate tax

1. Definition of royalties

The definition of royalty under Section 4 (20) of the Tao. The main change in the definition is that royalties are now defined as the result of certain exclusive rights, i.e. taxpayers no longer have to base their tax base adjustments on the difference between income and expenses, but on the difference between income and expenses.

These exclusive rights are:

• the patent,
• the utility model registration,
• plant variety protection,
• the supplementary protection certificate,
• protection of the topography of microelectronic semiconductor products,
• a licence to use the copyrighted software, a licence to use,
• designation as an orphan medicinal product.

In the tax year, the income must be reduced by the related costs incurred for the purpose of the royalty, such as the costs of subcontractors used in the tax year to produce the intangible asset, or the depreciation of the intangible asset, and only the difference is considered royalties.

2. Tax base corrections

The other main change is that in some cases "only" a proportionate share of the royalty income can be deducted from pre-tax profit. However, not all taxpayers are affected by this change, only those that order R&D services from an associated company to obtain a royalty-bearing or qualifying intangible asset or purchase a royalty-bearing or qualifying intangible asset from an associated company.

Taxpayers who do not acquire the intangible asset in this way will continue to be able to benefit from the reliefs in respect of the royalty income without restriction.

The ratio required for the deduction [Section 7 (22) of the Tao. tv.] can be determined by dividing the taxpayer's own direct R&D costs incurred for the acquisition or development of the given intangible asset by the "total" direct R&D costs incurred (including the taxpayer's own R&D and R&D ordered from an affiliated company or the acquired asset). In effect, we are looking for the proportion to which the taxpayer itself has contributed to the creation of the intangible good. In any case, the ratio thus determined may be increased by a further 30%.

Therefore, if the taxpayer shows a rate of 70%, he can increase it to 100% under the law, i.e. he can claim the reduction without limitation.

A new tax base-increasing item is also introduced in Section 8 (1) (c) of Article 8 (1) of the Tao. Based on this correction item, if the taxpayer has applied the pro rata reduction of the royalty received in the previous tax year, but in the following tax year realises a loss for the same royalty (more costs than income), then 50% of the pro rata loss will increase the tax base. Thus, in effect, the royalty deduction received "becomes definitive" if the taxpayer realises a gain on the intangible asset in the tax year following the deduction.

3. Transitional rules

Transitional provisions [§ 29/A (28)-(32)] have been inserted in the Tao. law to ensure the applicability of the provisions of the normative text in force from 16 July 2016. The essence of these is that the amended regulations apply to intangible assets acquired after 30 June 2016 and entitling to royalties produced, as well as to intangible assets declared after that date. Therefore, for intangible property acquired, produced or declared before 30 June 2016, the benefits can be claimed under the "old" rules:

- until the end of the tax year ending 30 June 2021 at the latest, if the taxpayer has applied a deduction to them until 30 June 2016 in accordance with the provisions of Tao. "old" § 7(1)(c), (e) or (s); or would have been entitled to do so in the period between 1 January and 30 June 2016;

- for the last time in the tax year ending 31 December 2016, if the intangible asset was acquired from a related company in the period from 1 January to 30 June 2016 and the related company was not entitled to the benefit at the time of the transfer.

In summary, the change in the definition of royalty and the inclusion of a loss realised on the same intangible asset in the deduction may affect any taxpayer, while the pro rata deduction is limited only to taxpayers who acquire the intangible asset from a related company and produce it with its help.

Source: NAV, 5percAdo.hu

This article was approved for publication by György Lovász ICT Európa Holding Zrt; Dr. Balázs Termel ICT Európa Holding Zrt.