After the battery industry, Antal Rogán’s ministry is attempting to make Hungary more attractive in another sector, targeting companies that would rely on workforce from outside Europe. The legislative proposal by the Prime Minister’s Cabinet Office, pertaining to “digital companies”, suggests a preferential tax system for these companies and their employees.
According to the draft legislation regarding digital companies, these companies would be exempt from paying public burdens and local business tax. Individuals in an employment relationship, as well as company executives, could fulfil their social contribution obligations on their incomes through a Special Social Contribution Tax (különleges közteherviselési hozzájárulás, or “kükho”). The suggested tax rate is 15 per cent in case of an employee who
- is not of retirement age,
- does not qualify as a citizen of a third (non-European) country,
- or is not ensured as a citizen of an EEA state (which includes Iceland, Norway, and Liechtenstein, in addition to EU member states).
The new tax obligation is to be only 9.5 per cent if the individual
- is of retirement age,
- is a citizen of a third country,
- or is insured in an EEA state.
The 9.5 per cent special tax deducted from the individual would be considered personal income tax (SZJA), while out of the 15 per cent rate, 63.3 per cent would be allocated to personal income tax, and the remaining 36.7 per cent to social security contributions (TB). In other words, someone paying the 15 per cent special rate would qualify for insurance in Hungary.
The draft formulates this condition by stating that “the combined ratio of third-country nationals and persons not insured in an EEA state reaches at least 60 per cent in relation to the total headcount.”
It is noteworthy that access to these benefits would be conditional on having appropriate certification. The certification process is to be outsourced to the sphere of extra-governmental foundations: foundations responsible for announcing and evaluating applications would be appointed by government decree. After obtaining certification, digital companies could enter into a fixed-term contract with the respective authority, yet to be designated.
The draft also reveals a peculiar interpretation of the rule of law, as the decision of the authority in contract with the digital company, made in a public administrative procedure
could not be overturned by courts of public administrative jurisdiction.
The Prime Minister’s Cabinet Office put the text up for public consultation on the government’s website one day before Christmas, stating that it had not yet been assessed by the government. As opinions could be submitted until December 31, 2023, we asked the ministry regarding when the proposal would be presented to the government. Although this question has received no reply, the Cabinet Office’s brief response still made it apparent that the proposal was not intended to merely gather dust in a drawer. They wrote
that the legal category for digital companies promotes the substantial expansion of employment in high-tech sectors, the creation of more attractive conditions for Hungarian professionals working in cutting-edge technology abroad, as well as the improvement of Hungary’s competitiveness by providing the opportunity to employ highly skilled foreign workers within the country.
The legal category of ‘digital company’ would be established by the law, if accepted. The status could be attained by limited liability companies (kft.) and joint-stock companies with at least HUF 20 million in equity, which enter into contract with the respective authority. This would be applicable to companies that base their operations on “information technology development activities, the applicability of smart contracts, cybersecurity, information and communication research and development, and innovation activities that are made available to the market, industry, and science.” The proposal also outlines possible main activities (as per the EU’s NACE framework, existing as TEÁOR in Hungary), specifying that any other activity may only be directed towards supporting the main activity, and the revenue derived from such activities cannot exceed 20 per cent of the total.
The main activities are as follows (NACE/TEÁOR number in brackets, we’re using state statistic office KSH’s terminology for the activities):
- manufacture of electronic components (2611)
- manufacture of loaded electronic boards (2612)
- manufacture of computers and peripheral equipment (2620)
- manufacture of communication equipment (2630)
- manufacture of consumer electronics (2640)
- manufacture of irradiation, electromedical and electrotherapeutic equipment (2660)
- manufacture of magnetic and optical media (2680)
- manufacture of electric domestic appliances (2751)
- manufacture of other electrical equipment (2790)
- manufacture of office machinery and equipment (except computers and peripheral equipment) (2823)
- computer programming activities (6201)
- computer consultancy activities (6202)
- computer facilities management activities (6203)
- other information technology and computer service activities (6209)
- data processing, hosting and related activities (6311)
- web portals (6312)
The response sent by the Prime Minister’s Cabinet Office to 24.hu states that the purpose of the legislation is to
attract programmers and IT professionals to Hungary, as there is a shortage of these professions. An additional goal if the proposal is to attract further investments to Hungary, promoting the country’s development and increasing its competitiveness.
However, experts consulted by our newspaper believe that based on the detailed list of activities, the proposal is not focused on highly skilled professionals, but rather, on inexpensive guest workers –once again. The majority of the NACE codes involved do not represent the kind of digital activities that would require programmers, but rather, they denote activities related to assembly and manufacturing, tasks that can be performed by inexpensive, unskilled or semi-skilled workers.
We also asked Rogán’s office about how much money these – predominantly foreign – workers could save with the proposed special contribution compared to generally applicable tax obligations. This inquiry, too, has gone unanswered.
The government was just recently forced to take measures to protect Hungarian jobs following multiple scandals involving several manufacturing companies in Hungary laying off Hungarian workers to employ Asian labourers in their stead. Aiming to protect domestic employment, the government has decided to lower the maximum annual number of guest workers in 2024, reducing the figure to 65,000 from the previous 81,000.
Machine translation revised by Frigyes Harmath.
