The Hungarian tax system encourages research and development through various incentives. Corporate income tax payable for a given tax year may be reduced to zero, while, through the appropriate combination of tax base allowances, local business tax, innovation contribution and employment-related tax liabilities may also be reduced. However, the application of these incentives is subject to strict conditions and requires careful planning.

Under the current legislation, five types of R&D tax incentives (or tax base allowances) are available:

• a direct corporate income tax credit based on eligible R&D project costs,
• a development tax incentive available for R&D investments with a present value of at least HUF 100 million (which also reduces the corporate income tax payable),
• an R&D tax base allowance that may be applied simultaneously in the corporate income tax, local business tax and innovation contribution bases,
• a social contribution tax allowance available to employers qualifying as a “research center” in respect of employing researchers with a scientific degree, and
• a social contribution tax allowance available to employers qualifying as a “research center” in respect of the eligible R&D wage costs of research staff.

Regardless of the type of incentive applied, the taxpayer must be able to demonstrate that its activity qualifies as R&D activity, performed within the own scope of services, under the applicable tax rules. For this purpose, an expert opinion may be obtained from the National Research, Development and Innovation Office (NRDIO).

In the case of cost-based tax incentives, the taxpayer must substantiate, within the statute of limitations period, the amount of direct costs incurred for R&D purposes and, where applicable, the investment costs relating to R&D. Eligible costs may include, in particular, the wage costs of researchers and the depreciation of assets used for R&D activities. A key practical requirement is that R&D incentives are typically applied on a project basis; therefore, maintaining separate, project-level cost records is essential. Development tax incentives are subject to additional requirements (e.g. mandatory operation period, specific record-keeping and reporting obligations, and notification to the Ministry of National Economy).

Before selecting from the available options, it is advisable to assess which combination of incentives yields the greatest tax benefit and how this benefit is realised over time. The R&D corporate income tax credit may be utilised over a maximum of four tax years, and any unused amount may be refunded by the tax authority upon request; however, the incentive is subject to activity-specific caps. The development tax incentive reduces corporate income tax in the year of the investment and the following 12 tax years. Although the R&D corporate income tax base allowance reduces the tax base only in the year the R&D costs are incurred, the legislation does not prohibit the creation of a tax loss; such loss may be carried forward and offset against positive tax bases in the subsequent five tax years. The R&D tax base allowance also reduces the base of local business tax and the innovation contribution in the year the direct costs are incurred (subject to statutory limitations). The advantage of the social contribution tax allowance is that it directly reduces personnel expenses, which may be particularly beneficial for companies where wage costs represent a significant portion of R&D expenditure.
Further planning is required, as costs financed by state aid are generally not eligible for R&D tax incentives, and the combination of different incentives is also subject to limitations. The R&D corporate income tax credit and the R&D tax base allowance are mutually exclusive and cannot be applied in parallel in respect of the same costs. While certain combinations of incentives are restricted, the development tax incentive may be combined with other R&D incentives subject to statutory conditions (allowing both the investment and the resulting R&D activity to benefit from tax incentives). The R&D tax base allowance may be combined with the corresponding allowances in local business tax and innovation contribution; however, a given cost may reduce the local business tax base under only one legal title. In the case of social contribution tax allowances, it must be noted that if the allowance is applied to R&D wage costs, the same wage costs may either benefit from the social contribution tax allowance or from tax base reductions in corporate income tax, local business tax and innovation contribution, but not both.

To ensure compliance with the strict requirements and transparency, it is recommended to establish a structured framework for project qualification, cost allocation and the related administrative and internal control processes. A well-functioning accounting and record-keeping system ensures, in the long term, that the taxpayer can fully utilise the available R&D tax incentives and can substantiate the eligible costs in the event of a tax audit.

Our advisors assist clients in identifying the available tax incentives tailored to their activities and in designing the required documentation processes in line with the selected structure.