Depreciation allowance

The corporate tax and dividends law permits taxpayers to make a depreciation allowance on taxable income. According to the Hungarian accounting law, this is in line with and over the plan should it not exceed the amount calculated in accordance with the provisions and write-off rates specified in the tax law.

With effect from 1 January 1998, the provisions of the tax law make it possible for amortization to be deducted from the profit before tax, even if the book value of the asset in question is zero on the first day of the fiscal year on the basis of accounting records, and the taxpayer did not allow the total prime cost on taxable income. Taxpayers may apply this provision to determine their taxable income and tax payable for 1997.

The tax law accepts the description effected in accounting for taxable income in the following cases:

• for tangible assets;
• for tangible assets produced under concession agreements;
• for tangible assets serving the purposes of road, water and sewage, energy and telecommunications supply, and services qualified as utilities of the industrial park. For the purposes of the law, industrial park is a special area equipped with infrastructure, designed and prepared for industrial enterprises with established legal conditions, and it must win the qualification of 'industrial park' in formal competition. The title 'industrial park' shall be won by submitting tenders in accordance with terms and conditions set out in the requirements of a competitive system under the Decree of the Minister of Industry, Commerce and Tourism;
• in mining - equipment serving only mining purposes, for underground mining areas and buildings as well as the special machinery and the land used, for buildings, and in the power industry for nuclear plant technology buildings and constructions;
• for tangible assets under the prime or prime cost of HUF100,000, as well as those classified under the rate of 33 per cent under Chapter IVa) of write-off rate schedules.

For machinery and equipment between ITJ (Statistical Product List) 32 and 39, and under the product number 42, implemented after 31 December 1995 and not yet used, 30 per cent of the prime cost shall be allowed on the taxable income.

The prime cost of tangible assets implemented after the qualification of the enterprise zone of the area where the taxpayer is established or has an office is registered with the Court of Registry or local authorities, and where it has not yet been used, except for road vehicles (ITJ 41-3, ITJ 41-4) buildings and constructions, shall be allowed in full.

The taxpayer who is established in the enterprise zone or has an office registered with the Court of Registry or local authorities shall make a depreciation allowance of ten per cent on buildings put into operation after the qualification of the enterprise zone of that area, and prior to it being used. For this, however, it is essential that the taxpayer not make use of the optional six per cent tax benefit provided by the law.

Forms of investment incentives

Investments by economic associations are supported by further (direct or indirect) incentives, in addition to the elements of investment incentives in taxation (level of tax rates, tax benefits and amortization rules). These other incentives appear in relationships with other sectoral goals, such as environmental protection, regional development, and small enterprises promotion, and often favour objectives other than investment as well. This is the reason why these forms are extensive, complex, and at the same time, difficult to understand.

The source of investment incentives is mostly the central government budget or extraordinary funds, maybe foundations. Furthermore, foreign loans or the National Bank of Hungary (NBH) can also extend interest subsidy for some credit facilities (eg, start loan, Bavarian and Baaden-Württemberg loans, E-loans, etc). Certain incentives comprise final grants that are not repayable, while other incentives are generally considered to be interest free loans. The indirect means, such as guarantees related to investment loans, government guarantees, are considered to be special elements of investment incentives.

Since the financing and incentives are generally different and mostly of a non-productive nature, this article does not cover the investments by the government, local governments and government agencies.

The main incentives for the investment of enterprises sector are the following:

• credit facilities - the credit stock of over HUF100 billion is distributed among several facilities, some of which are exclusively to support investments, while others are general enterprise incentives. Most of them provide interest subsidies in line with the central bank's basic rate or preferential NBH refinancing;
• credit guarantee scheme - these guarantee schemes are to assist indirectly in developments mostly related to investments loans, and allow for investments that could not be implemented from internal funds; lending would be prevented by the lack of collaterals required by the bank. The scheme is completed with a counter-guarantee by the central government budget, also accepted and applied as indirect subsidy in the European Union (EU);
• Government funds - financing activities by these funds, such as the Road Fund and the Water Management Fund, is particularly related to non-productive developments, while some extra budgetary funds provide investment incentives to enterprises as well, eg, the Labour Market Fund and the Environment Protection Fund give preference to the fields of job-creating investments, environment-related developments and enterprises. Such funds can provide grants or repayable subsidies, or even undertake credit guarantee.
• specific allocations in sectors - specific allocations integrated with the Government budget generally provide subsidies in a competitive system and take various forms. The extensive nature, and at the same time, the fragmentation of these forms, are well-reflected in the fact that under the Annex to the Government Decree No. 263/1997. (XII.21.) on Regulations of co-ordinated use for related purposes of appropriations treated as Chapters and appropriations of extra budgetary funds, there are 47 development (research, development, investment) appropriations that should be used in a co-ordinated form;
• other financial institutions - Eximbank and Mehib Rt. (Hungarian Export Credit Bank) are important institutions of export oriented enterprise promotion. The Government assists in their operations by providing a large part of the core capital and continuous financial background from the central government budget. In terms of investment incentives, Eximbank is permitted to grant five-year loans with a preferential rate of interest.