Hungary: Easing the tax burden of innovative startups – from January 2025, the IP contributions will become tax-free

The beginning of technological developments can encounter many difficulties even in the case of the implementation of an idea that fills a gap and satisfies market needs. Inventors or creators of IP typically decide to establish start-ups, thus coming into the sights of venture capital (VC) investors. VC investments are an integral part of the technological development process, as the journey from the idea to the product market launch is expensive.

Currently, according to the Personal Income Tax Act in Hungary, if the creator (original rightholder) of an IP, as an individual, provides the IP to a company (start-up) in the form of a non-monetary contribution, upon realisation of the contribution, a tax liability arises based on the value of the IP.

IP contributions rarely occur without the involvement of VCs, who support the financing of the product to be created in the hope of future profit. If the VC provides financial capital to the company in exchange for a given ownership stake, this determines the value of the acquired ownership stake, i.e. the value of the IP. Under the current tax laws in force in Hungary, the ownership stake received by the VC in exchange for the contribution is considered income for the contributor, which results in tax liability.

At the beginning of innovative development, it is rarely possible to “price” the IP, as this largely depends on the future market success. The other aspect is that this type of IP transfer is a non-monetary contribution, so there is no actual cash flow. In other words, there is no actual income that would serve to pay the tax burden, meaning the contributor is forced to deduct this tax from other sources.

In Hungary, with the adoption of the amendment by the Parliament, this problem could be solved from January 2025 by making the contribution of IPs to a company tax-free.

The proposed amendment to the law also states that in the case of securities acquired based on the contribution of IP, the certified contribution of the original rightholder (individual) – which he/she made in order to create the IP – qualifies as the acquisition value of the security. This essentially means that individuals involved in the early stages of a company, usually researchers, developers and senior employees, can “convert” IP into securities tax-free.