On the occasion of the festive season, many companies focus on making donations to support initiatives, topics and organisations that are important to them. Tax laws set out specific rules for these charity activities. In principle, providing donation (in Hungarian “adomány) ”is tax-free for the company making the donation, but in order to benefit from favourable tax rules, special attention must be taken regarding the circumstances of the donation and the related administration. In our article, we briefly summarised the tax aspects that companies need to be aware of in order to make tax risk-free donations to various organisations from a corporate income tax (CIT), KIVA (small entrepreneurs’ tax) and value added tax (VAT) perspective.
As a first step, companies making the donation need to assess what organisation they intend to support and for what purpose, whether the donation is a product, service or cash grant. In this respect, the tax rules distinguish between grants/support (in Hungarian “támogatás”) made for the purpose of a donation (a public donation according to the strict terminology of the Act on VAT) and grants/financial and other supports failing to qualifying with this strict public donation VAT definition. Let us look at the difference between the two forms of support.
Donation, public donation
The Act on CIT uses the concept of donation, while the Act on VAT the concept of public donation (in Hungarian “közcélú adomány”). These definitions are practically identical with minor differences.
For CIT purposes, grants to public benefit organisations and legal persons of churches registered in Hungary, furthermore, grants for public interest commitments without repayment obligation are considered donations. It is important that the support is purpose-linked and that it actually serves the dedicted purpose (for example, in the case of a public benefit organisation, the public benefit activity set out in the articles of association of the organisation and defined in the relevant law, and in the case of a legal person of a registered church, the religious activity defined in the law).
A further condition for the grant being treated as a donation is that the donation does not provide a financial advantage for the company providing the support and for a specific group of persons connected to the company (e.g. member, shareholder, executive officer, auditor, close relatives of these persons). However, it is possible for the organisation receiving the donation to mention the name and activity of the company making the donation in its communication. It is also important to ensure that the donation is not just seemingly charitable or seem to be for the interest of the public based on its actual content, as there is a risk that the tax authority would reclassify the transaction to a transfer of goods, provision of services or money for free of charge or for consideration taking into account the genuine circumstances.
The above is also applicable from a VAT perspective, except that the definition of a public donation in the Act on VAT includes the support of an educational institution instead of a public interest commitment.
A certificate issued by the beneficiary organisation is required for both CIT and VAT purposes in order to apply the favourable tax treatment. This certificate must contain the following information: name, registered office or permanent residence, tax number or unique identification number (in the absence of a tax number) of both the company making the donation and the beneficiary, the amount of the donation and the purpose of the donation (as already mentioned, the latter must be in line with the activity(ies) of the organisation receiving the donation, as defined in its articles of association).
If this certificate is available and the conditions outlined above are met, the donation will be recognised as a deductible expense for CIT purposes at the company making the donation and the donation is not subject to VAT liability. Moreover, if the donated goods or services provided are considered to be a public donation for VAT purposes, no adjustment/recovery of (input) VAT previously deducted on the acquisition is necessary. We note that the Act on KIVA does not contain specific provisions on donation, however, in our view, even for companies taxed under the KIVA, the above conditions must be met in order to avoid paying small entrepreneurs’ tax on the donation.
We will not go into details in this article, but we think it is important to point out that donations or grants to certain categories of persons (e.g. the Hungarian Disaster Relief Fund, the National Cultural Fund, higher education institutions, public trust foundation performing public services) are subject to CIT relief (additional tax base reduction) if certain conditions are met. It is advisable to examine the rules on these in detail where appropriate and to take advantage of the relief.
Support/Grant not qualifying as tax-free donation
If the support is not made under the conditions outlined above, or if the certificate is not available or incomplete, the support cannot be considered as a (public) donation and be subject to different tax treatment.
For CIT and KIVA purposes, the rules on costs and expenses not incurred for business purposes should be examined. According to these rules, a grant/support provided to a foreign person for purposes other than donation, without any obligation to repay, does not qualify as a deductible expense, so the company providing the grant must increase its tax base by the amount of the grant.
If the beneficiary is a domestic person, the deductibility of the grant for CIT and KIVA purposes at the supporting company will be determined by whether the declarations with the content specified in the Act on CIT can be issued and are available. Accordingly, the grant will be considered as a deductible cost in the following cases:
- the company providing the grant has a declaration from the beneficiary that in the tax year of the grant it accounted for the grant as revenue in its profit and that its pre-tax profit or tax base will not be negative excluding the revenue related to the grant, and that it will pay CIT on this revenue, as certified by a declaration after the preparation of the CIT return;
- if the beneficiary does not carry out a business activity, the declaration condition is deemed to be fulfilled if the beneficiary declares that it did not carry out a business activity in the tax year of the grant, or that the grant was not provided for its business activity, or that it does not incur a tax liability for its business activity (civil organisations are typically one of these cases).
In the case of a cash grant, there is no VAT implication. However, if the grant is made in an in kind form (goods are handed over and/or services are provided) and it does not qualify as a public donation, the following rules apply.
If the company knows at the time of the purchase or production of the goods or the provision of the services that it will pass them on/provided as a grant, it cannot deduct the related underlying VAT, but it will not be liable to charge VAT when the goods are transferred or services are provided to the beneficiary. However, if the company did not originally purchase or produce the goods or create the services for the purpose of the grant and thus exercised its right to deduct the related (underlying) VAT, it will incur a VAT liability (e.g. invoice should be issued and VAT is payable by the company making the donation) when it makes the grant. Of course, VAT does not have to be paid by the beneficiary, but it must be declared by the company providing the grant as a liability in the VAT payment period including the date of supply.
In connection with the above, it is important to emphasise that during the Covid emergency period, special provisions apply to the benefit given free of charge to the person in distress in order to prevent and mitigate the damage caused by the pandemic situation. In this context, the Ministry of Finance and the Central Administration of the Hungarian Tax Authority issued a detailed guideline in 2020, which is available at the following link: A koronavírus-járvány elleni védekezéssel összefüggő ingyenes termékátadások, ingyenes szolgáltatásnyújtások adózási szempontú megítélése – Nemzeti Adó- és Vámhivatal (gov.hu)