New Hungarian proposal promotes the employment of foreigners in digital companies

According to a new proposal, digital companies where more than 60% of the employees are third-country nationals could enjoy significant tax benefits. For now, this is just a proposal, but the new concept is supposed to boost modernization and encourage foreign investment in Hungary.

What are digital companies?

The digital company would be a new category for businesses created by the new proposal in case it is made into a law. Companies that meet specific requirements regarding size and activities will be able to apply for the title, which will make them eligible for a very favorable tax regime.

• Must be an LLC (“KFT” in Hungarian) or joint stock company (“RT” in Hungarian)
• Share capital must be at least HUF 20 million, ca. EUR 50,000
• Must enter into a contract with the relevant authority (to be created)
• At least 60% of the employees are third-country nationals and/or not insured by social security in any EEA country

Moreover, their activities must include IT development, cybersecurity, R&D and innovation in IT. The proposal includes a detailed list of activities expected from digital companies, complete with NACE codes.

1. Manufacture of electronic components (2611)
2. Manufacture of loaded electronic boards (2612)
3. Manufacture of computers and peripheral equipment (2620)
4. Manufacture of communication equipment (2630)
5. Manufacture of consumer electronics (2640)
6. Manufacture of irradiation, electromedical and electrotherapeutic equipment (2660)
7. Manufacture of magnetic and optical media (2680)
8. Manufacture of magnetic and optical media (2751)
9. Manufacture of other electrical equipment (2790)
10. Manufacture of office machinery and equipment (except computers and peripheral equipment) (2823)
11. Computer programming activities (6201)
12. Computer consultancy activities (6202)
13. Computer facilities management activities (6203)
14. Other information technology and computer service activities (6209)
15. Data processing, hosting and related activities (6311)
16. Web portals (6312)

From the above list, it is apparent that manufacturing relevant devices or components is also acceptable. As a result, not only IT service providers and other companies employing mostly highly qualified employees could apply, but also companies interested in factory manufacturing.

New tax regime for digital companies

Similar to how small businesses are eligible for a tax regime designed just for them (KIVA), digital companies would be eligible for a preferential tax regime:

• No corporate tax (9%)
• No local business tax (at most 2%)
• Every payroll related tax would be covered by KÜKHO, a “special payroll tax” (különleges közteherviselési hozzájárulás), meaning personal income tax (15%), social security contribution (18.5%), and the social contribution tax (SZOCHO, 13%)

The rate of KÜKHO would depend on the status of each employee.

KÜKHO would be charged at 15% for employees who are:

• not receiving pension for retirement
• not third-country nationals
• not insured by social security in an EEA country (meaning EU member states or Iceland, Norway, or Lichtenstein)

KÜKHO would be charged at 9.5% for employees who are:

• receiving pension for retirement
• third-country nationals
• insured by social security in an EEA country (see above)

In line with this, digital companies could achieve incredible tax savings in Hungary, even compared to standard taxation, since corporate tax is already the lowest in the EU. Payroll tax benefits will be eligible for Hungarian employees as well as third-country nationals, making business operation even more cost-effective.

How to qualify as a digital company?

According to the new proposal, digital companies could receive qualifications and apply for the favorable new tax regime if they are first verified by a foundation that would be set up for this purpose. Once qualified, digital companies would also be allowed to provide their services to various Hungarian authorities.

Foreign talent still welcome in Hungary

Recently, a new immigration law has been accepted that restructures work permit options for third-country nationals moving to Hungary. At the same time, the number of acceptable work permit applications in 2024 has been limited to 65,000. However, the new proposal suggests that foreign talent is still welcome in Hungary, and investors are encouraged to try and take advantage of the available favorable conditions.

It has not yet been announced when the new proposal will be submitted to the parliament. It remains to be seen whether any changes would be applied to it after the commenting period, and how it can benefit Hungary and foreign investors if accepted.

Expert assistance form Helpers

Helpers provides business and immigration assistance to everyone living, working, and doing business in Hungary, from individuals through small businesses to global corporations. We do our best to help foreign investors, business owners, and their employees navigate Hungarian bureaucracy with information as well as advisory and administrative support.

Watch this space for updates on the proposal about digital companies and other related topics.

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