Local Business Tax 101

The local business tax (LBT) is a highly significant tax for every company operating in Hungary, with a substantial impact on financial planning and day-to-day operations. Below, you will find a summary of the most important information to help you stay up to date with current regulations, opportunities, and obligations.

What Is the Local Business Tax?

The local business tax is collected by municipalities from all businesses that have a registered office or branch in the given locality and conduct economic activity there. The tax rate may vary by municipality, but by law, it cannot exceed 2%. There are some municipalities where LBT is not levied at all, making the choice of registered office important from a tax perspective.

When Is LBT Payable and What Should You Watch For?

Every business conducting income-generating activity in Hungary must pay LBT, regardless of whether it is a sole proprietorship or a company.
Tax liability arises in relation to the registered office and branches of the company, and is payable to the respective municipality or municipalities.
Municipalities typically do not send automatic reminders for due payments or returns, so it is advisable to keep track of deadlines yourself or seek help from an accountant.

Determining the LBT Tax Base

The tax base for LBT is the company’s net revenue, from which certain costs can be deducted:

Cost of goods sold (only for goods sellers, invoice required)
Intermediated services (re-invoiced services)
Subcontractor performance (written contract required)
Material costs (purchases supported by invoice)
R&D costs (direct costs of research and development)

After deducting these items, the resulting tax base is multiplied by the LBT rate applicable in the given locality. For example, in Budapest, the current rate is 2%.

Example of LBT Calculation

Suppose a company’s annual revenue is HUF 12,000,000, of which HUF 4,000,000 is material cost and HUF 2,000,000 is cost of goods sold. The tax base is:

12,000,000 HUF – 4,000,000 HUF – 2,000,000 HUF = 6,000,000 HUF
If the municipality applies a 2% tax rate, the annual LBT is:
6,000,000 HUF × 2% = 120,000 HUF

Simplified (Band-Based) LBT for Small Businesses

The simplified, band-based tax base calculation primarily benefits sole proprietors. In this case, a fixed tax base is applied based on revenue bands, and LBT is paid once a year. Choosing this method reduces administrative burdens, as there is no need for detailed cost accounting.

LBT Based on KIVA – A Simplified Option for Companies

Companies subject to the small business tax (KIVA) may pay LBT based on 120% of their KIVA tax base. This greatly simplifies the determination of the tax base, as there is no need to account separately for material costs or subcontractor performance. The choice must be declared in the tax return.

Key Deadlines and Tasks

The deadline for LBT returns and payments is generally May 31 of the year following the tax year.
Advance payments must also be made, with the amount determined in the return based on previous years’ payments.
The tax base calculation method (standard, band-based, or KIVA-based) must be chosen in advance and applied for the entire tax year.

Additional Points to Consider

Some municipalities may offer tax allowances or exemptions, so it is worth checking these in advance.
The IPA rate, allowances, and exemptions may differ by locality, so it is advisable to familiarize yourself with the rules of each relevant municipality.
Failure to pay or declare LBT can result in serious financial consequences, so meeting deadlines is essential.

Understanding the rules related to the local business tax and choosing the appropriate tax base calculation method can result in significant savings for businesses. In addition to accurate administration and meeting deadlines, it is advisable to seek the help of a professional accountant to avoid unnecessary burdens and penalties.

If you have any questions regarding the local business tax, please do not hesitate to contact our office!