In Hungary, there are two typical ways of using cars for business purposes. .
One scenario is that the company buys the car and allows its employee to use it for private purposes - either partially or entirely.
The other is that the company expects its employee to use his own car for business purposes, and then reimburses any related expenses.
What follows is an outline of the most important tax liabilities related to car use.
Duty is payable when the ownership title to a car is acquired, inherited or received as a gift. The duty is HUF10 for each cubic centimetre of engine capacity.
Generally, consumption tax is payable when a car is first purchased in Hungary. This is equal to 10% to 32% of the customs value in the case of imported cars, subject to engine capacity and to the existence of a catalytic converter; or 10% to 32% of the price net of tax in the case of domestically-manufactured cars.
The tax is payable by the importer or by the domestic manufacturer.
Motor vehicle tax
Motor vehicle tax is payable on vehicles with Hungarian registration and licence plates and on foreign-registered vehicles used in Hungary.
The tax is payable by the person or entity indicated as owner or operator in the registration document on the first day of the year.
The tax is based on the weight of the vehicle, and the actual amount is set by the local authority of the area where the car is registered as being kept, at between HUF600 and HUF1,000 for each 100kg of the car's weight.
Personal income tax
Company car tax
Income earned in connection with the private use of a company car qualifies as a fringe benefit.
The owner or operator (ie the company that provides the car) indicated in the registration document is required to pay company car tax, which increases in line with the time passed since purchase and with the price of the car.
The monthly tax payment ranges from HUF3,000 to HUF21,000. For leased cars, the tax is assessed on the basis of the purchase price indicated in the lease agreement.
If the lessee is not shown in the registration, the amount of the tax will be an amount proportionate to the number of days when the car was used during the month rather than the statutory total monthly tax.
The purchase price should be assessed on the basis of the year when the title to the car was acquired, rather than the year when the car was first used.
The value-added tax charged at the time of purchase should be treated as part of the purchase price in all cases.
The regulations provide exemption from company car tax in certain cases. The tax is not payable if the car is not used for private purposes and the owner has sound evidence to prove this fact (ie a proper road log).
Similarly, the tax is not payable if there is evidence that the car was not used for more than one month for any reason, or it is clear that the car cannot be used for private purposes because the owner has made private use impossible (eg returned the licence plate to the police).
Obviously, company car tax is not payable if a private individual using the car pays the statutory mileage cost or more for the private use (but private and business use must be clearly distinguishable on the basis of the road log). The statutory mileage cost is equal to the fuel costs plus HUF3 per kilometre.
Deducting fuel costs and other car-related costs and expenses from tax.
Fuel costs are tax-deductible on the basis of third party invoices (ie not in-house road logs). The company operating the car may also elect to finance other costs, which do not give rise to personal income tax liabilities. Such costs and expenses typically include insurance, vehicle weight tax, maintenance, repairs, car washes, etc.
Expense reimbursement rules for privately owned cars
An amount paid to an employee as reimbursement for travel and meal expenses on the basis of an assignment order in connection with an official or business trip does not qualify as income.
The amount will not be taxable as long as the reimbursement does not exceed the statutory limit. If the company pays more than the statutory limit, the difference will qualify as income and will be taxable for the private individual.
If the expenses are reimbursed on the basis of a road log rather than an assignment order, the reimbursed amount qualifies as income for the individual.
However, deductions can be made against this income in the individual's tax return on the basis of a road log, in accordance with personal income tax rules. Fuel, repair and maintenance costs proportionate to business use, (flat rate) depreciation and rent or lease fees are also deductible on the basis of a road log.
Expense deduction rules for cars owned by self-employed persons
Self-employed people are also required to pay company car tax if they use a car owned by them or by their spouse for business purposes only and deduct the related fuel, depreciation and maintenance costs.
Fuel costs must be calculated on the basis of the official fuel consumption standards and the fuel price set by the tax authority or on the basis of invoices received for fuel purchases.
However, the quantity of fuel taken into account in invoice-based calculations may not be more than the quantity calculated with the official consumption standard.
Corporate income tax
In general, expenses associated with the use of company cars (such as fuel, repair and maintenance costs, insurance premiums, statutory depreciation, etc) qualify as business expenses and are therefore not subject to corporate income tax (general rate is 18%) in Hungary.
Under the Corporate Income Tax Act, the amount of fringe benefits associated with the private use of a company car is generally also deductible from the corporate income tax base.
Fringe benefits provided to employees, senior officers and shareholders personally involved in the business of a company, retired employees, and to close relatives of the above, as well as the taxes and other charges payable on such benefits, all qualify as business expenses and are therefore not subject to corporate income tax.
In the event that a Hungarian company provides a company car to a foreign national who works in Hungary but is not employed by the company, the costs and expenses incurred in connection with the car will only be deductible for corporate income tax purposes if the agreement on the foreign national's secondment specifically provides for company car use.
However, that part of repair and maintenance costs, insurance premiums, statutory depreciation and registered value upon removal from the accounts of a car first used after December 31, 1996 with a historical value of more than HUF6 million, which is proportionate to the amount in excess of the HUF6 million, does not qualify as a business expense even in the cases discussed above.
Consequently, the relevant part of these costs and expenses is added to the tax base, and thus subject to corporate income tax.
Value added tax
Every transaction that involves the acquisition of the ownership title to a company car qualifies as a product supply.
Therefore, not only sale and purchase transactions but those lease arrangements, which involve the transfer of the title, also qualify as product supplies.
The tax liability arises when the supply takes place (possession of, or title to, the car is acquired), on the basis of the full price.
It will qualify as a product supply for VAT purposes if a company discontinues the use of a company car for its taxable business activities or transfers it to the ownership of another entity free of charge (ie does not sell it).
Provided that the company has had deductible VAT in connection with the car (eg deductible VAT on refurbishing or repairs), the company will incur VAT on the transfer.
Car rent where title is not transferred qualifies as a continuously supplied service, and the tax liability arises on the dates when the rental fee instalments are payable.
The potential right to deduct pre-charged VAT on rental fee instalments also arises on the dates when these instalments are payable.
The company will be taxed on the consideration received for the supply, or on the fair market value if the consideration is disproportionately low.
In Hungarian judicial practice, a value is deemed disproportionately low if the discrepancy with the fair market value is significant. If the price is paid in a foreign currency, the tax base should be calculated on the basis of the exchange rate quoted by the Hungarian National Bank on the date of supply.
The Hungarian VAT Act provides that input VAT is not deductible
- on car purchases if the purpose of the purchase is not resale
- on gasoline purchases if the purpose of the purchase is not resale
on fuel purchases if the taxpayer uses the fuel directly to operate a car.
The Hungarian VAT regime generally prohibits the deduction of VAT on fuel and car purchases.
The prohibition applies to acquisition without resale, and therefore rental companies are among those who may not deduct input VAT.
However, VAT is deductible if a car is purchased for the specific purpose of resale, including cars sold under lease arrangements.
If private use of a company car can be verifiably ruled out and the vehicles are used only for the company's taxable business activity, or the employees pay appropriate compensation for private use, the input VAT incurred in relation to the operation of the vehicle (servicing, repair, storage, rent) is deductible.
The payment of company car tax implies private use, and therefore no VAT is deductible when the tax is paid.
However, it is possible that a company pays company car tax for technical reasons and is able to prove that no private use occurs (eg with a road log). In such cases the related VAT can be deducted.
It does not qualify as a consideration if a private individual pays the company car tax to his employer for the private use of a car only, and therefore these cases are treated as free use.
If the VAT is not deductible at the time of purchase, but then the car is sold within 60 months of acquisition, a VAT amount proportionate to the number of months remaining at the time of sale from the 60-month period will become deductible. The sale is subject to VAT.
In financial lease arrangements the part of the lease fee in excess of the full principal is exempt from VAT. It must be determined on a case-by-case basis whether a particular financial lease arrangement qualifies as a supply of a product or a service.
If it is a supply of product, ie the title to the car will automatically (without any further declaration of the parties) be transferred to the lessee at some point in the future based on the agreement, one invoice should be issued for the entire amount and the date of supply is the date when lessee gains possession of or title to the car.
If it is a supply of a service, ie transfer of title occurs only at the explicit declaration of the parties (option privilege), separate invoices should be issued for each instalment.