Parliament adopted the amendment to the KATA Act on 12 July 2022 by special procedure, which will significantly change the flat rate tax of small enterprises from September. In our newsletter, we summarise the most important changes and what those who will no longer be able to opt for this form of taxation from September can do.
The new law does not change the current rules of KATA (flat rate tax of small enterprises), but creates a new form of taxation (a new KATA) by abolishing the KATA taxable status of everyone under the current rules as of 1 September 2022.
Only private entrepreneurs selling products and providing their own services to the public can opt for the new KATA taxable status. This means that new KATA taxpayers can only receive income from private individuals. The exception to this is taxi drivers, who may continue to provide services to legal persons.
Another novelty is that under the amendment only full-time private entrepreneurs can opt for the new KATA, so for example legal persons, old-age pension beneficiaries, partners in another business and small part-time taxpayers are exempt from the new KATA rules.
The amendment allows private entrepreneurs to benefit from the reduced tax rate up to an annual income threshold of HUF 18 million. The tax rate for all small businesses is HUF 50,000 per month.
The above rules enter into force on 1 September 2022. Everyone must opt in to the new KATA (including private entrepreneurs currently covered by KATA). The notification can be made to NAV from 1 August 2022. Although the choice must be declared by 31 August 2022, if this is not done, the private entrepreneur is still entitled to make this choice by 25 September 2022 for the month of September 2022.
Those who do not meet the conditions of the new KATA will have their KATA taxpayer status terminated on 1 September 2022 and will have to choose another form of taxation or, if they do not, they will be taxed under the general rules applicable to their form of business. If you cannot commit to earning income only from private individuals from September, or if you are not a full-time private entrepreneur, you may be taxed as follows.
I. Private entrepreneurs
If the private entrepreneur does not opt for a different tax form, they will be taxed according to the rules applicable to entrepreneurial PIT. The entrepreneur's PIT is 9 per cent and the tax rate on the entrepreneur's dividend base is 15 per cent. The entrepreneur's PIT tax base is determined by deducting expenses from the entrepreneur's total income, adjusted for the items specified by law, and the entrepreneur's dividend base is calculated from the entrepreneur's after-tax income.
If you are taxed as an entrepreneur, you must keep itemised records of all income and expenditure relating to your entrepreneurial activity.
Flat rate taxation
The other option for private entrepreneurs is to switch to flat-rate taxation. The transition for the 2022 tax year can be declared until 31 October 2022. Flat-rate taxpayers have to pay taxes and contributions on the basis of their income calculated according to the presumed cost ratio applicable to their activity.
When opting for flat rate taxation, entrepreneurs must calculate their tax base on the basis of their income, taking into account the level of costs set by law. The tax is based on 60 per cent of income in the default case, but can even be 10 per cent depending on the entrepreneur's activity, and an exempted part of income has been introduced. A private entrepreneur who opts for flat rate taxation does not have to pay personal income tax on income below half the annual minimum wage.
II. Legal persons
Legal persons currently subject to KATA will automatically be subject to the 9% corporate tax on profits from 1 September. Upon transition, an opening balance sheet must be prepared and audited by an auditor. If they do not wish to do so, they can opt for liquidation.
However, as a legal person, it is possible to register for small taxpayer tax (Hungarian acronym: ‘KIVA’). KIVA is a simplified form of taxation at a rate of 10%, which small businesses can opt for instead of corporate taxation. The tax is based on the sum of personal-type expenses plus the balance of capital and dividend operations, adjusted by a few additional items. KIVA may be a good choice for legal persons when leaving KATA if they decide to continue their operations.