DEVELOPMENT RESERVE – Tax Base Reduction Opportunity
As we are in process of closing the books for 2020 it is a good time to consider available option for reducing the corporate tax burden. One of the available options which sometimes is overlooked is opting for using the so called development reserve. The Corporate Income Tax Act with effect of 2021 allows tax payers to form a tied up reserve up to a maximum of the years pretax profits – any addition to this reserve will be deductible in determining the taxable result for the year. Therefore in theory it will be possible to reduce your current corporate tax liability to nihil. However, as usual, there some conditions and limitations applicable which should be considered before opting for applying the development reserve.
There are conditions for utilisation of this reserve as well as a time limit for utilisation. The development reserve can typically be used for investment in fixed assets for which the company would be entitled to depreciation. The investment costs will be reduced for maximum the amount of the investment, thus reducing the purchase price of the asset(s) – therefore, in practical terms the facility can be considered as an accelerated depreciation resulting in a deferral of tax. Since the purchase price of the assets will be reduced with the amount from the development reserve the depreciation costs for later years will be reduced or even nihil resulting in a higher tax burden.
In case no investment in a qualifying asset is made within four years from forming the reserve the reserve will have to be released and will be treated as taxable income for that year. In addition, delay interest will be due calculated from the date the tax return in which the reserve was formed had to be submitted.
With effect of 2021 the previously applicable cap (HUF 10 Bn) has been abolished.
If you wish to find out if the use of the development reserve would be beneficial for your company please get in touch with your DBH Finance contact.
