Basic Rules of Accounting the Expenses of the Operation of Vehicles in the Personal Income Tax and Corporate Income Tax System 2015.

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Basic Rules of Accounting the Expenses of the Operation of Vehicles in the Personal Income Tax and Corporate Income Tax System

2015.

The Act on Personal Income Tax1 defines the expenses associated with the use of motor vehicles for official and business purposes among the recognised expenses. The expense accounting also depends on the activity or the legal relationship in relation to which the vehicle is used.

For the purposes of the PIT Act official and business travel

shall mean trips taken by a private individual with a view to obtaining income or to performing a task connected with the activities of the party paying such income, with the exception of commuting to the workplace, head office or place of business from the domicile, including, especially, travel necessary for working on assignment (appointment), except if established, even if indirectly, on the basis of the actual contents of the travel documents and the applicable circumstances (arrangements, advertisement, promotion, travel route, destination, duration of stay, ratio of actual business related and free programmes, etc.) that the official or business nature of such travel is fictitious, furthermore

trips of a Member of Parliament, spokespersons of nationals, Mayor, member of a local government required in relation to the responsibilities related to their office (absence from the domicile).2

The costs of operation of vehicles consist of the costs of fuel, maintenance, repair and overhaul, i.e. toll, garage rental fees and parking fees are not part of the costs of operation.

The cost of fuel consumption may be accounted on the basis of the number of kilometres travelled for business (official) purposes, stated in the mileage log, at the consumption rates, specified in the government decree3. The government decree defines the fuel consumption rate according to the type and engine capacity of the vehicles. A private individual may choose from the two fuel consumption rates. However, only one fuel consumption rate can be applied in one calendar quarter, the two rates cannot be mixed up.

When accounting the expenses, either the fuel price4 , published by NAV5, or the fuel price stated on the invoices, may be taken into account as the fuel price, and the selected method cannot be changed during the applicable calendar quarter. Private individuals must prove ownership of their own cars with the receipt documenting the payment of the compulsory third party liability motor vehicle insurance in compliance with the provisions of the PIT on retaining accounting documents. The receipt shall be kept until the right to assess the tax expires.

1 Act CXVII of 1995 (hereinafter: PIT Act)

2 Section 3. point 10. of the PIT Act

3 The rate defined in Section 4. or Annex 1. of the Government Decree No. 60/1992 (IV.1.) on the Rate of Fuel and Lubricant Consumption of Motor Vehicles, Agricultural, Forestry and Fishing Machinery (hereinafter: Government Decree), claimable without substantiation.

4 The fuel prices are published in a monthly breakdown in the Hungarian Gazette and online on the following website: www.nav.gov.hu

5 National Tax and Customs Administration (NAV)

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For the purposes of the PIT Act a vehicle leased by closed-end arrangement is also an owned vehicle. Similarly, a vehicle owned by the spouse or leased by closed-end arrangement is also an owned vehicle6.

I. Vehicles used in the interest of the payer

I.1. Vehicles owned by a private individual

A private individual may receive expense reimbursement for the official/business use of an owned passenger car7 according to two methods.

a) According to the first method of expense reimbursement, the private individual receives the expense reimbursement according to the mileage log, on the basis of the actual number of travelled kilometres or flat rate consumption. This is mostly applied when a private individual uses his own car for official purposes on a regular basis. In such cases, the amount received under the title of expense reimbursement is a taxable income, against which the expenses incurred on business (official) trips (mileage) may be claimed. Depending on the choice made by the private individual, the expenses may be accounted against the revenue in two ways.

aa) First expense accounting method:

as fuel consumption, either the fuel quantity defined according to the fuel consumption rate, specified in the Government Decree, multiplied by the fuel price published by NAV, or the fuel purchases substantiated by an invoice (invoices) may be claimed. However, the quantity of fuel accounted on the basis of invoices may not exceed the quantity calculated as the fuel consumption allowance, and only maintenance, repair and overhaul expenses, substantiated with an invoice (document) may be claimed in proportion to the official use.

Private individuals who deduct the VAT of the fuel pursuant to the rules of the VAT Act8 cannot apply the fuel price published by NAV in the accounting of fuel expenses. In such cases the fuel expenses may be accounted, following the deduction of the VAT, only in an itemised manner, on the basis of invoices.

Since only the expenses associated with official and business trips may be claimed against any expense reimbursement, a mileage log9 must be kept for each official trip in order to establish the appropriate ratio. (The mileage log is the basic document used for the accounting of vehicle expenses.) The mileage log shall include the model of the motor vehicle, its registration number, and the applicable fuel consumption rate as well as all the data that are

6 Point IV 1 of Annex 3 of the PIT Act

7 Pursuant to Section 3, Point 45 of the PIT Act, a passenger car shall mean a motor vehicle equipped with three or four wheels with a passenger capacity of no more than eight adults, including the driver, with the understanding that petrol or diesel powered vehicles, electric vehicles, gas powered vehicles, race cars and caravans (mobile homes) are also included in this category. Multi-purpose motor vehicles with a gross weight of less than 2,500 kilograms (passenger cars with oversized cargo space) whose factory-designed cargo space can carry more than two passengers, with seats that can be simply removed at any given time to transfer the cargo space behind the cabin wall to carry any cargo for which the vehicle is designed, including when the removal of the seats is accomplished by irreversible technical conversion, shall also be regarded as passenger cars.

8 Act CXXVII of 2007 on value added tax

9 Detailed mileage log pursuant to Annex 5 Chapter II. point 7 of the PIT Act

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required for the accounting of expenses, including the odometer reading on the first and last day of the year and the number of kilometres covered for official and business purposes.

Where a private individual who is required to maintain a mileage log is required to indicate - in the course of carrying out his activities under confidentiality requirements on the strength of law (e.g. medical practice) - in the mileage log the personal data of any private individual in respect of whom the confidentiality requirement applies, the travel made to such persons shall be recorded separately. As regards these separate mileage logs, the person required to keep them shall ensure that, apart from the officer of the tax authority carrying out the inspection, no third party is allowed to have access to such records. The tax authority shall be entitled to record the data contained in such mileage logs only if presented as evidence in connection with an infringement in the course of the proceedings of the tax authority.

ab) Second possible expense accounting method:

in addition to fuel expenses, instead of claiming for other expenses of the use of the car based on invoices and other documents, a flat rate of 9 HUF/kilometre as general purpose passenger car standard expense may also be selected.

Each private individual may choose between the two methods, but the chosen method must be applied to all passenger cars used by them throughout the year. If a private individual accounts any expense, based on a mileage log, for the official (business) use of an owned vehicle, then they must also be aware of their company car tax liability due to the expense accounting. Booklet No. 31 contains more information on the payment of the company car tax.

b) A private individual may be eligible to expense reimbursement from the payer for the official use of their own passenger car based on an assignment order10, too. The PIT Act specifies the required contents of the assignment order. Accordingly, an assignment order is a document issued by the employer in two counterparts, containing the name and tax identification number of the private individual, the make, type and registration number of the vehicle, the objective, duration and distance of official or business trip(s), paid travel expenses, meal allowances, and the data necessary for the calculation of such expense reimbursement(s) (fuel consumption rate, fuel price, etc, with the provision that an electronically generated accounting document handled and stored in a closed system with due considerations paid to the provisions of the regulation on the rules of digital archiving and containing the above data also qualifies as an assignment order. The original copy of a printed assignment order is retained by the payer, a facsimile thereof is retained by the private individual in due observation of the regulations on the storage of accounting documentation).

In relation to the assignment order, it is important to note that it may be issued not only in view of the employment, but also based on other legal relationships (e.g., assignment, member, executive officer, elected officer’s position, etc.). The assignment order can also be used if the private individual does not receive any remuneration for the activity but performs it in the interest of the public, and requests only the reimbursement of the expenses associated with the use of the car.

If the reimbursement does not exceed the amount that may be accounted without any substantiation according to the law [the fuel cost calculated as the number of kilometres

10 Section 3 point 83. of the PIT Act

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travelled for official purposes multiplied by the fuel price published by NAV on the basis of the fuel consumption rate specified in the government decree and HUF 9/km (general passenger car fuel consumption standard expense)], then the private individual does not need to count it as revenue.

In practice that also means that if a private individual has to travel further on an official business trip in relation to another legal relationship (e.g., private entrepreneur), then any trip subject to expense reimbursement, not constituting a revenue, must be deemed a trip for private purposes and, in regard to all other trips made for business purposes in relation to the other activities, the private individual may opt for the HUF 9/km in addition to the accounting of the fuel cost or to account for the trips based on the invoices, on a pro rata basis, in comparison to the other trips, made for business purposes.

If the payer reimburses the expenses on the basis of the assignment order at a rate that is higher than specified by law, then the total amount shall be classified as taxable income.

In terms of expense accounting, then the private individual has two choices. Either the amount, accountable without any substantiation, is claimed as an expense and tax is paid for the remaining portion of the reimbursement in view of the specific legal relationship or the incurred expenses are accounted on a pro rata basis, based on the mileage log, reflecting the ratio of trips made for official and private purposes, as substantiated with documents (invoice, other documents).

In practice that latter choice also means that, based on the expense accounting, the owner of the passenger car must pay company car tax even if the private individual is the financial lessee and, since 30 June 2013, operational lessee of the car.

c) If a private individual uses an owned heavy goods vehicle to provide a service to the payer, their expenses may be reimbursed on the basis of a mileage log. However, the HUF 9 passenger car standard expense cannot be applied to heavy goods vehicles, which is an important difference.

I.2. Vehicles owned by others

In respect of vehicles, owned by others and used exclusively for business purposes the following expenses may be claimed:

verified lease or rental charges (not including the rental or lease charges on passenger cars);

the quantity of fuel according to the consumption rate and a mileage log, substantiated with invoices, or the fuel cost, established on the basis of the fuel price published by NAV;

other invoiced expenses if charged to the private individual on the basis of a contract.

b) The amount eligible as an expense on the grounds of rental or lease charges of a passenger car, owned by others and used for official and business purposes may not exceed 1 per cent of the revenues, otherwise the private individual may not claim any expenses on such grounds.

In respect of a vehicle which is not own property and is used for business purposes, the following may be claimed, based on a mileage log, for the period of the business use:

the fuel cost established on the basis of the quantity of fuel according to the consumption rate, substantiated with invoices, or established on the basis of the fuel price published by NAV;

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other invoiced expenses if charged to the private individual on basis of a contract.

It is also important to note that if the passenger car is owned by others then, in view of the official and business use, the favourable rule associated with the assignment order cannot be applied.

Commuting to work

In cases defined in Section 2 a) of Government Decree No. 39/2010. (II.26.) the reimbursement of the expenses of commuting to work, the employer may, and in certain cases must, reimburse the expenses of commuting to work for the employees. The expense reimbursement is not included in the tax base, i.e., it may be granted practically tax free, if its amount does not exceed HUF 9/km, calculated on the basis of the distance measured on public roads between the workplace and the domicile both ways. That amount should not be confused with the general passenger car standard expense, because apart from the expense reimbursement for commuting, no further expenses (e.g. fuel cost) may be claimed. It also means that the amount of the expense reimbursement over the sum calculated as HUF 9/km constitutes the private individual’s income from employment.

The employer must provide HUF 9 expense reimbursement by kilometre if

there is no public transport between the permanent or temporary place of residence of the employee and the workplace;

the employee cannot use the public transport at all or only with a long waiting period, because of the work schedule;

the employee is unable to use any public transport vehicle due to any disability.

The reimbursement may be provided also to employees who do not own a passenger car. The HUF 9 expense reimbursement/kilometre may be paid to disabled employees for commuting even if they travel within the administrative boundaries. The expense reimbursement granted to private individuals for commuting does not trigger a company car tax liability for them.

III. Accounting of costs of vehicles owned by self-employed private individuals - other than private entrepreneurs

Self-employed private individuals may account their expenses incurred directly in relation to their gainful activities and to the operation of the vehicle used for their operation, for official and business travels in compliance with the provisions of point I., providing that they keep a mileage log. If a self-employed private individual receives expense reimbursement for the use of the passenger car on the basis of an assignment order, then the provisions of Section I.1.b) must be applied.

Depreciation write-off may be applied by the flat rate against the acquisition price of own vehicles, which cannot exceed 1 per cent of the annual revenues and no more than 50 per cent of the book value of the vehicle. For passenger cars flat-rate accounting may be applied at 1 per cent of the annual revenues and no more than 10 per cent of the acquisition price. This flat rate depreciation may be applied only once, in the year of commissioning of the vehicle (including also passenger cars). In this latter case it is important to note that if the private individual applies a write off in the flat-rate in the year of commissioning the vehicle, they may not apply the HUF 9 general passenger car standard expense by the kilometre.

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Further rules pertaining to primary agricultural producers

Primary agricultural producers may account the purchase price of vehicles, used exclusively for business purposes as depreciation, as specified in Annex 11 of the PIT Act, although a passenger car cannot be deemed vehicle used exclusively for business purposes in the case of primary agricultural producers either.

With the exception of passenger cars, only the primary agricultural producer may account depreciation for the vehicles. Private individuals treated as family estate farmers on the last day of the tax year under the Act on the Turnover of Agricultural and Forest Management Land11 and their family members participating in the family homestead in a form other than employment have the option to claim the acquisition costs of vehicles other than passenger cars as recorded at the time of commissioning, provided that such assets are part of the family homestead, as expenses for the tax year when they were commissioned. Primary agricultural producers performing their activities in a disadvantaged region, specified by law, may also claim the acquisition costs of vehicles other than passenger cars as expenses.

Of the self-employed private individuals, a special rules applies to primary agricultural producers who may, instead of keeping a mileage log, claim 500 kilometres per month for the use of own passenger cars for business purposes, regardless of the number of passenger cars being operated. This accounting method may only be used for the entire tax year, or for the full duration of the activities within a fiscal year. If the primary agricultural producer opts for that method, then they may account the fuel costs only according to the standard fuel consumption rate and the price published by NAV, while the costs of operation may be accounted only at the HUF 9 general passenger car standard expense by the kilometre. The date of expense accounting is the first day of all months of the year, for which the primary agricultural producer claims the flat rate cost of 500 kilometres. No company car tax is payable for the months, for which an expense is accounted under such title.

IV. Accounting of costs of vehicles of private entrepreneurs

Private entrepreneurs may also claim expenses on the basis of a detailed mileage log, although they can register only the trips made for official purposes. Expenses may be claimed only for the business trips made in relation to the activities of the private entrepreneur. If a private entrepreneur received expense reimbursement based on an assignment order related to a different legal relationship, which does not count as revenue, then the trips completed on the basis of the assignment order do not need to be registered in the mileage log. If the private entrepreneur intends to claim the costs of operation in proportion to the official and business trips, then the trips made on the basis of the assignment order must be included in the private trips in the pro rata calculations.

With the exception of passenger cars, the provisions of point II. of Annex 11 of the PIT Act may be applied to the claiming of the acquisition cost as an expense of vehicles, used exclusively for business purposes. Any motor vehicle is a tangible asset used only for business purposes if it is used in connection with the regular operations of a private entrepreneur engaged in car rental or passenger transportation services, if it is not used for other purposes to any extent whatsoever, and such use is clearly supported by the business records. In practice that means that the acquisition cost of passenger cars used for such activities may be claimed as depreciation. The total purchase price of any other passenger car

11 Act CXXII of 2013

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cannot be claimed as depreciation, as flat rate depreciation may be claimed up to 1 per cent of the revenues, and no more than 10 per cent of the purchase cost of one passenger car at the time of the commissioning. The amount eligible as an expense on the grounds of rental or lease charges of a passenger car may not exceed 1 per cent of the revenues even if it applies to more than one passenger car. Passenger cars involved in car rental or passenger transportation activities are exceptions, as the applicable rent or lease fee related to them may be claimed as an expense pursuant to the applicable regulations. Nonetheless, in regard to allowances deductible from revenues, for the purposes of the small business allowances, a passenger car that has never been used previously also qualifies as a tangible asset directly serving the entrepreneur's activities exclusively for business purposes,

1. providing that the private entrepreneur applies the small business allowance and pays company car tax on the vehicle concerned for four tax years following the use of the small business allowance, or until any of the events defined in Section 49/B(14) a), d) and e) occurs,

2. if it is the subject or an asset of the activity of a private entrepreneur engaged in car rental or passenger transportation services and the private entrepreneur does not use it for any other purposes, which is sufficiently supported by the business records (i.e. the private entrepreneur does not need to pay any company car tax as long as no expenses are claimed against the revenues from the business).

Private entrepreneurs may also opt for not keeping a mileage log and claiming expenses for 500 kilometres a month for the business use of their own passenger cars, irrespective of the number of cars operated by them. This accounting method may only be used for the entire tax year, or for the full duration of the activities within a fiscal year. If the private entrepreneur opts for that method, then they may account the fuel costs only according to the standard fuel consumption rate and the price published by NAV, while the costs of operation may be accounted only at the HUF 9 general passenger car standard expense by the kilometre. The date of expense accounting is the first day of all months of the year, for which the private entrepreneur claims the flat rate cost of 500 kilometres. Similarly to the primary agricultural producers, private entrepreneurs opting for the flat rate cost to be claimed for 500 kilometres do not have to pay company car tax either.

Private entrepreneurs who had started depreciation write-off before 1 February 2009 may continue that practice until total write-off with the proviso that they pay company car tax.

V. Vignettes

Of the cost of motorway vignettes, private individuals, using their own (or leased) passenger cars for business and official purposes, may claim expenses for the official and business trips completed on the toll roads, based on detailed records substantiated with a mileage log, during the effective period of the vignette.

Pursuant to the PIT Act12 , the use of a motor vehicle supplied by a payer or a non-resident legal person for private purposes, including the related road passes or tickets provided by the said payer or non-resident legal person constitutes a tax free in kind benefit.

12 Annex 1 point 8.37 of the PIT Act

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If a private individual uses an own car for official and business purposes and the payer provides a motorway vignette or any tickets to the private individual by paying for them as well, then neither the provider, nor the recipient has any tax liability even if they are used by the private individual also personally for private purposes13.

VI. Vehicles owned by companies

Taxable persons falling within the scope of the Act on Corporate Income tax and Dividend tax14 may account the acquisition cost (purchase price) of the vehicles according to the general rules applicable to tangible assets. This leads to an effective rule, applicable both to the accounting and the calculation of the tax base, whereby the acquisition cost of such assets must be accounted as depreciation. Taxable persons falling within the scope of the Corporate Tax Act may claim the expenses of purchase, operation, maintenance, repair and fuel of their owned vehicle(s) only based on invoices issued in compliance with the provisions of the Accounting Act. The costs documented in such manner are recognised under the Corporate Income Tax Act in the tax base. Pursuant to the Corporate Income Tax Act, the costs of company cars, including maintenance and operating costs and including the compulsory payments made in connection with the use of company cars to any subsystem of the central budget as prescribed by law, qualify as costs or expenses incurred in the interest of business operations.15 Based on that provision, the business association does not have any tax liability (increasing the tax base) irrespective of whether or not the company car owned by it is used also for private purposes.

VII. Fuel savings

Pursuant to Section 27(1) b) of the PIT Act, the fuel allowance paid by the employer to an employee or by a business partnership to a member who participates in person in the business partnership’s operations as the driver of a vehicle - according to his job function - operated by the employer or the business partnership, calculated based on the actual distance travelled and verified in kilometres, up to the amount of such fuel allowance, not exceeding 100,000 forints per month, shall be deducted from the revenues from activities other than self-employment when determining the income.

Fuel savings mean the adjusted amount that is less than the portion of the amount calculated by the standard fuel consumption rate - corrected by the relevant adjustment factors - as per the actual distance travelled and verified by a mileage log (travel records, shipping documents) referred to in Paragraph (1) b), as defined in the Government Decree on the Rate of Fuel and Lubricant Consumption of Motor Vehicles, Agricultural, Forestry and Fishing Machinery16, claimable without substantiation, or calculated by the official fuel prices published by the state tax authority that is in excess of the amount determined by the quantity of fuel and the official fuel prices published by the state tax authority as claimed by the employer or by the business partnership on the basis of an invoice or invoices, including also the case where the employer or business partnership provides the fuel from its own fuel

13 Section 4 (2a) of the PIT Act

14 Act LXXXI of 1996 (hereinafter Corporate Income Tax Act)

15Annex 3. chapter B) point 6. of the Corporate Income Tax Act)

16 Government Decree No. 60/1992 (IV.1.)

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station to its employees or members and less fuel is used than specified in the standard consumption rate.

National Tax and Customs Administration (NAV)

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