Palfi's film won out over other recent high-profile Hungarian films, including Janos Szasz's Opium and Krisztina Goda's Children Of Glory.
Bela Tarr's Cannes competition title The Man From London was not eligible as it has not yet been released in Hungary.
Taxidermia won the main prize at Hungarian Film Week in 2006 and saw its world premiere in Un Certain Regard last year.
Palfi won Best Director awards at the Chicago International Film Festival and at the Eurasia International Film Festival in Antalya.
Palfi's debut, Hukkle, won the EFA Fassbinder Award and was screened at more than 100 film festivals and released in art house theatres worldwide.
Taxidermia, his second feature, was produced by Budapest based Eurofilm Studio headed by Peter Miskolczi and Gabor Varadi.
Fortissimo Films is handling world sales. Taxidermia has already been released in Austrian, Belgian, Dutch, French, German, Norwegian and UK theatres, with North America, Asia and Middle East releases to come.
The Hungarian committee included Baron Gyorgy of the Association of Hungarian Film Artists, Miklos Szita of the Hungarian Independent Producers Association, Laszlo Sipos of the Hungarian Producers Association, Jozsef Rak of the Hungarian Society of Cinematographers, and Andras Fesos of the Hungarian Directors' Guild.