Background

On the night of 17 July 2023, Gov. Decree No. 317/2023 (VII. 17) ("Gov. Decree") was published in the Hungarian Gazette, laying down detailed rules for the tax relief available for extra-profit taxes affecting the pharmaceutical industry.

As of 24 December 2022, Hungarian pharmaceutical manufacturers are obliged to pay an extra-profit tax (hereinafter "windfall tax") pursuant to Gov. Decree 197/2022 (VI. 4) on extra-profit taxes ("Windfall Tax Decree").

Subsequently, as of 1 June 2023, the payment obligation ("clawback payment obligation") of marketing authorization holders (or the distributors, in case of an agreement approved by the Hungarian tax authority) was significantly increased by the Government, from 28% to 40%. The clawback payment obligation applies to reimbursed medicines sold in pharmacies and with a producer price exceeding HUF 10,000 (approximately EUR 27). The rate of the clawback payment obligation was 20% prior to the Windfall Tax Decree.

On 19 June 2023, the Government announced that, as part of its new economic protection plan, it will implement a tax relief for the pharmaceutical industry, reducing the windfall tax and/ or the clawback payment obligation by up to 50%, by the value of investments in tangible assets and research and development costs.

Conditions for reducing the increased clawback payment obligation

Deductible items: The amount of the increased clawback payment obligation may be reduced in the 2023 and 2024 tax years by the sum of the following expenses shown in the annual accounts for the tax year preceding the ongoing tax year:

a) The cost of an investment within the territory of Hungary for the acquisition or production of tangible assets in the tax year preceding the ongoing tax year;

b) If the investment referred to in point (a) was not completed in the preceding tax year, the increase in the cost of that investment in the tax year preceding the ongoing tax year – with the additional condition that the reduction applied pursuant to this point (b) also reduces the amount of point (a), as appropriate, in order to avoid double application of the tax relief - and

c) Direct costs of fundamental research, applied research and experimental development carried out within the taxpayer’s own scope of activities in accordance with the Act on Corporate Income Tax and Dividend Tax, relating to the healthcare sector, including the cost of all approved phase I to III clinical trials, and lastly the cost of clinical research commissioned in Hungary (hereinafter together "direct R&D costs").

(The above items hereinafter together "deductible items".)

Tax relief cap: The taxpayer may benefit from a tax relief of up to 50% of the increased clawback payment obligation, meaning that the amount payable under the clawback payment obligation cannot be less than what would have been payable if the original tax rate of 20% had been applied.

Discount for companies included in consolidation: Another significant benefit for company groups preparing consolidated financial statements is that the company liable to pay the clawback payment obligation is entitled to apply the deductible items indicated in the financial statement of the affected company included in consolidation for the tax year preceding the ongoing tax year in addition to the deductible items indicated in its own financial statement. If consolidation is applied, the tax relief for the same amount of direct R&D cost may be applied only to one taxpayer.

Clinical research and direct R&D costs: Based on the text of the Gov. Decree, in addition to the costs of phase I to III clinical trials, the costs of clinical research commissioned in Hungary can also be applied as a deductible item, which includes a broader scope than clinical trials. Further, according to the text of the Gov. Decree, for direct R&D costs (including phase I to III clinical trials) it is not necessary that direct costs are incurred domestically as long as the clinical research is commissioned in Hungary, although restrictions of the Act on Corporate Income Tax and Dividend Tax could still apply.

Entry into effect: The rules on tax relief for the clawback payment obligation entered into force on 18 July 2023. According to the Gov. Decree, tax relief can be applied as follows:

• The tax relief can be applied for the first time for the clawback payment obligation due by 20 July 2023.
• If the taxpayer has not fully exhausted the total value of the Deductible Items for the clawback payment obligation due by 20 July 2023, the remaining amount may be applied to subsequent clawback payment obligations.
• The tax relief is available for the last time for the clawback payment obligation due by 20 March 2025.

Conditions for reducing the windfall tax on Hungarian pharmaceutical manufacturers

Common rules: For the windfall tax on Hungarian pharmaceutical manufacturers, the following rules apply in the same way as the rules described in connection with the clawback payment obligation:

• The same deductible items can be applied.
• The tax relief cannot be reduced by more than 50% of the otherwise applicable windfall tax.
• Clinical research commissioned to Hungary involving may also be taken into account to reduce the windfall tax.

Derogations: For the windfall tax on Hungarian pharmaceutical manufacturers, contrary to the rules applicable to the clawback payment obligation:

• It is not possible to apply the deductible items indicated in the financial statement report of the affected company included in the consolidation for the tax year preceding the ongoing tax year.
• The windfall tax on Hungarian pharmaceutical manufacturers cannot be reduced in the 2023 tax year, the tax relief will only take effect on 1 January 2024. Hungarian pharmaceutical manufacturers may apply the tax relief for the first time when determining their tax liability for tax year 2024.