By Shannon Power, 21st July 2022
The Hungarian government recently submitted new proposed changes to the Itemised Tax for Small Businesses law, also known as KATA for short in Hungarian. The changes to the KATA tax system will take effect on 1st September 2022. KATA is a flat-tax system where small Hungarian businesses pay a fixed monthly amount to cover all their Hungarian tax obligations. This taxation can also be applied by those who are self-employed. These changes are necessary to reduce misuse of the system and deliver enhanced benefits to those who the KATA tax system was created for.
Reason for KATA Changes
The Hungarian government has stated that it was essential to return to the original starting point and intention for which the tax was created – namely to create a low tax, low administrative burden, and a reasonable form of taxation for individual entrepreneurs and small Hungarian businesses who provide services to the public or sell products to private individuals. According to the Hungarian Ministry of Finance, the new amended rules are necessary as certain employers were forcing their employees into a KATA tax status. It was discovered that some employers were not registering workers and paying the required tax and duties on their wages, instead, they were hiring them as subcontractors paying lump-sum taxes for their low-taxed companies when they were in fact employees. This has resulted in damages to the central budget, employees, and honest taxpayers.
The new rules aim to eliminate these hidden employments. The preferential tax will now be restricted to self-employed entrepreneurs, with the exemption of taxi drivers, who are selling their own products or offering their own services to businesses.
The Revised KATA Tax System
According to the Hungarian government, as of 1st September 2022, KATA will only be available to full-time, self-employed individuals providing services or selling products to others. This will result in a significant portion of the approximately 450,000 taxpayers who are currently availing of KATA now compelled to find another tax solution for their businesses.
Whilst this will leave many small Hungarian businesses unsure of their tax situation, those who are self-employed entrepreneurs will benefit more from the new legislation compared to the original regulations of KATA. The previous turnover threshold of HUF 12 million (€29,000) has been brought up to HUF 18 million (€44,000), meaning that entrepreneurs will pay HUF 50,000 (€120) per month in taxes.
The chairman of the economic committee stated that there will be more options available to small Hungarian businesses. They can be taxed at a flat rate, and if they are entrepreneurs and provide services to businesses, they can be taxed in a favourable form with a 40% deduction for cost-sharing. These taxpayers may pay slightly more than they would have under KATA, but the alternatives provide a low administrative burden and a low tax burden.
Looking at the average Hungarian income, these individuals could pay HUF 515,000 (€1,260) more in taxes compared to the KATA system. However, those with multiple income sources could be better off under the new law, paying around HUF 20,000 (almost €50) less in taxes and contributions than they would have with the KATA tax system.
When businesses do not qualify for the updated KATA tax system the government has confirmed that other programs are available. These measures ensure that Hungary remains a favourable destination for foreign investment and business operations. If you have any queries regarding the information in this article or if you are interested in starting your own Small Hungarian Business, please get in contact with the Euro Company Formations team today on + 353 (0) 1 6461627 or contact us online and one of our agents will be happy to assist you.