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Calculating the local business tax base in Hungary (HIPA)

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Calculating the local business tax base in Hungary (HIPA)

This article covers the following topics:

Is local business tax a profit tax?

The tax base of the local business tax is defined as the net revenue of the business. The word “net” indicates that something can be deducted from the total revenue. Most importantly, VAT should not be considered. At the same time, some costs are also deductible, but not all of them. As a result, it is not really a profit tax.

To understand how the tax base of the local business tax is calculated, it might be best to compare it with the regular corporate tax (TAO in Hungarian, sometimes also called CIT in English for Corporate Income Tax).

 Corporate taxLocal Business Tax
Cost of Goods Sold (COGS)deductibledeductible
mediated servicesdeductibledeductible
subcontractor services (subject to statutory conditions)deductibledeductible
material costsdeductibledeductible
certain R&D costsdeductibledeductible
salaries and payroll costsdeductibleX
rent and office expensesdeductibleX
marketing expensesdeductibleX
legal and accounting feesdeductibleX
depreciationdeductibleX
administrative costsdeductibleX
other operating costsdeductibleX

As you can see, the scope of deductibles is much smaller in the case of the local business tax. As a result, HIPA cannot be considered a profit tax – in fact, the HIPA payable can show a wide variation if compared to the profits.

HIPA for service and trading companies

In line with the above, companies with different profiles will have proportionately very different HIPA burdens. Trading and retail companies can typically reduce their local business tax base significantly, while service providers have few deductible costs. To see a typical example:

Cost categoryTrading companyService provider
Yearly revenue (without VAT)EUR 10,000,000EUR 2,000,000
Deductibles: 
COGS (purchased products, inventory, resale goods)EUR 9,000,000EUR 0
Mediated servicesEUR 0EUR 445,000
Subcontractor services (IT developers, consultants, engineers)EUR 0EUR 1,000,000
Material costs (raw materials, consumables, production inputs)500,000EUR 55,000
Qualifying R&D costsEUR 0EUR 0
Non-deductibles:  
Salaries (sales staff, management / consultants, developers)EUR 100,000EUR 300,000
Payroll taxes & contributionsEUR 30,000EUR 90,000
Office expenses (rent, utilities, cleaning, coworking)EUR 20,000EUR 20,000
Administrative expenses (accounting, legal, HR, bank charges)EUR 15,000EUR 15,000
Marketing expenses (advertising, social media, events)EUR 10,000EUR 10,000
IT and software expenses (ERP, CRM, SaaS subscriptions)EUR 5,000EUR 5,000
Other overhead expenses (insurance, training, travel)EUR 5,000EUR 5,000
Accounting profitEUR 315,000EUR 55,000
HIPA tax baseEUR 500,000EUR 500,000
Local business tax (max)EUR 10,000EUR 10,000

In the case of the service company, while the business only turns a EUR 55,000 profit, most of its costs are not deductible from the HIPA tax base, which remains the same as their revenue. As a result, service companies may face a relatively higher HIPA burden because salaries and most operating expenses do not reduce the local business tax base.

In the case of the trading company, the costs of goods sold significantly reduces the HIPA tax base. As a result, although its revenue is 10 times of the service company in our example, its HIPA liability is roughly the same because the trading company operates with a relatively low margin and significant deductible direct costs.

Simplified HIPA regime for small businesses

Hungarian legislation also provides a simplified HIPA regime for small businesses with a yearly revenue under the current statutory revenue threshold (HUF 25 million yearly, ca. EUR 70,000 in 2026). Under this regime, businesses may elect a simplified method of determining the tax base instead of performing the detailed calculations described above.

The simplified regime:

  • must be elected by the taxpayer,
  • reduces administrative burden,
  • may result in a lower effective tax burden depending on your operation.

The simplified calculation method offers three tiers:

Yearly revenueTax baseMax. tax
Below HUF 12 millionHUF 2.5 millionHUF 50,000
Between HUF 12 and 18 millionHUF 6 millionHUF 120,000
Between HUF 18 and 25 millionHUF 8.5 millionHUF 170,000

Please note that the able table showcases the tax base for each tier as well as the maximum local business tax payable. The actual tax payable will depend on the local tax rate, which might be lower.

Local business tax up to 2%

The local business tax rate is determined locally, by the local government (municipality). The maximum statutory rate is 2%, but municipalities may choose lower rates, or even full exemptions for the smallest businesses.

For example, in Budapest:

  • The standard local business tax rate is 2%.
  • Businesses with a yearly revenue below HUF 1.5 million (ca. EUR 4,000) are not required to pay HIPA at all.

Business planning should include the local business tax

When making your business plan, you should keep in mind the local business tax (HIPA, short for Helyi Iparűzési Adó), which is up to 2% on the net revenue (tax rate depending on where the business operates). HIPA is not a profit tax, but it is not simply a tax on the total revenue either. When calculating the tax base, several expenses can be deducted, which typically favor trading or retail businesses, leaving service businesses with proportionately bigger HIPA liabilities. At the same time, small businesses may opt for a simplified tax regime, while micro-businesses may be exempt.

Local Helpers with the local business tax

Helpers specializes in supporting international clients in Hungary with accountancy as well as company setup and operation. Our goal is not only to provide precise calculations but also to help you run your business in a compliant fashion and make informed business decisions.

Frequently Asked Questions

FAQ

What is the tax base of the local business tax in Hungary?

The tax base of the local business tax is defined as the net revenue of the business. This means the revenues minus VAT, while some other costs may also be deducted, primarily the Costs Of Goods Sold (COGS, or ELÁBÉ in Hungarian for “eladott áruk beszerzési értéke”).

What does HIPA stand for?

In the context of accounting in Hungary, HIPA is short for Helyi Iparűzési Adó, which means local business tax. (HIPA is also short for the Hungarian Investment Promotion Agency, but that is less relevant in this context.)

How much is the local business tax in Hungary?

The local business tax is up to 2%, depending on the local municipality. In Budapest, the tax is 2%, while in some towns it is 0%, and in many others it is somewhere in between. However, it is not recommended to choose a seat provider solely based on the local business tax, because the actual place of operation must be reported too, and then local business tax will need to be split between these locations, complicating administration.

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The post Calculating the local business tax base in Hungary (HIPA) appeared first on Helpers Finance.

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