After days of street protests, the Hungarian government announced the new act on the reshaped KATA taxation regime after an extremely rapid legislative process. The new rules significantly narrow the possibility of small businesses in Hungary to choose and apply this rather favourable tax scheme.
From 1 September, only entrepreneurs who are selling goods and services (except taxi services) to private individuals can remain under KATA taxation. For them, the monthly lump sum tax remains extremely low at HUF 50,000 (EUR 125), while the annual revenue limit will increase from the current HUF 12 million (EUR 30,000) to HUF 18 million (EUR 45,000). All those Hungarian businesses that are selling goods or services to domestic or foreign corporate entities will now fall out of the scope of KATA and must apply another tax scheme.
Flat personal income taxation could be an obvious choice for the ex-KATA entrepreneurs, but even this type of taxation would mean a significant increase in the tax burden.
Under flat or lump-sum personal income taxation, the tax base equals 60% of the revenue after the deduction of 40% (or 80% and 90% in specific sectors) lump-sum cost on which personal income tax is due. (A tax base up to HUF 1.2 million or EUR 3,000 is tax exempt). Taxpayers are also subject to 18.5% social security contribution and 13% social contribution tax payable on the tax base determined for personal income tax purposes.
Due to the significant increase of the tax burden for entrepreneurs falling out from the KATA regime, it is anticipated that services they provide to their customers will become more expensive. Since as many as 460,000 taxpayers have been taxed under KATA in the previous years, most probably the current tax law change will imply price increases in almost all industrial sectors, which could add to the extreme inflation rate experienced these days. Meanwhile, those businesses that cannot absorb the increased tax burden could continue in the grey or black economy. Given these risks, companies doing business with this group of taxpayers should still put increased efforts into implementing KYC procedures and checking their service provider’s tax status.
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The article was co-authored by Diána Galambosi.