In recent times, the forint has strengthened significantly against the euro, and for the time being it appears that this is not merely a temporary fluctuation but a more sustained trend. Many Hungarian businesses generate a significant proportion of their revenue in euros, whilst a substantial share of their costs continues to be incurred in forints. In such an environment, exchange rate movements are not merely a financial or liquidity issue, but a factor that can also substantially influence one’s tax position. It is therefore worth reviewing from time to time what consequences foreign currency revenues and expenses may have for the various types of tax.
Corporate income tax: when does a foreign exchange gain arise?
From a corporate income tax perspective, the first point to consider is that if the company keeps its accounts in forints, revenue from invoices issued in foreign currency must be converted into forints during the accounting process. The revenue therefore appears in the books not in euros, but as a forint amount determined at the exchange rate applicable at the time of realisation.
Subsequently, exchange rate fluctuations may have a further impact on profit or loss. If the company still has outstanding foreign currency receivables or liabilities at the end of the financial year, these must be revalued at the year-end exchange rate. As a result of the revaluation, an exchange rate gain or loss may arise even though the company has not actually received the money or made the payment. However, the rules of corporate income tax allow the taxpayer to apply a tax base adjustment in relation to unrealised exchange rate differences, so the result arising purely from revaluation does not necessarily give rise to an actual tax liability.
The situation is different, however, when an exchange rate gain or loss is realised, for example upon settlement of a receivable or the actual conversion of foreign currency. In this case, the realised exchange rate difference is already part of the company’s pre-tax profit, and may therefore affect the corporate tax base and, ultimately, the amount of tax payable.
It is important to note, however, that the forint continues to play a central role for corporate tax purposes. Even if a company keeps its books in euros and prepares its financial statements in euros, the corporate tax base and the amount of corporate tax payable must be determined in forints. To this end, the tax base and tax amount determined in euros must be converted into forints using the official MNB exchange rate valid on the last day of the tax year.
Fewer people are aware, however, that corporate income tax can be paid not only in forints, but also in euros or US dollars. The condition for this is that the company must notify the tax authority of its choice by the last day of the year preceding the tax year in question. The notification deadline is peremptory, meaning that failure to meet it precludes the possibility of submitting a request for justification. In such cases, the tax authority converts the amount paid into forints at the MNB exchange rate valid on the date of payment, and this amount is credited to the tax account.
VAT: it is not the receipt of payment that counts
In the VAT system, invoicing in foreign currency follows a different logic. Although the invoice is issued in euros or another foreign currency, the VAT amount must be determined and declared in forints. To this end, the tax base specified in foreign currency must be converted into forints using the exchange rate specified in the VAT Act.
As a general rule, businesses apply the exchange rate of a credit institution; however, under certain conditions, they may also choose to use the exchange rate of the National Bank of Hungary (MNB) or the European Central Bank. The chosen method must be applied consistently.
From a VAT perspective, it is particularly important that, as a general rule, the date of conversion into forints is determined not by the actual receipt of the money, but by the date on which the tax liability arises. For this reason, it may happen that a business declares and pays VAT based on an exchange rate that differs significantly from the rate at which the customer subsequently makes the payment. Any gain or loss arising from the change in the exchange rate between the two dates is no longer a VAT issue, but rather a matter of accounting and corporate income tax.
HIPA: operates according to a different logic
In the case of local business tax, the regulations take a different approach. If the company keeps its accounts in forints, foreign currency turnover must be converted into forints during the accounting process, so that net turnover is reported in forints.
However, the result arising from subsequent exchange rate movements is typically not included in the net turnover forming the basis of HIPA for companies engaged in general business activities. This means that if the company realises an exchange rate gain or suffers an exchange rate loss due to the strengthening of the currency, this does not usually affect the basis for local business tax.
This can result in a significant discrepancy between corporate income tax and HIPA. Whilst realised exchange rate gains or losses may affect the profit or loss for corporate income tax purposes, the HIPA base may remain unchanged. Consequently, the same foreign exchange transaction may have different tax implications under the various tax regimes.
Not just a financial issue
Businesses invoicing in foreign currency typically focus their attention on exchange rate risk and liquidity effects. However, exchange rate fluctuations can also have significant tax implications. Corporate income tax, VAT and local business tax treat the same foreign currency transaction according to different principles, so the same economic event can yield different results under each tax category. For this very reason, the tax implications of foreign currency operations deserve at least as much attention as the exchange rate risk itself.
Disclaimer: this article is a translation of our original article written in Hungarian, which you can find here.
