The new transfer pricing documentation decree

Master file: Its preparation will only be mandatory if the aggregate value of related-party transactions exceeds HUF 500 million (Section 4(3) of the NGM Decree).

Local file: The exemption threshold is increased from HUF 100 million to HUF 150 million, while the aggregation of similar transactions remains mandatory (Section 4(4)(a) of the NGM Decree).

If the consideration for assets or services obtained from third parties is recharged to multiple related parties at an unchanged amount and the total recharged cost does not exceed HUF 500 million in the tax year (Section 4(4)(c) of the NGM Decree), the taxpayer is exempt from the obligation to prepare a local file, provided that it substantiates that the applied allocation method complies with the arm’s length principle (Section 4(6) of the NGM Decree).

The new decree describes in greater detail than before the functions and risks that, among other things, must be analysed as a minimum in transfer pricing documentation (Section 6(3)(f) of the NGM Decree). The list includes, for example, functions and the associated risks related to intangible assets

The new decree addresses in greater detail the requirement to break down the income statement by activities (Section 6(4) of the NGM Decree). When calculating the profitability indicator for the activity (business segment) affected by related-party transactions, the revenues, costs and expenses of the income statement must be allocated between the part relating to related-party transactions and the part not relating to such transactions. If a given item is also attributable to other activities, it must be allocated in a reasonable manner among the relevant activities. Following the allocation (between related and non-related transactions), no item may remain that is not allocated to activities.

A simplified local file may be prepared (Section 7(1) of the NGM Decree):

Low value-adding services may include, among others, the leasing or rental of real estate or other assets, as well as the onward sale, in unchanged form, to a related party of an asset or service procured from an independent party (Section 7(3) of the NGM Decree).

In the case of a simplified local file, the presentation of the business strategy and the evaluation of internal or external comparable transactions (benchmark study), among other items, are not required (Section 7(2) of the NGM Decree). Furthermore, in this case the local file does not need to include a presentation of the relevant market if the consideration of the related-party transaction does not exceed HUF 1 billion in the tax year (Section 6(5) of the NGM Decree).

A database search must meet at least the following criteria (Sections 11(1)–(8) of the NGM Decree):

If the tested party carries out its activities domestically, the comparable geographical area is Hungary. If filtering to Hungary results in an insufficient sample size, the comparable geographical area shall be Hungary together with the Czech Republic, Poland and Slovakia. If this still results in an insufficient sample size, the comparable geographical area shall additionally include Bulgaria, Estonia, Croatia, Latvia, Lithuania, Romania and Slovenia. If this also results in an insufficient sample size, the comparable geographical area shall be the Member States of the European Union. If this still results in an insufficient sample size, another area that is the most appropriate for the given related-party transaction shall be considered the comparable geographical area.

In the case of the receipt of financial or non-financial services, it is necessary to demonstrate that the service is fully required for the business activity and that, under similar conditions, the taxpayer would be willing to pay an independent party for  services of the sa me nature same price, or would otherwise perform the service itself. Accordingly, a so-called benefit test must be carried out, i.e. the “benefit test” as defined by the OECD (Section 6(3)(i) of the NGM Decree).

In the master file, it is necessary to present the group’s developments relating to intangible assets, its ownership and exploitation strategy, the list of legal owners, and the related intercompany agreements. In the transaction-level section of the local file, a detailed functional analysis and the facts relating to the transaction must be presented (e.g. the impact of transfers or developments of intangibles), as well as the allocation methods applied. It is also necessary to present, at the transaction and party level, who performs the so-called D-E-M-P-E functions (Development, Enhancement, Maintenance, Protection and Exploitation), who owns the necessary assets, and who bears the related risks (Section 5(1)(c) of the NGM Decree).

Previously, the documentation could be prepared in Hungarian, English, German or French; going forward, the documentation must be prepared in Hungarian, English or German (Section 4(9) of the NGM Decree).

The taxpayer is required to retain the local file and its annexes in a legible form for at least eight years. If the transaction relates, for example, to a fixed asset, the documentation must be retained for at least eight years following the final derecognition of the asset from the books (Section 4(10) of the NGM Decree).

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