Switching to small business tax scheme (KIVA):

the year-end is the most appropriate period for the decision

Under the forthcoming tax bills before Parliament, more companies will be eligible for small business tax (KIVA) taxation next year. In addition, as part of the 2020 summer tax package, the KIVA rate has been reduced from 12% to 11% with effect from 1 January 2021, which, together with the planned increase in entry thresholds, could provide a significant tax benefit to businesses.

What are the positive changes?

Pursuant to the bill, a company will be able to opt for this favourable taxation scheme if its sales revenue in the previous tax year and the balance sheet total thereof have not exceeded HUF 3 billion. In addition, a company’s eligibility for KIVA will cease if the company exceeds the HUF 6 billion revenue threshold on the first day of any business quarter. However, all further eligibility criteria - one of the most important of them being the maximum average statistical headcount of 50 - remain unchanged.

Why is the end-of-year period the most appropriate time to make the decision?

Switching to KIVA is also possible during the year, because the KIVA taxpayer status is granted from the first day of the month following the notification to the tax authority. However, the changeover creates a new business year, so the previous business year ends on the day preceding the date of the transition. This also involves preparation of “extraordinary” financial reports. Considering that only companies with the same business year as the calendar year are eligible for taxation under the KIVA, in the case of a changeover on 1 January, the extraordinary financial reporting obligation coincides with standard reporting, so a changeover scheduled for the beginning of the year would involve least administration.

Who should switch to KIVA?

KIVA replaces three taxes: corporate tax (9%), social contribution tax (15.5%) and vocational training contribution (1.5%). In general, it is particularly favourable for businesses where personnel expenses exceed business profits. For fast-growing companies planning to invest in property, plant and equipment and inventory, the changeover should also be considered, as KIVA does not charge retained earnings.

How to decide if it is worth switching to KIVA?

Although the Hungarian Parliament has not yet voted to raise the entry thresholds, the legislative intention is likely to coincide with the Government's clear aspirations to increase the popularity of this simplified taxation scheme. It is therefore recommended that potentially eligible companies model both KIVA and corporate tax taxation now in order to determine the most optimal taxation method for them.

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VGD Hungary's tax experts will be pleased to prepare the impact study and comparative model for KIVA and corporate income tax, thus helping their Clients to make informed decisions.

Should you have any questions regarding this newsletter, the tax experts of VGD Hungary will be pleased to assist you. This newsletter provides general information and does not constitute tax advice.