A new era for the Hungarian KATA taxation

On 11 July 2022, legislation changes announced by the Hungarian Government in early 2022 were published as a draft law aiming to re-regulate the itemised tax for small businesses (Hung. “KATA”). On 12 July 2022, in an exceptional procedure, the Hungarian Parliament debated the new law in the framework of a consolidated debate, then held a final vote on it. The aim of the re-codification is to ensure that the KATA taxation - as originally intended - is only available to the small businesses that render services or sell goods to household consumers (private individuals). This approach is reflected in the new law, which significantly narrows the scope of eligible taxpayers, but at the same time, through the increased revenue threshold, provides for more favourable rules for the eligible small businesses who presumably have been using the KATA taxation for its original purpose since the inception.

The fact that the new law will enter into force as early as 1 September 2022 appears to make the application of the law significantly more difficult.

Below we summarise the most important provisions that represent a substantial change from the previous legislation.

WHAT CHANGES:

• Only individual entrepreneurs should be KATA taxpayers

Under the new rules, only full-time individual entrepreneurs can opt for KATA taxation, so the new law excludes sole proprietorships, limited partnerships, partnerships limited by shares, law firms from this form of taxation. It will no longer be possible for taxpayers to choose KATA as a secondary occupation (e.g. in addition to employment), thus the so-called "25 thousand Forint" KATA will be abolished.

• KATA taxpayers can invoice only to private individuals

Eligibility for the KATA should cease if the small business received revenue from a payer company (i.e. domestic or foreign legal entity, other organisation or domestic individual entrepreneurs). An exception to this rule is proposed only for small businesses providing passenger transport services by taxi (NACE code 49.32.11).

As a result, the new legislation will remove the 40% tax imposed by the current legislation on the payer companies paying income exceeding the annual HUF 3 million to a single small business, as well as domestic or foreign payer companies paying any income to small businesses qualifying their related parties. The payer companies’ obligation to declare income above the annual HUF 1 million received by the same small business will also be abolished with the adoption of the new law.

• The annual revenue threshold increases from HUF 12 million to HUF 18 million

For the small business in the scope of KATA for the whole year, the 40% special tax is only payable on the part of the revenue exceeding the annual HUF 18 million.

• The option to pay a higher rate of lump-sum tax is abolished

The option for small businesses to pay a higher rate of flat-rate tax (HUF 75,000 per month instead of HUF 50,000) in order to qualify for a higher rate benefit will be abolished.

WHAT IS ALSO IMPORTANT:

The eligibility and election for the KATA under the new law should be declared to the tax authority from 1 August 2022. On the basis of the taxpayer’s declaration made by 25 September 2022, the tax authority will register the small business as a KATA taxpayer from 1 September 2022.

An individual entrepreneur who is not entitled to the new KATA status, but is in the scope of the old KATA on 31 August 2022, may declare their election for a flat-rate tax under the Hungarian Personal Income Tax Act for the tax year 2022 until 31 October 2022 (the tax authority will publish the rules for declaring by 15 August 2022).  

The new KATA Act also contains a number of transitional provisions.

WHAT REMAINS UNCHANGED:

• The KATA lump-sum remains HUF 50,000 per month;
• A special tax of 40% is payable if the annual revenue threshold of HUF 18 million is exceeded (on the exceeding part of revenue only);
• The individual entrepreneur under KATA will continue to be entitled to social insurance by paying the HUF 50,000 itemised tax, which substitutes for any employment taxes; the base for health, pension and social security benefits will remain at HUF 108,000 per month;
• The due date for KATA payment will continue to be the 12th of the month following the tax month, and the tax year's income should invariably be declared by 25 February of the year following the tax year;
• The small businesses under KATA will continue to be eligible for the simplified method of assessing the local business tax base, with the same tax base threshold as before - HUF 2.5 - 2.5 million per municipality. Thus, the increase in the revenue threshold to HUF 18 million has not affected the notional local business tax base.

12 July, 2022

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This newsletter provides general information and does not constitute tax advice