R&D and investment tax incentives may undergo significant changes from 2027

The proposed amendments are intended to strengthen support for higher value-added projects and investments, in line with the Government’s objective - reiterated on several occasions over the summer - to increase R&D expenditure from the level of 1.3–1.4% of GDP (where it has remained broadly stagnant for nearly a decade), to 2% of GDP by 2030. Based on the experience of other EU Member States, this objective cannot be achieved without increasing corporate R&D expenditure. This, in turn, fundamentally requires an increase, already from 2027, in tax and tax base allowances designed to encourage corporate R&D expenditure across several types of tax. As a result, maintaining and increasing R&D expenditure would also become a condition for large enterprises to claim the development tax allowance. The knock-on effects of these measures could further support the economic policy objective of promoting higher value-added investments and projects.

The planned changes go beyond modifying the conditions applicable to individual tax incentives: they could substantially reshape the relative value of the tax incentives available to companies. While the R&D tax allowance would increase significantly, as would, subject to certain conditions, the tax base allowance for in-house R&D carried out by a company’s own activities and employees, the eligibility of contract R&D services would become more restrictive. In addition, new R&D, investment, environmental protection and occupational safety conditions would be introduced for the development tax allowance. For certain very large enterprises (covering companies subject to the global minimum tax), an overall cap affecting several tax incentives would be incorporated directly into the corporate income tax rules. Consequently, the changes may require companies to plan development and energy-efficiency investments, as well as other tax incentives, in an integrated manner alongside R&D projects. For projects planned for 2027, it may be particularly important over the next one to two months to model in advance which available incentives could apply to ongoing and future projects, under what conditions, in which combinations and with what timing.

The current proposal does not address the definition of the research and development nature of projects. Accordingly, based on the well-established practice of recent years, which follows international examples, the tax authority is expected to continue relying on the expert opinion and classification of the National Research, Development and Innovation Office (NRDI Office), which has been responsible for this task since 1 September 2023, when determining what qualifies as research and development and what constitutes R&D conducted within a company’s own scope of activities.

I. Changes related to R&D tax incentives

As a general rule, the amendments affecting R&D would apply from 1 January 2027. The new rules governing the R&D tax allowance would first apply to the 2027 tax year, to R&D projects commenced on or after 1 January 2027, and to eligible costs incurred from that date. Accordingly, it is advisable to assess separately the tax treatment of R&D projects already in progress and those commencing from 2027.

1. R&D tax base allowance: higher tax benefit for in-house research and development

Under the proposal, in the case of the allowance provided for under Section 7(1)(t) of the Corporate Income Tax Act, certain costs relating to R&D conducted within a company’s own scope of activities would receive particularly favourable treatment. Twice the amount of the depreciation recognised in the tax year on tangible assets used by researchers and developers, as well as twice the personnel-related expenses attributable to researchers and developers, could be taken into account when determining the R&D tax base reduction. As a result, the relevant eligible personnel-related expenses and depreciation could effectively be recognised up to three times in the tax base, while other R&D costs could be recognised twice.

2. Amendment of the R&D tax incentive available under Section 22/G

The general rate of the corporate income tax allowance relating to R&D projects would increase from 10% to 20% of eligible costs and would continue to be available in the form of tax retention.

Another important change is that the current requirement to make a binding election for five tax years would be abolished. However, the amended rules included in the proposal would still not allow the R&D tax allowance and the R&D tax base allowance to be applied simultaneously to the same eligible cost.

3. More restrictive treatment of contract R&D services for both tax incentives

One of the most important structural changes proposed concerns contract R&D services purchased from third parties and would limit which costs qualifying as R&D services may be taken into account as the basis of the certain tax incentive. However, the practical application of the proposed amendment may require further interpretation.

II. Key proposed amendments affecting the development tax allowance

According to the proposal, the Government proposes a significant overhaul of the development tax allowance. Taken as a whole, the conditions would make access to the development tax allowance more restrictive for all businesses, and particularly for large enterprises, while also indirectly encouraging high value-added research and development activities.

1. Proposed new conditions for investments by large enterprises (i.e. enterprises not qualifying as SMEs):

• In Western and Central Transdanubia and Pest County, the minimum investment threshold could increase from HUF 3 billion to HUF 5 billion. In the rest of Hungary outside Budapest, the HUF 1 billion threshold would remain unchanged. The increase may reflect inflation since the introduction of the HUF 3 billion threshold.
• One condition for claiming the development tax allowance would be that the company shall increase the direct costs of R&D conducted within its own scope of activities by at least 5% per year during the first three tax years of the mandatory operating period, compared with the average for the three tax years preceding the relevant tax year. If the company did not incur such costs in any of those years, 2% of its revenue would be used as the basis for the calculation. From the fourth year until the final year in which the tax allowance is claimed, the company would be required to maintain the increase.

2. Proposed changes applicable irrespective of company size:

• The period during which the development tax allowance may be claimed would be shortened. Under the proposal, the allowance could be claimed in the tax year in which the investment is placed into service or in the following tax year, and during the subsequent 10 tax years, but no later than the 12th tax year following the tax year in which the notification was filed. The corresponding limits under the current rules are 13 and 16 years.
• The development tax allowance could be claimed up to 70% of the calculated tax liability after deducting the R&D tax allowance in each year, compared with 80% under the current rules.
• The current rules on the development tax allowance allow itto be claimed on favourable terms for manufacturing investments related to so-called clean technologies, such as solar panel manufacturing, including investments in Budapest. The proposed rules would significantly reduce the current maximum amounts to one-tenth of their current levels for battery, accumulator and energy-storage technologies, to EUR 15 million in Budapest and EUR 35 million outside Budapest.
• The tax allowance would not be available in a tax year in which the taxpayer has been subject to at least three occupational safety fines.
• Companies that breach both the emissions-related and occupational safety restrictions applicable to the development tax allowance in the same year could lose their entitlement to the allowance for a further year. If they breach both restrictions in three consecutive years, they would permanently lose their entitlement to the allowance and would be required to repay the tax allowance already claimed, together with late-payment interest.

3. Proposed amendments affecting investments by small and medium-sized enterprises (SMEs):

• Under the proposal, the headcount maintenance requirement would be abolished for investments by SMEs.

According to the proposal, the new rules governing the development tax allowance would first apply to investments notified and started on or after 1 January 2027. Therefore, particularly in the case of planned investments by large enterprises, it may be advisable to consider submitting the relevant notifications as soon as possible.

We would also highlight that the conditions applicable to individual incentives, including the development tax allowance, are also governed by other legislation, such as government decrees. Accordingly, the new incentive framework will only become final once the proposal has been adopted and the relevant detailed rules have been amended. We will, of course, continue to report on developments in our newsletters.

III. Other tax changes affecting the incentive framework

1. Cap for certain very large enterprises

The proposal would introduce a limitation applicable to certain large enterprises, defined as taxpayers whose relevant consolidated or individual annual revenue reaches the HUF equivalent of EUR 500 million. The limitation would apply to the combined amount of the tax effect of certain cost-based tax base reduction items specified by law and the tax incentives claimed in the relevant tax year, with the exception of the R&D tax allowance under Section 22/G of the Corporate Income Tax Act. Accordingly, this would include the R&D tax base allowance under Section 7(1)(t) of the Corporate Income Tax Act, together with, among others, the development tax allowance and the energy-efficiency tax allowance.

Under the new rule, the combined amount of the tax effect of the relevant tax base reduction items and the tax incentives falling within the scope of the provision could not exceed the lower of the following two amounts:

• 5.5% of the higher of the taxpayer’s payroll costs for the tax year and the depreciation of tangible assets recognised in the tax year; or
• 1% of the carrying amount of the relevant tangible assets recognised in the annual financial statements for the tax year.

Importantly, for the purposes of the new large-enterprise cap, the R&D tax base allowance and the R&D tax allowance would not be treated in the same manner, since the R&D tax allowance under Section 22/G of the Corporate Income Tax Act is not included among the tax incentives subject to the new limitation under the proposal.

2. Increase in other tax incentives

Other incentives linked to the employment of researchers and developers would also increase significantly:

• the 50% rate under the social contribution tax rules would increase to 100%;
• the 50% rate under the small business tax (KIVA) rules would increase to 200%.

However, these changes should be assessed along with the corporate income tax incentives.

3. Innovation contribution

Under the proposal, the innovation contribution rate would increase from 0.3% to 0.5%, and the increased rate would already apply when calculating innovation contribution advances for 2027.

In light of the proposed amendments, it would be advisable to assess their potential impact on all ongoing and planned R&D and investment projects over the coming weeks, as insufficient planning could significantly affect the amount of incentives available and, consequently, the assessment of the business case for certain R&D and investment projects.

Our experts are available to assist you in assessing the potential impact of the proposed changes on your business and in reviewing the tax incentive opportunities available in relation to R&D activities and investments.