The defence contribution is a new tax term introduced at the extraordinary government briefing of 8 July. Although not all of the rules are yet known, the decrees published in the Official Journal at the beginning of the week provide some points of reference for their understanding. This article summarises the details.
Defence contribution: extra profit taxes that are here to stay, accompanied by increasingly stringent rules
Gergely Gulyás, Minister of the Prime Minister’s Office, announced at the extraordinary Government Information programme held on 8 July that all companies realising extra profits due to the war will be required to pay a defence contribution. The government expects the measure, which primarily affects the bank sector, multinational corporations, and energy companies, to yield several hundred billion HUF in budgetary revenue. Responding to questions, the Minister confirmed that the defence contribution is a new tax type. His short reply seems to indicate that the government will be using this new term to refer to the part of the already familiar special taxes that will not be phased out, and that some of the rules will be made more stringent.
Applicable government decrees
Not long after the Government Information programme, Government Decree 1201/2024 (VII. 8.) on the anti-war action plan was published in the Official Journal, decreeing that the defence contribution would form the revenue of the National Defence Fund. According to the decree, the ministers for finance and the national economy will be tasked with drafting the necessary legislative amendments without delay.
In addition, Government Decree 183/2024 (VII. 8.) was also promulgated, which once again amended Government Decree 197/2022 (VI. 4.) on extra profit taxes, introduced by the government in 2022. All in all, this brings significant changes to the financial transaction tax starting from 1 August 2024, with an additional financial transaction tax introduced starting from 1 October 2024. This year’s rules on the extra profit special taxes payable by banks and oil producers (namely MOL) are also becoming more stringent.
The current government communication indicates that the other extra profit taxes and the extra profit tax on the retail sector will not be decreased in 2024, either, though there will also not be any increases. At a press conference held on 10 July, Minister for the National Economy Márton Nagy announced that the extra profit taxes imposed on the telecommunications sector, the aviation industry, and pharmaceuticals manufacturers would be phased out starting in 2025. However, this raises the question of whether these other sectoral extra profit taxes will remain next year even though previous communications had indicated they would last have to be paid in 2024.
Components of the defence contribution
The following provides details on the changes affecting the government decree on extra profit taxes. To the best of our understanding, these form part of the measures grouped under the term defence contribution.
Financial and government securities transaction tax
The most important aspects of changes in financial transaction tax rules are expected to affect cash deposits, transfers by private individuals, the general tax rate, and special transactions. Details:
- For cash deposits, the tax base will be the amount of payments that exceed HUF 50,000, up from the current HUF 20,000, if made via the institution operating the Post Office Clearing Centre. The tax base for transfers from the payment accounts of private individuals will also be the amount that exceeds HUF 50,000, again up from the current HUF 20,000. Individual entrepreneur accounts are an exception.
- The general financial transaction tax increases from the previous rate of 0.3% to 0.45%, and the maximum amount payable per transaction is upped from HUF 10,000 to HUF 20,000. The tax rate also rises for cash withdrawals from payment accounts as well as withdrawals using non-cash means of payment: the increase is to 0.9% from the previous 0.6%. If the tax is payable by the institution operating the Post Office Clearing Centre, the rate increase is from 0.3% to 0.45% with a maximum of HUF 20,000. This amount was previously HUF 10,000.
- As a special case, the purchase of financial instruments remains exempt from the tax if the purchase is for a private individual and only if the value does not exceed HUF 50,000 (up from the previous HUF 20,000). The changes pertaining to exemptions will enter into force in August 2024.
Additional financial transaction tax (currency conversion tax)
Under the new regulations, a new tax will also be introduced for the financial sector starting from 1 October 2024. An additional financial transaction tax will be payable for payment transactions and transactions for the purchase or exchange of a financial instrument that includes the conversion of currencies. The tax will be payable in addition to the general transaction tax, depending on the value of the transaction. The rate is set at 0.45% with a maximum of HUF 20,000 per transaction.
Special tax on financial institutions, as part of the defence contribution
Another amendment to the government decree on the extra profit tax pertains to determining the item decreasing the special bank tax.
Under the rules currently in force, if a credit institution or financial enterprise increases its average daily holding of financial securities between 1 January and 30 November 2024 as compared to the period of 1 January and 30 April 2023, the special tax payment obligation can be reduced by 10% of the face value of the government securities, up to a maximum of 50% of the special tax payable. With the exception of state securities obtained as part of certain financial transactions, state securities maturing after 1 January 2027 with HUF denominations are considered eligible.
The amendment clarifies the types of state securities and financial transactions that may or may not be taken into account when calculating the increase in state securities holdings after 1 August 2024. It also specifies the method for calculating the average daily holding of state securities: the face value of the state securities have to be taken into account for the increment calculations.
Although the rate of the special tax on financial institutions is not changing, the Government Information programme indicated that the changes were necessary because the banks affected by the special tax interpreted the rules promoting the purchase of state securities in a manner that differed from the legislator’s intent. Instead of actually increasing their holding of state securities, they realised increases in holdings of the designated state securities by restructuring their holdings to apply to the 50% tax discount.
Special tax on oil producers
When calculating the tax base for the 95% special tax on oil producers applied in 2024, starting from 1 August 2024 oil producers may reduce the price difference between oil from Russian Federation and the market price of Brent oil by USD 5 per barrel instead of the previous USD 7.5 per barrel.