New Transfer Pricing Regulation

This article summarizes the most important changes.

Amendments relating to general topics

• A significant change has been introduced to the definition of low value-adding services. In the future, there will be no exhaustive list of services falling under this category; instead, the regulation will describe circumstances under which a service does not qualify as low value-adding. If a service meets the definition, then for transfer pricing purposes, the acceptable price for service provision will be the total cost and expenses incurred up to operating profit, increased by at least a 5% mark-up. For services received, the mark-up may not exceed 5%. In practice, this means applying a “total cost + 5% mark-up” approach, as opposed to the previous narrower cost base and 3–7% mark-up range.
• The section on interpretative provisions and definitions will be expanded with several new terms, such as characterization, gross profit margin, return on assets, net margin, and tested party. Some of these are considered essential clarifications.
• Transactions involving money transfers without consideration will become subject to documentation requirements, albeit only in the form of simplified documentation, which may still pose challenges (see later comments).
• For clarity, transactions without consideration will be addressed separately: a controlled transaction is deemed to exist between parties even if no invoicing occurs, but based on ‘substance over form principle’ performance happened.
• The draft regulation stipulates that taxpayers must retain the local file and its annexes in a legible format for at least eight years. If the controlled transaction involves a fixed asset, the retention period is extended to eight years following the asset’s removal from the books.
• Regarding the master file, the preparation deadline has been clarified: if the taxpayer ceases to fall under the scope of the Corporate Income Tax Act, the master file must be prepared by the corporate tax return filing deadline. Furthermore, the threshold for preparing the master file has been set higher than that for the local file (see below).
• Under the new rules, transfer pricing documentation and supporting documents may only be prepared in Hungarian or English; French and German will no longer be accepted.

New thresholds

• According to the draft regulation, the thresholds for documentation obligations will change for all types of records:
  • No master file is required for a tax year in which the total arm’s length value of controlled transactions does not exceed HUF 500 million.
  • A local file must be prepared only for transactions whose arm’s length value, excluding VAT and considering aggregation rules, exceeds HUF 150 million in the tax year.
  • Cost recharges remain exempt from documentation only if their arm’s length value, excluding VAT, does not exceed HUF 500 million in the tax year. Above this threshold, a simplified local file is required.
  • A simplified local file may also be prepared for monetary transfers without consideration (above HUF 150 million).

Changes to the Content of Transfer Pricing Documentation

• The content requirements for the simplified local file will also change (varying by transaction type), expand compared to current rules. A point of concern is that, since functional analysis will now be part of this documentation type, it is unclear what meaningful analysis can be provided for cost recharges or monetary transfers without consideration.
• The draft regulation provides detailed guidance on the functions and risks that the tax authority expects to see in the functional analysis section of transfer pricing documentation. This includes DEMPE functions related to intangible assets and associated risks.
• To facilitate easier identification of transactions, the regulation aims to standardize transaction descriptions in the documentation. Accordingly, the local file must include the transaction name selected in the data reporting process and, where applicable, the most relevant NACE code.
• If majority control exists indirectly, the local file must include details of intermediate entities, as well as the nature and extent of majority control in those entities. It is advisable to obtain these data from the group in a timely manner, as collecting such information for large corporate groups may require significant effort.
• The draft regulation lists possible functional characterizations. If a party to the transaction falls under one of these categories, the local file must include the precise characterization and a detailed justification. Where circumstances justify the use of a limited-risk characterization, there is no need to justify the choice of method, tested party, or profitability indicator. These are the followings:

• For services or financial transactions, performing a benefit test will be mandatory. This test aims to thoroughly assess the business rationality of the transaction. The analysis must examine whether, under comparable conditions, the recipient would have obtained the service or loan from an independent party and paid for it, or whether the taxpayer would have performed the activity itself or whether the loan was unnecessary. The results of the analysis must be presented in detail in the local file; however, the regulation does not specify the required depth of information.
• For transactions whose arm’s length value, considering aggregation rules, does not exceed HUF 1 billion, industry or market analysis is not required.
• If the local file includes aggregated transactions, the justification for aggregation must be provided in detail. The regulation also clarifies which transaction types cannot be aggregated.
• The draft regulation specifies that if the tested party performs multiple activities and separate analyses are prepared for each, corporate-level data must be segmented accordingly. Although the tax authority has always requested this during audits, the draft now explicitly emphasizes this requirement.

Database Searches

The preparation of benchmarking analyses will now be governed by regulatory guidance, which previously existed only as informal instructions on the tax authority’s website:

• The draft stipulates that if the tested party operates in Hungary, the primary geographical area of comparison should be Hungary. If insufficient results are available, the geographical scope may be expanded following prescribed steps.
• The draft also regulates how many years of data must or may be considered in the comparables sample and requires verification of the websites of companies included in the sample.
• However, the draft does not provide guidance on how to document cases where a search strategy yields insufficient results, nor whether filtering must be performed at each stage to determine the final sample size, or whether it is sufficient to filter the larger sample if professional judgment clearly indicates that the initial strategy will not yield an adequate sample size.
• The draft uses the term “adequate sample size” but does not define it. This would be important because it determines when the initial search may be expanded.

Updates Related to Transfer Pricing Data Disclosure

• There are no substantive changes regarding the reporting obligation; the focus remains on standardization and supporting risk analysis so that the tax authority can access easily processable data and conduct targeted audits.
• The only modification is that the category “53 – other transaction” has been split into two, allowing clearer identification of whether the tested party acts as a supplier or a customer in the transaction.

Entry into Force

The new regulation would enter into force on the 31st day following its promulgation. Taxpayers may choose to apply its provisions to documentation for tax year beginning in 2025; however, for tax years beginning in 2026, compliance with the new rules will be mandatory.

It should be noted that if the deadline for preparing documentation related to corporate income tax obligations for the 2025 tax year falls after the effective date of the new regulation, taxpayers may still opt to comply with the new rules.

Summary

The new transfer pricing regulation will introduce significant changes. While some administrative burdens will be reduced, the amendments also impose new tasks and challenges for taxpayers. Should you require further advice on this topic or assistance in preparing transfer pricing documentation, our colleagues would be happy to help.